e   rit    ar et in ndia      14.7
          Commodity futures serve a great purpose in      price of wheat in future would not impact its cost
     any economy. As we see in the case of agricultural   of production.
     commodity—their prices play a key role in                 However, what needs to be kept in mind is
     determining the fortune of the agriculture and       that farmers do not largely operate in the futures
     food processing industry in India. These prices      market. This is partly due to operational difficulties
     undergo a large degree of fluctuation. Reasons for   and lack of knowledge. Though, they observe the
     price fluctuation are crop failure, bad weather,     price trends emerging from a futures market and
     demand-supply imbalance, etc. This fluctuation,      then decide what commodity in what proportion
     in turn, leads to a ‘price risk’. This price risk is to cultivate.
     largely borne by the farmer and the industries
                                                               In case of user industries, commodity
     where agricultural commodities are used as raw
                                                          exchanges help them to plan their production and
     material. Commodity exchanges are associations
                                                          determine their cost of production. Commodity
     that determine and enforce rule, and set procedures
                                                          exchanges are an effective tool to hedge price
     for trading of commodities. The main objective of
                                                          risk. However, the government needs to improve
     the exchange is to protect the participants from
                                                          infrastructure, put in place vigilant governing
     adverse movement in prices by facilitating futures
                                                          systems, etc., to encourage trading on these
     trading in commodities.
                                                          exchanges.
          If the participants hedge themselves against
     this price risk, then they would be able to insulate      Big money started flowing into commodity
     themselves against the inherent price fluctuations   futures with the advent of online multi-commodity
     associated with agricultural commodities. One        exchange. The boom, which began when the
     of the methods of doing this would be by using       stock market was sluggish, has surprisingly not
     commodity exchanges as a trading platform. Apart     waned even after the Sensex crossed 20,000
     from hedging against price risk, a commodity         (by 2004–06). High stakes, long trading hours
     exchange helps in production and procurement         and comparatively little knowledge about the
     planning as one can buy in small lots. Further as    derivative products have underscored the role of
     the exchange consists of various informed industry   a regulator. The Forward Markets Commission
     participants, price discovery is more efficient and  (FMC), which for decades was entrusted with
     discounts the local and global factors.              the job to curb forward trades, now has the job
          Let us take a very simple example to understand to develop and regulate the commodity futures
     how trading on commodity exchanges help              market.
     industry participants. A farmer who is producing
     wheat can sell ‘wheat futures’ on a commodity
                                                          fmc
     exchange. This will help him lock in a sale price    The Forward Markets Commission is a statutory
     of a specified quantity of wheat at a future date.   body set up under the Forward Contracts
     Hence the farmer would now be able to get an         (Regulation) Act, 1952. It functions under
     assured price for his produce in future and any      the administrative control of the Department
     decline in the price of wheat would not impact his   of Consumer Affairs, Ministry of Consumer
     earnings. On the other hand, a user industry (e.g.,  Affairs, Food & Public Distribution. In 2014,
     a flour mill) could purchase the wheat futures from  the commission was transferred to the Ministry
     the exchange. Hence the flour mill would now be      of Finance. Headquartered at Mumbai with
     able to fix its future purchase cost for a specified one regional office at Kolkata, the commission
     quantity of wheat. Therefore, any increase in the    comprises a Chairman, and two members. The