Hiccups in Integrating Spot & Futures Commodity Markets
National Agricultural Market provides scope to have a spot price determined electronically just like a stock price
settlement. In case of stock markets this happens seamlessly because both markets — cash and derivatives — operate on the same platform and final settlement price for a share or index is the spot price.
In case of commodities, it is complex as the futures market developed independent of the spot markets. The reason is that wholesale cash markets or mandis were in operation for years and operate in the physical manner which is opaque. Futures are on electronic platforms which make the price discovery process transparent. However, there are few spot prices that can be linked directly with Addition of 35.65 lakh investor in FY17 so far Source: PTI the futures prices as there are a plethora of varieties/grades in agri products which may not be traded on a daily basis in the physical market. While there could be over 60 varieties of cotton, the futures exchange deals with probably not more than two. Spot prices are procured through a process of polling of market participants that are cleansed and used as benchmarks. This is because arrivals come at harvest time at the primary stage of sale and could be anytime during the year when there is a secondary sale. The polled spot price is finally used for settling the contract as the futures price should converge with the spot price. While this sounds good, it has been found that the level of accuracy is low since the price is a polled one and can be influenced by participants.
The concept of National Agricultural Market (NAM) provides scope to have a spot price of say mustard determined electronically just like a stock price which can be juxtaposed with the NCDEX futures contract of mustard with the same basis centre. This will make it easier to match the two and the price discovery process becomes robust. The Budget talks of bringing about such a link where there is seamless relationship between the two segments.
The NAM will theoretically link all the 7,500 odd mandis and the prices for all products. Futures prices would then give an option of deciding the timing of sale.
But as this task is humongous, the existing commodity exchanges should be given access to run mandis which are the ‘basis centers’ for their contracts with government support so that the two markets get integrated.
(Views are personal)