INAUGURAL ADDRESS OF PROF. K.V. THOMAS, HON’BLE MINISTER OF STATE (I/C) OF CONSUMER AFFAIRS, FOOD & PUBLIC DISTRIBUTION AT THE “AGRIBUSINESS & COMMODITY MARKETS STAKEHOLDER AWARENESS AND EDUCATION SEMINAR” ON 30TH JUNE, 2012 AT KOCHI, BEING ORGANISED BY THE HINDU BUSINESS LINE, FMC AND NCDEX:
Chairman of Forward Markets Commission, M.D of National Commodities and Derivatives Exchange (NCDEX), G. Chandrasekhar from Hindu Business Line, other dignitaries on the dais, Ladies and Gentlemen: It gives me great pleasure to inaugurate the “Agribusiness & Commodity Markets Stakeholder Awareness and Education Seminar” being organised in Kochi by The Hindu Business Line, Forward Markets Commission (FMC) and the National Commodity and Derivatives Exchange (NCDEX). I especially would like to thank The Hindu Business Line for taking the initiative as a confidence building measure, in association with the FMC and the NCDEX, in bringing about awareness amongst all the stakeholders of the commodity markets such as producers, processors, trading houses, importers, exporters and others operating in the physical market about the importance of reducing/controlling commodity price risks arising out of volatile market conditions.
Agriculture occupies an important role in Indian Economy and importance of Agri-business and commodity trading in present times cannot be underestimated. Indian Commodity markets have been in place since historical times. It is heartening for me to note that in just about 9 years since liberalization, commodity futures market has emerged as one of the fastest growing segments of our economy. At present there is permission for trading for more than 100 commodities. Out of these 100 permitted commodities, about 27 Agri-commodities and 20 Non-Agri-Commodities are actively traded on exchange platforms. Price volatility of essential commodities has great significance to developing countries like India as it has been found to be contributing to poverty, social unrest and other negative economic and welfare impacts. Price volatility also affects the business environment in that the uncertainty that it creates undermines investors’ confidence in the business, ultimately affecting the economic development of the nation. It is therefore essential that public-private effort is encouraged to address price volatility of food and other agriculture commodities in an effective manner. I take this opportunity to congratulate The Hindu group of publications for their proactive efforts in attracting the attention of policymakers to areas that need urgent and prompt attention.
India has always been adopting a cautious approach when it comes to its finance and economic policies. India is a democratic and a socialistic country. The need to take along all sections of the society as we strive to ensure a better future for all the citizens of the country is of utmost importance. However, adopting caution can never be considered lacking in courage. The principle of cautious approach holds true in all spheres of economic policy of the Government including the sensitive commodity markets. We believe that the fundamentals of demand and supply in the physical market decide the prices of commodities and that futures market only acts as a platform for price discovery and price risk management for the physical market participants.
However, I must admit that the rise in prices of certain agricultural commodities, including some essential commodities in recent months, has been attributed as contributory, in some quarters, to excessive speculation in futures market. I may add that in the first quarter of 2012, prices of mustard seeds, chana, potato, mentha oil, soya bean, cardamom, black pepper, etc. increased by more than 100% which was a matter of grave concern to the government. Although FMC is an independent regulatory, it acts in close coordination with the Government and is keeping a close watch on the situation and will make use of all the regulatory tools available to keep a check on the excessive speculation in the futures trading in commodities, specifically the agricultural commodities. The FMC has already implemented higher margin requirements for trading in agri-commodities and has also reduced position limits for essential commodities. This is in addition to advisory committees being formed for all commodities including agri-products which would consist primarily of physical market participants such as representatives of farmers, producers, processors, exporters, domain experts and other stakeholders to advise the Government and the FMC. These advisory committees will guide the government on how to bring about better alignment between the physical markets and the futures market so that farmers and hedgers are substantially benefitted from the futures trading which is its primary purpose. An advisory committee has already been constituted to study various issues in rubber futures trading. The FMC will also look into areas of hoarding and sources of finance that help hoarding. All these initiatives will definitely help us to steer clear of the pitfalls generated out of commodity price risks. AGMARKNET, the e-governance portal has been evolved for strengthening the interfaces among government organisations, farmers, industry, policy-makers, academic institutions and other beneficiaries.
