After the ban, the facts: futures didn’t spike wheat, pulse prices

The report on wheat and chana, obtained by The Indian Express, shows that Naik’s study establishes that there is no evidence to show that futures trading had any significant influence on their spot market rates. In fact, a comparison of data on futures trading between wheat and chana suggests that a more reformed agricultural commodities market is likely to be more beneficial to farmers.

The study looked at price volatility in a 30-month period before and after the introduction of futures trading in agriculture commodities. For wheat, price volatility increased from 7.09% between January 2002 and June 2004 — before trading was allowed — to 13.63% between July 2004 and December 2006 after introduction of the exchange markets.

But this jump, Naik’s analysis shows, isn’t because of futures trading but because of lower production, lower stocks, and soaring international prices of wheat.

“The year 2005-06 turned awful for wheat production,” says the report, “the actual production (68.6 million tonnes) turned out 5 % less than forecast which led to prices soar up by 8%.” Also, this year, international production dipped and global prices rose by almost 20 per cent to $158 per tonne. In the case of Chana, price volatility, in fact, marginally decreased from 6.4% between April 2002 and March 2004 before future trading was allowed to 6.16% between April 2004 and March 2006 after introduction of the exchange markets. However, there was high volatility during April 2006-March 2007, which the report says, was the result of “panic” over lower chana production due to “weather aberration.”

The study reveals that while integration between the futures and spot prices of wheat is not that strong, the market integration in chana is reasonably better than wheat. Speaking from Bangalore, Naik told The Indian Express: “This could be because of the volumes of the two commodities being traded and the level of participation by different players. While the volume of wheat traded in the futures market is less than 0.5 percent of the production, the volumes in chana traded has been 16 and 28 times (in 2005 and 2006, respectively) the total production in the country.” Understandable, given that the largest stockholder of wheat in the country, the government-owned FCI, doesn’t enter the futures market. “Selective participation of FCI in the futures market would be a welcome step,” said Naik. “It will only deepen the market.”