DE­RIV­A­TIVES PRO­POSED FOR ONION PRICE VOLATIL­ITY

Business Standard - - THE SMART INVESTOR - RA­JESH BHAYANI

With onion price volatil­ity ev­ery year, ex­perts sug­gest fu­tures trad­ing with an ac­tion plan based on a price band and for­ward trad­ing with de­liv­ery-based set­tle­ment.

At times, farm­ers throw away their onion pro­duce due to ex­cess sup­ply mak­ing the cost of tak­ing this to the whole­sale mar­ket higher than the pre­vail­ing price. It hap­pened in Mad­hya Pradesh last year. On the other hand, con­sumers some­times suf­fer due to soar­ing prices, due to sup­ply short­age or trader carteli­sa­tion. Both sit­u­a­tions oc­cur fre­quently.

An­nual pro­duc­tion is 19-20 mil­lion tonnes, con­cen­trated in a few states; the con­sum­ing states are many.

Sev­eral sow­ing cy­cles and in­ter­mit­tent gaps between sow­ing and har­vest­ing usu­ally cre­ate rip­ples and prices go up sharply and fall as sharply. A 40-50 per cent price move­ment in a month is no sur­prise.

Some years ago, the re­tail price touched ~100 a kg, rais­ing fear of un­rest.

A need was felt for a long-term so­lu­tion by in­tro­duc­ing de­riv­a­tives trad­ing, to smoothen the volatil­ity while bal­anc­ing the farmer’s need for a bet­ter price with con­sumer in­ter­est.

Vi­jay Sar­dana, an agri busi­ness ex­pert, says: “Fu­tures trad­ing in onions can be in­tro­duced with min­i­mum and max­i­mum price bands; any breach re­quires some reg­u­la­tory ac­tion. This will help check the spec­u­la­tive in­ter­est.” The govern­ment has al­ready no­ti­fied onion as a per­mis­si­ble com­mod­ity for de­riv­a­tives trad­ing on reg­u­lated ex­changes.

How­ever, the price of onion is a po­lit­i­cally sen­si­tive one. If fu­tures trad­ing is al­lowed and prices start ris­ing, the blame will fall on fu­tures rather than the fun­da­men­tals.

Sar­dana’s sug­ges­tion is de­signed to ad­dress this, of a price band-based de­riv­a­tive, with pre­ex­plained trans­parency. Fu­tures should be in­jected when the price falls be­low the av­er­age pro­duc­tion cost for farm­ers.

When prices go up, say, three times the cost, gov­ern­ments have to in­tro­duce stock lim­its, tak­ing it as a sig­nal of un­usual move­ment. If prices rise fur­ther, say, four times the cost of pro­duc­tion, fu­tures trade would be sus­pended. The price base, band and the per­mis­si­ble rise is to be de­ter­mined on a study of price move­ment and volatil­ity.

Such a mech­a­nism, goes the ar­gu­ment, would stay traders from carteli­sa­tion, as there will be fear of reg­u­la­tory ac­tion, in­clud­ing sus­pend­ing of fu­tures, if prices go beyond a per­mis­si­ble higher band. The price is to re­main in a pre­fixed band and en­sure farm­ers and traders get to earn a profit, while al­low­ing cus­tomers a right to get the com­mod­ity at a rea­son­able price.

An ex­change of­fi­cial says while in­tro­duc­ing fu­tures, there is a need for a trans­par­ent spot mar­ket price which can be used to ar­rive at a set­tle­ment price. Polling is one way but that is not trans­par­ent. Stor­age is an­other is­sue with onion.

Traders in­vari­ably face com­plaints of carteli­sa­tion; three years ear­lier, when it was re­tail­ing at ~100 a kg, the Com­pe­ti­tion Com­mis­sion of In­dia be­gan a probe. The agri-cen­tric Na­tional Com­mod­ity and De­riv­a­tives Ex­change (NCDEX), which has set up a com­mod­ity repos­i­tory, has pro­posed for­ward trad­ing in onion to ad­dress price volatil­ity and stor­age is­sues. For­wards are dif­fer­ent from fu­tures, which trade in stan­dard­ised con­tracts and may be set­tled in cash.

Ac­cord­ing to sources, the com­mod­ity ad­vi­sory com­mit­tee of the Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) be­lieves for­ward trad­ing is fine in­so­far as the ex­change pro­poses set­tle­ment in de­liv­ery, while tak­ing care of grad­ing, as­say­ing and de­liv­ery cen­tres.

An NCDEX source said they’d be in­ter­ested in launch­ing for­ward trad­ing in onions if per­mit­ted by the reg­u­la­tor. The Sebi Act per­mits for­wards and fu­tures, as well as op­tions and de­riv­a­tives.

Sebi’s com­mod­ity ad­vi­sory panel be­lieves for­ward trad­ing is fine in­so­far as the ex­change pro­poses set­tle­ment in de­liv­ery, while tak­ing care of grad­ing, as­say­ing and de­liv­ery cen­tres

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