But I must also share with you our concern that our attempts in cleansing the system should not result in weakening our commodity markets which are still under-developed with huge scope for progress. Development in the sector is expected to contribute significantly in strengthening Indian economy and the agricultural field in particular and enable it to face the challenges of globalization. Commodities today account for 48% of the Indian GDP and are on the path growth even beating equities. Demands from developing economies like India have a sure share in developing economies sustaining global growth which is a good sign for India as a developing country. Commodity Spot Exchanges are helpful for farmers to sell their small lots through Commodity Exchanges. Farmers who cannot directly take part in this area due to various reasons can benefit from the price signals emanating from the exchange platform. For example, farmers of Kerala have gained a lot through the Commodity Spot Exchanges: especially the rubber growers benefited a lot in realising over 90 per cent of the final prices through participation in the future markets. So what is needed in a balanced and cautious approach as our aim is to ensure that the benefits of commodity markets are reaped while the loopholes leading to counterproductive effects on the people are plugged.
All developing countries including India are dependent on primary commodities for the precious foreign exchange. But we must beware risks and instabilities that come on the way. But with increasing awareness of such risks, the potential of commodities for India’s economic growth, role of futures exchange, regulatory functions, etc. we can learn to use financial instruments to our advantage, to improve our economic management, and to the betterment of the people of the country.
The Forward Markets Commission along with National exchanges is implementing price Dissemination Project for disseminating spot and futures prices of agriculture commodities by installing Electronic Price Tickers Boards at all prominent locations frequented by farmers and other stakeholders. Am happy to note that 1400 price Tickers Boards have been installed in the 11th Five Year Plan and another 7500 price Ticker Boards would be installed in the 12th Five Year Plan. Large scale presence of Price Tickers Boards and information display about Agri-commodities prices would go a long away in checking Information Asymmetry and benefit farmers in Price Risk Management.
Indian Commodity markets have to come to terms with many challenges. Efforts to effectively deal with them will strengthen these markets further. One of the pressing needs of the time is better alignment of Physical and Futures markets. Commodity futures markets in India are about 3 times the size of physical markets but more than 10 times the size of physical markets in other developed countries hence physical markets are precious for our economy. If I may say so Physical markets are tied to the soil of the land and alignment of physical markets with futures markets will benefit farmers most. Futures markets can serve as adjunct to the physical commodities markets.
Warehousing facilities is another dire requirement of farmers and other participants of commodities markets. Warehousing system and warehouse receipts act as the chain, connecting farmers with the future market and credit financing. But compared with the growth of futures trading in India, there are not sufficient numbers of warehouses. Small and marginal farmers do not have a storage capacity and hence are forced to sell their crops at whatever price is offered to them and cannot wait to get better prices. Effective warehouse facilities would provide necessary storage support to farmers and they can hold the commodity for future profit can make money for giving inputs and make day to day expenditure. Effective warehousing is also essential for facilitating effective delivery mechanism on exchange platform. There are wide differences among different states in terms of storage capacities for commodities and there is a need to smoothen these differences. There is a need to work on the reliability and efficiency of current warehouse systems in the country. The warehousing system also helps in the better integration of ready market for commodities across time and places, thereby facilitating better integration of spot and futures markets. This in turn improves efficiency of futures market in price discovery and price risk management functions. Starting of new warehouses would be very useful for the further development and increasing participation of all kind of players in the commodity futures market.
Instruments like warehouse receipts are very important for the transition to well functioning markets. Current methods of physical settlements can be replaced with settlement using warehouse receipts over a period of time. Eventually physical receipts would be completely replaced by electronic receipts. Warehouse receipts also help in availing credit financing. Loan facility against warehouse receipts is useful for farmers and traders and they can use this money for inputs for crops and sowing. Commodity markets are expected to serve as a hedging platform. At present there are institutional as well as other constraints for effective hedging. There is a need to broaden the participation of hedgers like banks, SMEs and corporate houses. Primary role of banks would be to facilitate hedging. Participation of Cooperative Societies also needs to be encouraged as they also are a strong agency to play the role of “Aggregators”. States like Kerala have an effective experience at “aggregation” and I am confident that participants from other states would benefit by that experience. Hedgers’ participation will also enable market deepening as they can act as agents and aggregators for retail participation, thus leading to market inclusion of millions of potential investors. At the same time, their participation will bring in high amount of liquidity in the
I am sure, the seminar which is going to have suggestions and opinions of a cross section of society from the industry, government agencies and the experts, will prove to be an excellent opportunity to understand such a critical and sensitive issue as the “commodity markets” so that we could make the best use of them to the overall economic development of the nation.
