Futures Trading does not Impact Commodity Price or its Availability

The future trading in commodities is allowed in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 for performing two important economic functions, i.e., price discovery and price risk management.

The commodity futures market by performing the two important economic functions of price discovery and price risk management, serves as an important adjunct to the commodity spot market. It also helps policy makers to realign policies to meet likely shortage or surplus situation in a given commodity in the near future. 

Some of the essential commodities are permitted for futures trading. The presently actively traded essential commodities are wheat, chana, mustard seed, soyabean, soya oil, maize and potato. 

Futures trading does not impact the price or availability of any commodity in the short-term. But in the medium or long-term price discovery process facilitates strategic action by various stake holders including policy planners in government to augment production and imports in shortage situation and export and MSP operations during surplus situation, thereby helping the consumers and producers respectively as well as stabilize the prices. Thus, futures market helps the players in the real economy to plan their economic activities better and balance the demand-supply equation. 

As per the provisions of the Forward Contract (Regulation) Act, 1952, presently options trading in commodities is not allowed. However, under the proposed amendments to the FC (Regulation) Act, options well be allowed. An options contract provides an option to a producer/stockist/importer to sell or not to sell his commodity if the subsequent price movement is upwards. In other words, if the prices move down, he can exercise his option and sell his goods to the options underwriter (counter party who has transferred the risk to himself) at the agreed price but retains the right not to sell by foregoing the option premium if price movement is favourable to him. In that situation, he can sell his goods in the open market at higher price. Thus, the options contract will help a farmer to protect his down side without foregoing the benefit of the potential upside whereas in futures contract, the farmer has to sell the goods at the agreed rice. Thus, options contract is a superior instrument for price risk management as far as the farmer is concerned. 

This information was given by Prof. K.V. Thomas, Minister of State for Agriculture, Consumer Affairs, Food & Public Distribution, in written reply to a question in the Lok Sabha today.