The commodity trading in agricultural commodities are aimed at stabilising the overall prices of commodities. Ensuring fair prices to the producers, avoiding instabilities, producing an accurate price discovery etc. are possible with the help of future trading in agriculture. At the same time, some speculators may take benefit by brining high instabilities in commodity prices.
Objectives of opening agricultural commodity trading
Benefiting producers from stable prices.
Building a better link between the future market and the spot market.
Ensuring price stability so that seasonal variations can be minimised.
Importance of agricultural commodity trading
Agricultural commodity trading market is helpful to discover future prices depending upon the current trends.
They are helpful to discover prices and in this way, they may influence the pricing decisions of the farmers.
A better link between the future market and spot market powers the commodity market to influence the overall agricultural sector.
Agricultural prices in India are set or influenced by MSP and the wholesale price set by traders. Both these may contain errors as a market oriented price mechanism. In this context, a more refined commodity market may power market oriented price determination.
Scenario of agricultural commodity trading
Of the total commodity trading, agriculture contributes to nearly 12 percent and non-agricultural goods like metal, crude etc contributes to the remaining (88%).
At present, there are four commodity trading stock exchanges in the country – the MCX, NCDEX, NMCE and Indian Commodity Exchange. Among these, the NCDEX and NMCE are focusing on agricultural commodities. Besides, there are regional players as well.
The NCDEX is the largest agricultural commodity stock exchange in the country. At NCDEX, agriculture had the highest share in the turnover at 99.9 per cent followed by bullion at 0.1 per cent. Another exchange that solely rely on agricultural commodities is the NMCE. Almost the entire turnover at NCDEX and NMCE was contributed by the agricultural commodities segment. At MCX, the share of agricultural (agri) commodities in the total turnover was 2.4 per cent in 2016-17.
As on end December 2017, there were 29 agricultural commodities that are allowed by the SEBI to be traded at various commodity stock exchanges.
Major items treaded include wheat, barley, cotton, pepper, rubber, sugar, maize, milk, etc.
Problems and corrective measures by SEBI
In the past, SEBI has suspended trading in some agricultural commodities due to excessive speculative actions or manipulation. There were worries about large-scale speculation in online commodity trading, sending wrong price signal to the spot market. Punitive actions were taken by the regulator as a follow up.
Later, some of them like castor seed and chana were relaunched in 2016-17.
To attract more investors, SEBI has recently allowed to Category III Alternative Investment Funds to trade in commodity markets