Advance Price Signals in India’s Pulses Market

Praveen Gopinathan, NCDEX

 

Futures prices give vital signals of economic fundamentals of a crop. These signals can be used by hedgers comprising of farmers, traders and corporates who base their production and processing decisions on it. Also, the Government may take policy decisions regarding the MSP and export-import by viewing futures prices.

 

The futures trading in pulses started with the launch of chana contracts on NCDEX in April 2004, has been an efficient signaling mechanism. Urad and tur futures were launched respectively in July 2004 and April 2005. Futures trading on NCDEX platform have enabled pulses value chain participants across India to participate in the market on real time basis overcoming geographical barriers. Salient features of exchange based trading like standardization, anonymity, neutrality along with market depth assured traders that the prices discovered are competitive and completely transparent.

 

Futures trading in pulses have been linked to spiraling price rise. But facts link price rise to increased rural consumption of pulses and supply constraints. Trading on tur and urad were banned from January 2007 following apprehensions that futures trading had contributed to unprecedented inflation in these commodities even though facts reveal that tur and urad prices abated only in early 2010 when domestic availability improved.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Office of Economic Adviser

 

Many factors contribute to pulses inflation in India. During the period 2007-08 to 2009-10, rural incomes witnessed significant growth following large social and community services expenditure under central sponsored schemes. This percolated into greater rural demand for protein products like pulses which in turn strained domestic supply fuelling unprecedented food inflation. As if supply constraints were not enough the severe drought of 2009 forced nation to import inflation to fulfil domestic demand. Supply factors responded with a lag when increase in acreage and marked improvement in yields improved domestic production of pulses after 2010. Increased domestic availability of pulses then combined with lower imports dependency and softening rural demand to lower pulses inflation thereafter. Again, the contribution of Minimum Support Prices (MSP) to pulses inflation from time to time should also not be overlooked given significant revisions in urad and tur MSPs during the periods 2008-09, 2010-11 and 2012-13.  In case of chana, Australian yellow peas, its cheaper substitute and Canadian chickpea prices are seen impacting domestic price considerably as much as the imports from Myanmar  which impacts tur prices.

 

The Government of India had appointed a committee under the chairmanship of Prof. Abhijit Sen, Member, Planning Commission in 2008 to study the impact of futures trading on agricultural commodity prices. The committee found that negative sentiments have been created by the decision to delist futures trade in important agricultural commodities and that vibrant agriculture markets including derivatives markets are the frontline institutions to provide early signs of future prospects of the sector. The Committee recommended regulatory reforms by passing of the proposed amendment to Forward Contracts (Regulation) Act 1952. Therefore, from the above facts and findings, it is evident that futures trading of pulses have not fuelled any inflation in these commodities. The study instead justifies role of futures trading in strengthening the market by giving early warning signals of underlying crop fundamentals. The role of futures trading in giving advance price signals is explained below by Chana example.

 

NCDEX chana futures today serve as the best indicator for early warnings of any possible demand and supply mismatch in domestic chana industry. Chana prices are being impacted by interaction of a number of factors.  In 2011-12, dramatic rise in the price of yellow peas, the cheaper substitute to chana and second advanced estimates of 6.8% lower production of Chana at 7.66 million tonnes against 8.22 million tonnes in 2010-11 had put upward pressure on chana prices. This pressure of underlying fundamentals had been rightly signaled by the November 2011 chana futures (Fig-2) in advance. The pressure of fundamentals combined with market sentiments kept chana prices at high levels during the period between July 2011 and February 2013. Not only did chana futures signal the underlying supply constraints, it also helped close the lag as informed farmers responded swiftly with an increase in area under production which recorded 9008 thousand hectares in 2012-13 against 8162 thousand hectares in 2011-12. The chana production in 2012-13 season was at all-time high of 8.88 million tonnes. The resulting impact on domestic chana prices were signaled by April futures as depicted below (in Fig 3).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: NCDEX

 

Clearly, futures trading in chana has benefited farmers and consumers and strengthened the market with wider participation and price dissemination. Understandably NCDEX Chana futures today see a large market participation supported by a robust delivery system.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: NCDEX

 

Fig-4 shows a comparison of delivery on exchange platform in the last three years. Chana deliveries have been consistently high especially during the periods of high inflation (September 2011 to October 2012) which underlines the role of futures trading in giving advance price signals and in bringing transparency and efficiency to the physical market.

The futures trading, thus, gives advance signals of an imbalance between demand and supply, ensures availability of adequate supplies and averts spurt in prices. This helps the government to make plans and arrangements in a shortage situation for timely imports, instead of having to rush in for such imports in a crisis-like situation when the prices are already high.