Review on SEBI’s Suspension of Futures Trading in Chana, RM seed

SEBI has suspended futures of two commodities – Chana and RM seed in the months of August and October respectively. A number of decisions have been taken in the recent past to regulate trading of pulses and other commodities therefore it seems that the new government (much like previous governments) is also skeptical regarding futures market to be one of the factors causing inflation in commodities traded on the future exchange.

However, there has been numerous evidence provided by the exchange officials and market experts, which clearly indicates that suspension of futures trading has not been attributed to the inflationary mechanism. The regulator (SEBI) has permitted only closing of the existing positions and prohibited initiation of any new positions in the respective contracts.

The ban on chana and mustard futures and options trading on NCDEX has put farmer’s producer organizations (FPO’s) in a fix. NCDEX programme for FPOs was conducted between last November and this February and nearly 41 FPOs could attend the programme. The FPO’s of MP and Rajasthan were able to lock-in the price of 1,030 tonnes of chana and 1,980 tonnes of mustard seed, through purchasing of ‘Put’ options. This helped them to minimize their price risk ahead of the planting operations. Farmers usually have to make decisions regarding growing a particular crop after considering the average prices prevailing during the previous season but the risk of price fall increases at the time of harvest. Selling futures contracts minimizes the risk to some extent.

Similarly, the put option contract helps farmers to lock in the price and while purchasing the options, they just have to pay a small premium at the time of sowing. If the prices fall below the locked-in price farmers can deliver the commodity on the exchange platform and seek realisations. If the spot prices are higher than the locked-in prices, farmers can let go of their premium paid and sell their produce in the spot market.

Some of the stakeholders of FPO’s viewed that their returns would have been optimized through use of futures as well as options contracts. The ban on these commodities is certainly not seen as a justified move by most of the market participants as it will be difficult for some of the corporate bodies to take fresh positions in agriculture commodities. Usually the chances of getting hedgers back and regaining their confidence becomes a challenge once a commodity is banned from trading. 

Suspension of future trading implies lack of an appropriate platform for price discovery, and also results in preventing farmers, traders, processors or government in obtaining a reference price for planning their future course of action. It will be a matter of wait and watch as to when the Government considers the situation safe for removing the ban on futures trading of RM seed and chana.