IRT: http://groups.yahoo.com/group/mukto- mona/message/47771
Reply: Futures caused the market manipulation
I have deep respect for Mr. Krishan Bir Chaudhary and his organisation for the work done by him for the upliftment of Indian farmers. But I was shocked by his article written in Financial Express which quoted half facts. Half told truth is worse than a lie. This led me to send a formal reply where the facts were misquoted.
Mr. Cahudhary states that government delisted the wheat, rice, tur and urad contracts because of price manipulation. I want to bring to his notice that in 2006 futures prices provided the government with vital price signals on demand and supply mismatch in wheat and again tur did the same in 2007. Even after the delisting of the tur futures in Jan 2007 prices stayed higher through out the year. The prices of urad came down during rabi season (February 2007 onward) as production was in good shape at 5.1 lakh tonnes, it was more than half of Kharif output which was 9.1 lakh tonnes in 2006-07. I say that the futures trading was banned to satisfy the political demand rather than to do with anything else.
The author also states that futures have not benefited farmers. I argue that this allegation is totally baseless, In fact the advent of futures exchange in India has seen the prices of commodities evening out. The prices at the time of harvest now are much more in the favor of farmers than what it used to be any time before. Farmers are able to realize prices that are much higher than the minimum support price (this also quoted by Sharad Joshi one of the prominent farmleader in a newspaper last week), since the futures trading started. The accolades go to the price discovery taking place at futures exchange. Now the farmers cannot be taken for a ride as futures prices are disseminated to the farthest places in India through ICT. Price dissemination also helps farmers to take sowing decision.
The farm leader quoting the India economic survey 2007-08 said "Direct participation of farmers in the commodity futures is some what difficult at this stage due to the large lot size and other reasons…" But he turned the blind eye to the same survey a paragraph above mentioning "The commodity futures markets facilitate price discovery process and provide for risk management. Dissemination of price information is expected to help such participants to cover their price risk in their pre-sowing and post-harvest decisions". During 2007, 43 awareness programmes were organized by FMC and other agencies, exclusively for the farmers. The awareness programmes are designed to make farmers aware of the benefits of the futures market and to utilize the price signals emanating from the futures exchanges in taking various decisions. Though the number of seminars conducted seems to be minuscule but there is a seriousness to percolate the benefits of futures trading to all the stake holders.
Mr. Chaudhary mentions that farmers have no time to participate directly in futures markets as they have to prepare the field after harvest for the next crop. I humbly ask him does participating on futures exchange like traveling to the moon, which requires months of preparation time. The participation is just a click away. Only it requires is a proper judgment. He also says if corporates acts as an aggregator for the formers, they will exploit the later. I want to bring to his notice, it's not necessary that corporates act as an aggregator. A government organisation, NGOs etc can come forward to take up this job.
Ann E. Berg an international commodity specialist, in her report submitted in May 2007, to the Government of India, via the Department of Consumer Affairs, shares the HAFED's experience on hedging. The report mentions – During 2006-2007, HAFED was able to "lock in" a net profit of Rs. 108 per quintal after deducting all the expenses. HAFED stated that the average wheat farmer in Haryana produced about 50 quintals of wheat per year. If it had been able to return 80% of the 2006-07 profits back to its producing base, each farmer would have realized an additional Rs.4000 in income, a considerable sum for most. It could become possible only because of hedging. If there was all manipulation in the market will HAFED would able to profit?
The misquotations by the author doesn't stops here, he says there is no shortage of food in global markets and provides the production figures of 2007-08. He again turns a blind eve to the daily reports in news papers and various other media from World Bank to FAO expressing their concerns on food front. He also fails to quote the other facts in the same IGC report which he has quoted – The global production of foodgrains is stagnant and for at least last five years the consumption has outstripped the total production in four out of last five years. This demand supply mismatch has pushed the world ending stocks to the bottom not seen in last many decades. Also the IGC report forecast the world wheat production for 2007-08 at 604 million tonnes whereas the consumption is forecasted at 612 million tonnes one more year where consumption will out strip production – eating into the reserves. The world grain stock is forecasted at 248 million tonnes by IGC in 2007-08 down from 330 million tonnes in 2004-05.
When talking about India Mr. Chaudhary mentions about only the production side and is mum on supplies issues. One point here I would like to highlight for him is in India the production of foodgrains has not kept pace with the rising population. Per capita availability of foodgrains in India has fallen from 186.2 kg in 1991 to 154.2 kg in 2005, whereas the population has increased steadily since than. Rising income of country's millions of middle class consumers – increased spending on healthy food (pressurizing stagnant supplies), and growing dependence on wheat imports are all pressurizing the supplies. The increased spending by the government on various social programs is putting more money in people's hand who are chasing for the limited resources. And these are the major reason for prices drivers and not manipulation and hoarding what he has stated again and again in his article.
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