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