THANK YOU!
Chairman of Forward Markets Commission, M.D of National Commodities and Derivatives Exchange (NCDEX), G. Chandrasekhar from Hindu Business Line, other dignitaries on the dais, Ladies and Gentlemen: It gives me great pleasure to inaugurate the “Agribusiness & Commodity Markets Stakeholder Awareness and Education Seminar” being organised in Kochi by The Hindu Business Line, Forward Markets Commission (FMC) and the National Commodity and Derivatives Exchange (NCDEX). I especially would like to thank The Hindu Business Line for taking the initiative as a confidence building measure, in association with the FMC and the NCDEX, in bringing about awareness amongst all the stakeholders of the commodity markets such as producers, processors, trading houses, importers, exporters and others operating in the physical market about the importance of reducing/controlling commodity price risks arising out of volatile market conditions.
Agriculture occupies an important role in Indian Economy and importance of Agri-business and commodity trading in present times cannot be underestimated. Indian Commodity markets have been in place since historical times. It is heartening for me to note that in just about 9 years since liberalization, commodity futures market has emerged as one of the fastest growing segments of our economy. At present there is permission for trading for more than 100 commodities. Out of these 100 permitted commodities, about 27 Agri-commodities and 20 Non-Agri-Commodities are actively traded on exchange platforms. Price volatility of essential commodities has great significance to developing countries like India as it has been found to be contributing to poverty, social unrest and other negative economic and welfare impacts. Price volatility also affects the business environment in that the uncertainty that it creates undermines investors’ confidence in the business, ultimately affecting the economic development of the nation. It is therefore essential that public-private effort is encouraged to address price volatility of food and other agriculture commodities in an effective manner. I take this opportunity to congratulate The Hindu group of publications for their proactive efforts in attracting the attention of policymakers to areas that need urgent and prompt attention.
India has always been adopting a cautious approach when it comes to its finance and economic policies. India is a democratic and a socialistic country. The need to take along all sections of the society as we strive to ensure a better future for all the citizens of the country is of utmost importance. However, adopting caution can never be considered lacking in courage. The principle of cautious approach holds true in all spheres of economic policy of the Government including the sensitive commodity markets. We believe that the fundamentals of demand and supply in the physical market decide the prices of commodities and that futures market only acts as a platform for price discovery and price risk management for the physical market participants.
However, I must admit that the rise in prices of certain agricultural commodities, including some essential commodities in recent months, has been attributed as contributory, in some quarters, to excessive speculation in futures market. I may add that in the first quarter of 2012, prices of mustard seeds, chana, potato, mentha oil, soya bean, cardamom, black pepper, etc. increased by more than 100% which was a matter of grave concern to the government. Although FMC is an independent regulatory, it acts in close coordination with the Government and is keeping a close watch on the situation and will make use of all the regulatory tools available to keep a check on the excessive speculation in the futures trading in commodities, specifically the agricultural commodities. The FMC has already implemented higher margin requirements for trading in agri-commodities and has also reduced position limits for essential commodities. This is in addition to advisory committees being formed for all commodities including agri-products which would consist primarily of physical market participants such as representatives of farmers, producers, processors, exporters, domain experts and other stakeholders to advise the Government and the FMC. These advisory committees will guide the government on how to bring about better alignment between the physical markets and the futures market so that farmers and hedgers are substantially benefitted from the futures trading which is its primary purpose. An advisory committee has already been constituted to study various issues in rubber futures trading. The FMC will also look into areas of hoarding and sources of finance that help hoarding. All these initiatives will definitely help us to steer clear of the pitfalls generated out of commodity price risks. AGMARKNET, the e-governance portal has been evolved for strengthening the interfaces among government organisations, farmers, industry, policy-makers, academic institutions and other beneficiaries.
