Trading in commodity futures -- basically an arena of stock market players -- may have started with economic objectives such as price discovery and price risk management, but, of late, has become an important part of investment portfolio promising quick and attractive returns.

And, the commodity derivatives trade's value in relation to GDP has been galloping to touch 66 per cent during 2005-06 from mere 5.81 per cent in 2003-04. Now, it has neared 75 per cent of GDP with growth registering 300 to 400 per cent during past a couple of years.

In fact, stock marketing and futures trading are the main instruments of speculation in the capitalist economy in which the capital is invested and reinvested with a sole purpose of making a profit.

Thus the capital grows, multiplies and gets concentrated in a few hands. In such an economic set-up, the futures trading wields a tight grip over the real economy, influences the movement of spot prices. But, it also happens that the futures trade starts moving in an absurdly divergent manner, showing no connection with the spot market.

Thus, it becomes sheer gambling for a profit. This was particularly happened in the case of agricultural commodities- much illustrative example of chilies last year. Also, such trend lent a high volatility to the prices of agricultural commodities.

It happened in the case of prices of wheat, pulses and food items in past two years after the government allowed futures trading in essential commodities too in 2002. The government took that policy initiative following a pressure from WTO which was aimed at integrating (or opening up of) the Indian agriculture market with that of the developed world.

Futures and price rise

The abrupt rise in the futures trading of agricultural commodities synchronized with spiraling of farm produce prices.

Rather, it mounted up volume of goods contracted and flow of capital in the futures trading. The world over, suggestions from the experts sputtered in commodity exchanges and among speculators:' Make profit from the Global Agricultural Boom'�.. bull market in commodities sending agriculture prices through the roof�. Global agricultural boom is the safest, easiest ways to profit�'only two stocks you need to Retire Rich'.

Thus, the agricultural trade became a 'paper based derivatives trade' keeping prices of food items soaring globally. And, as a part of the price manipulation, a projection of shortage in production and supplies of wheat and other farm goods was made.

It led to a worldwide hue and cry over the looming threat to food security. Consequently, some poor countries even witnessed food riots and millions made to suffer severest bout of malnutrition.

In the Indian context, base metals particularly copper, energy (crude oil, natural as) and bullion ( gold and silver) has traditionally been the biggest share-holder (70 per cent) of the commodity futures trading at MCX . And the prices of these items are primarily driven by a benchmark international trade. Till 2005, grams, guar, mentha oil and soy oil has accounted for more than 60 per cent of the futures trade in the farm products.

But with the coming up another exchange, NCDEX , in 2006, the volume of farm good traded went up abruptly. And it focused its trade on the farm produce. The UN body, UNCTAD has quoted it as the third largest exchange trading in agricultural futures in the world.

It is fairly known that futures trading in farm commodities backed up by tremendous financial leverage has been cause of the market manipulation. That is why Finance Minister P Chindambaram slapped a commodities transaction tax (CTT) on options and futures on the lines of the existing securities transaction tax. But , the Forward Marketing Commission(FMC) made a half-hearted attempt attempted to regulate the market.

Futures Ban

With a steep rise in inflation this year, considered to be caused rise in farm produce prices, the government was quick to ban futures trading in four farm goods and again de-listed four more agricultural items from the exchanges.

And, set up an Abhijit Sen Committee to study the impact, if any, of futures trading on wholesale and retail prices of farm goods. But the committee has evades the direct answer to the question since it was composed of some members associated with trade, others having soft-corner for the trade.

The committee did not recommend the ban on futures trading in farm goods as sought by farmer leaders and civil society campaigners. However, it has unequivocally underlined 'futures markets must work in tandem with physical or spot markets. As the disconnection between the two trading entities widens, it gives rise of fierce speculation and market manipulation.

Suggestions are also coming that India should also treat hedgers and speculators differently in terms of margin requirement and impose strong delivery conditions. As an edit in Business Line says India needs "a delivery-based forward trading rather than paper-based derivatives trade".

The hard fact is that futures trading manipulated the price rise even as the Abhijit Sen Committee chose to be mum on the issue. On can differ on a degree to which the futures trading impacted the food prices in India and elsewhere.

The FAO has already reported that enhanced speculation in futures of agricultural produce has led to at least 30 per cent rise in food prices globally. How the spot market could be prevented from the overwhelming sway of the capital in futures trading could be judged from the following facts: India produces mentha oil worth $250 million odd but futures trade in this commodity generally goes up to $2,500 million.

The case of guar is most interesting; its production in India was around 1.6 million tone last year while its quantity traded on the futures market reached 169 million tone- around 1700 times more.

Such heavy flow of money in speculation is 'out and out' gambling as it virtually ceases to link with the traded commodity which becomes mere a 'notional' entity. In this context, Prof K N Kabra has rightly pointed out that "the Indian policy-makers must keep in mind that specific conditions relevant to agricultural commodities, interests involved in actual production, marketing, processing and export, and the availability of instruments more attuned to the needs of real economy players, and misadventure of in the form of freewheeling futures markets could have been avoided".

The volatile agricultural prices also made US- the champion of free markets-to ponder over the issue. The American concern in this regard is noteworthy when the country aplenty with subsidized food and nearly 70 per cent of its main crops are grown for overseas markets. Such a dispensation provides to America a near-ideal situation for free trade.

CFTC Intervenes

The US futures market regulator, Commodity Futures Trading Commission (CFTC) has already indicated to intervene in agricultural markets to check price volatility. The American Farm Bureau Federation has underlined that trading activity by funds as one of the factor pushing up futures prices. And the Commission also pointed out lack of convergence between futures prices and cash market prices.

The US, too, is taking initiatives to regulate the participation of large finance such as hedge funds. In a scenario that tends to develop as consequent of total oversight of the government, the much flaunted objective of price discovery goes haywire. There ceases to exist any connection between the real prices and transmission of price signals to the stakeholders which is crucial and integral to the commodity trading.

Now, it must be pointed out that the economists advocating Noe-liberal policies of globalization never tired out that futures trade helps the farmers in ensuing better price to them. As above mentioned that when America produces 70 per cent of crops for foreign trade providing heavy subsidies how prices determined by its Chicago Commodity Exchange could help farmers in developing countries including that of India in real price discovery of their produce.

Do farmers benefit?

In short, it is wrong notion or deliberately spread by the vested interests in India that the farmers are benefited from the existing futures trading in the country. The farmers get lowest price for their produce which they immediately sell off during the harvest. They do not have capacity to hold their stocks. Later, the stocks pass into the hands of traders and corporate houses who manipulate high prices for farm goods in the futures market.

The Economic Survey (2007-08) of Indian Government clearly underlined that " "Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margins, high membership fees etc work as deterrent to farmers participation in these markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers".

Hence the trade should stop using the farmers name to quench their unquenchable greed which care only for profit and rarely for consumers and producers.

(Jaspal Siddu is a senior agriculture journalist based in New Delhi. By arrangement with www.countercurrents.org)