The Hindu Business Line : Govt freezes wheat, rice futures

The scenario
Farmers looking for a bonus of Rs 50 a quintal like last year for wheat.
Prices have been declining on hopes of a better crop.

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Chennai/Mumbai Feb. 28 The Forward Markets Commission (FMC) has frozen futures trade in wheat and rice with immediate effect.

According to Mr Anupam Mishra, FMC member, no forward contracts in wheat and rice can be launched until further notice. In respect of running contracts of these foodgrains, no new positions can be taken. This means those who currently hold position can exit or square off.

The FMC sent a circular on this soon after trading hours last evening. The step is seen as one to tackle inflation.

Commodity exchange officials see this as a short-term measure since, according to them, the Centre has not de-listed forward trading as in the case of urad and tur last month.

Panel to study

The ban figured in the Budget. Mr P. Chidambaram also announced the setting up of a committee under the chairmanship of Prof Abhijit Sen to look into futures trade in essential commodities. It will submit its report in two months.

"The Centre could review the situation after the report," a commodity exchange official, who did not wish to be identified, said.

Commodity exchange officials, trade and analysts see a couple of reasons for the freeze on wheat and rice futures.

"One of the reasons could be the drubbing the Congress received in Punjab and Uttaranchal in the Assembly elections. Otherwise, why should it come the same evening when the results came as a bitter pill to them," wondered a trader. "The Government could have taken the decision to ensure that it procured enough wheat for buffer stocks," said an analyst.

A South-based miller said the Centre could have been influenced in its decision based on the trend in wheat futures in the last two years. "However, prices have been coming down on expectations of a better crop this year," he said.

Price justified

On Tuesday, wheat for April contracts closed at Rs 882 a quintal, while for May it ended at Rs 886. Far-month contracts such as July and August are ruling above Rs 900 a quintal. However, on Wednesday, the futures gained as traders tried to go short. March contracts increased over two per cent to Rs 976.

"Taking into consideration the minimum support price of Rs 750 a quintal announced by the Centre, interest, warehouse and transportation charges, the price in the futures market seems to be justified," said an analyst.

Wheat (dara), on the other hand, is ruling at Rs 1,020-1,035 a quintal in the spot market in Delhi. In places such as Uttar Pradesh, wheat prices are ruling at least Rs 100 higher than MSP.

"Actually, wheat has been harvested in States such as Gujarat, and farmers are not bringing their produce, hoping for better prices," the analyst said.

According to trade sources, farmers are expecting a bonus of at least Rs 50 a quintal like last year.

While wheat production is estimated to increase in India and Australia, farmers and traders are keeping an eye on the wheat pit in the Chicago Board of Trade (CBoT). "With the US going all out to use corn for ethanol production, it is wheat that is now seen as a feed substitute. In these circumstances, wheat prices are likely to rule higher," the analyst said.

Though the trade is divided over the freeze in rice futures, it is seen as a general measure to currently put on hold forward contracts in essential commodities. However, the volume of trade in the grain is negligible.

Mr Mohan Natarajan, Director of Kotak Commodity Services Ltd, said the freeze on wheat and rice futures was an "unfortunate and banning agricultural commodity contracts is like treating the symptom of a disease, not the disease itself".

Supply constraints

The main reason for inflation is supply side constraints. These need to be addressed immediately. The move will lead to prices becoming more non-transparent and farmers will lose out, he said.

Mr Si Kannan, Assistant Vice-President of Kotak Commodity Services Ltd, said the freeze was disappointing. "Consumption of wheat has been growing steadily for the last few years at an average of around 1.3 per cent, whereas the production of late hasn't kept pace with it," he said.

Wheat contracts on NCDEX make up 95 per cent of the total forward trading in the grain but it accounts for about one per cent of the trade volume of around Rs 3,000 crore.

Open interest in wheat on NCDEX was less than 5,000 for March; 9,361 for April; 34,150 for May; and about 3,000 for June, July and August together.

If the freeze prolongs, then it could have an effect on coverage next year, according to analysts.