But I must also share with you our concern that our attempts in cleansing the system should not result in weakening our commodity markets which are still under-developed with huge scope for progress. Development in the sector is expected to contribute significantly in strengthening Indian economy and the agricultural field in particular and enable it to face the challenges of globalization. Commodities today account for 48% of the Indian GDP and are on the path growth even beating equities. Demands from developing economies like India have a sure share in developing economies sustaining global growth which is a good sign for India as a developing country. Commodity Spot Exchanges are helpful for farmers to sell their small lots through Commodity Exchanges. Farmers who cannot directly take part in this area due to various reasons can benefit from the price signals emanating from the exchange platform. For example, farmers of Kerala have gained a lot through the Commodity Spot Exchanges: especially the rubber growers benefited a lot in realising over 90 per cent of the final prices through participation in the future markets. So what is needed in a balanced and cautious approach as our aim is to ensure that the benefits of commodity markets are reaped while the loopholes leading to counterproductive effects on the people are plugged.
All developing countries including India are dependent on primary commodities for the precious foreign exchange. But we must beware risks and instabilities that come on the way. But with increasing awareness of such risks, the potential of commodities for India’s economic growth, role of futures exchange, regulatory functions, etc. we can learn to use financial instruments to our advantage, to improve our economic management, and to the betterment of the people of the country.
The Forward Markets Commission along with National exchanges is implementing price Dissemination Project for disseminating spot and futures prices of agriculture commodities by installing Electronic Price Tickers Boards at all prominent locations frequented by farmers and other stakeholders. Am happy to note that 1400 price Tickers Boards have been installed in the 11th Five Year Plan and another 7500 price Ticker Boards would be installed in the 12th Five Year Plan. Large scale presence of Price Tickers Boards and information display about Agri-commodities prices would go a long away in checking Information Asymmetry and benefit farmers in Price Risk Management.
Indian Commodity markets have to come to terms with many challenges. Efforts to effectively deal with them will strengthen these markets further. One of the pressing needs of the time is better alignment of Physical and Futures markets. Commodity futures markets in India are about 3 times the size of physical markets but more than 10 times the size of physical markets in other developed countries hence physical markets are precious for our economy. If I may say so Physical markets are tied to the soil of the land and alignment of physical markets with futures markets will benefit farmers most. Futures markets can serve as adjunct to the physical commodities markets.
Warehousing facilities is another dire requirement of farmers and other participants of commodities markets. Warehousing system and warehouse receipts act as the chain, connecting farmers with the future market and credit financing. But compared with the growth of futures trading in India, there are not sufficient numbers of warehouses. Small and marginal farmers do not have a storage capacity and hence are forced to sell their crops at whatever price is offered to them and cannot wait to get better prices. Effective warehouse facilities would provide necessary storage support to farmers and they can hold the commodity for future profit can make money for giving inputs and make day to day expenditure. Effective warehousing is also essential for facilitating effective delivery mechanism on exchange platform. There are wide differences among different states in terms of storage capacities for commodities and there is a need to smoothen these differences. There is a need to work on the reliability and efficiency of current warehouse systems in the country. The warehousing system also helps in the better integration of ready market for commodities across time and places, thereby facilitating better integration of spot and futures markets. This in turn improves efficiency of futures market in price discovery and price risk management functions. Starting of new warehouses would be very useful for the further development and increasing participation of all kind of players in the commodity futures market.
Instruments like warehouse receipts are very important for the transition to well functioning markets. Current methods of physical settlements can be replaced with settlement using warehouse receipts over a period of time. Eventually physical receipts would be completely replaced by electronic receipts. Warehouse receipts also help in availing credit financing. Loan facility against warehouse receipts is useful for farmers and traders and they can use this money for inputs for crops and sowing. Commodity markets are expected to serve as a hedging platform. At present there are institutional as well as other constraints for effective hedging. There is a need to broaden the participation of hedgers like banks, SMEs and corporate houses. Primary role of banks would be to facilitate hedging. Participation of Cooperative Societies also needs to be encouraged as they also are a strong agency to play the role of “Aggregators”. States like Kerala have an effective experience at “aggregation” and I am confident that participants from other states would benefit by that experience. Hedgers’ participation will also enable market deepening as they can act as agents and aggregators for retail participation, thus leading to market inclusion of millions of potential investors. At the same time, their participation will bring in high amount of liquidity in the
I am sure, the seminar which is going to have suggestions and opinions of a cross section of society from the industry, government agencies and the experts, will prove to be an excellent opportunity to understand such a critical and sensitive issue as the “commodity markets” so that we could make the best use of them to the overall economic development of the nation.
THANK YOU!
