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Commodity Futures Markets in India Research Team | Posted On Saturday, April 18,2009, 04:48 PM

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Commodity Futures Markets in India



Agriculture sector in India has always been a most important field of government intervention since long back. Government tries to guard the interests of the poor Indian farmers by procuring crops at remunerative prices directly from the farmers without involving middlemen in between. This way Government maintains sufficient buffer stocks and at the same time provides the farmers protection against the fluctuating food crop prices. But government at the same time has limited this traditional sector by fixing prices of crops at a particular level and also by imposing several other restrictions on export and import of agricultural commodities. All these limits prevented this sector to move out its traditional features. So according to many economists liberalization of this traditional agricultural sector could have been of great advantage to our economy. But questions will obviously come up about the maintenance of buffer stocks and provisions of remunerative prices to the farmers. In absence of government's interference farmers will not be getting any prior information about the future markets of their products. Naturally a sudden price fall of food crops will have devastating effects on farmers. Here comes the important role of futures market. If the buyers in the commodity market foresee shortage of a particular crop in the coming season, future price of that crop will increase now and this will act as a signal to the farmers who will accordingly plan their seeding decisions for the next season. In the same way, an increase in future demand of food crops will be replicated in the today's price in futures market. In this way the system of futures market can be of great help to the Indian farmers avoiding them from being directly exposed to the unexpected price changes all of a sudden. It also helps towards developing a better cropping pattern in our country.

If the peasants are farming some crop now and are very much concerned that price will collapse by the time the crop comes in, then if there is futures market, they will have the option to sell their products in it. Price in the future markets being fixed; by selling products in future markets they get clear of their worries about the about the unexpected price fall. This helps them to take the danger of innovations, by using new high yielding varieties of seeds, fertilizers and new techniques of cultivation. Futures Market will act as a smoothing agent between the present and future commodity market. If the price, which is going to exist in future, is high compared to what it is now, then the arbitragers would like to buy the commodities now to sell those in future. The reverse process is also true. So the existence of a futures market is always fine for any economy. It opens up a new opportunity to people to safeguard themselves from unexpected risks.

Economic benefits of the commodity futures trading

Futures market for commodities has a very fundamental role to play in any economy given the fact that futures contracts perform two important functions of price discovery and price risk management with reference to the given commodity. At a wider level commodity markets provide advantages like it leads to integrated price structure throughout the country, it guarantees price stabilization-in times of violent price fluctuations and facilitates lengthy and complex production and manufacturing activities. At micro level also they provide many economic benefits to several different sections of the society. For example it is useful to producer of agricultural commodity because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities. The futures trading is very useful to the exporters as it provides an advance indication of the price likely to exist and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Further after incoming into an export contract, it enables him to hedge his risk by operating in futures market. Also from the point of view of a consumer these market provide an idea about the price at which the commodity would be accessible at a future point of time. Thus it allows the consumer to do proper costing and also cover his purchases by making forward contracts.

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