FMC allows long-term contracts

NEW DELHI: After months of resistance, the government has finally allowed traders and consumers to get a peek into how food, bullion, metals and energy prices will behave a year from now. FMC has permitted exchanges to launch far-month contracts for critical essential commodities like wheat, sugar, pulses, rice and cooking oils.

These are part of more than 50 new contracts that FMC has now permitted Ncdex and MCX to launch. The delay was strategic because with inflation already high, the government was worried about the impact of next year’s price signals on the market.

However, farmers may well pay dearly for this delay. In major commodities like raw and parboiled rice, farmers sowing in the beginning of this year’s kharif were not permitted to know how prices will rule in November when the crop will enter the mandis. FMC has allowed Ncdex to launch their November contracts only on August 10. Ncdex has not been permitted to launch any new contracts after April this year.

Similarly, the government did not allow exchanges to launch next year’s contracts in wheat even though exchanges had applied for them several months ago. This is because there was apprehension that allowing the market to get an indication of prices in January and February may further worsen the supply crunch. As late winter is the leanest month for wheat supplies, prices are usually quite high.

However, Ncdex has been allowed to launch wheat contracts for January and February, and they have permission to launch contracts up to later in the year. Mcx has been given approval to launch contracts from January to December 2007. They have not yet announced the date for launching these contracts.

Analysts say that had the FMC allowed these contracts to be launched earlier in the year, the impact on the market would have been minimal because everyone would have become aware of the worst. “By curbing next year’s contracts, they have only made the markets more choppy and uncertain,” said a trader.

However, neither of the two exchanges can launch several contracts of a commodity in a month. If they launch more than one, they need to get permission again from FMC. As a result, despite in-principle approval, December ‘07 contracts are still six to eight months away.

Sugar is another commodity for which neither mills nor industrial users could hedge prices beyond December ‘06. While Ncdex has launched January and February 2007 contracts, with permission up to December 2007, Mcx has just received approval to launch contracts for the entire year.

In cooking oils, no price view was available beyond October this year. As a result, traders had no way of knowing how prices would move in the festival months of November-December. Fortunately, as they are driven mainly by overseas markets, it has been simpler to predict local prices.

Meanwhile, Ncdex has introduced Basmati trading. Basmati was already being traded on Mcx. However, Ncdex has clearly differentiated between the two types of basmati — traditional and Pusa — because of their very different qualities, prices and markets. The contracts will be deliverable at Delhi, which is the main trading hub.

Interestingly, commodities which do not have heavy liquidity or are semi-liquid, have been allowed to launch contracts up to June 2007. That is expected to give exchanges an opportunity to review contract specifications and see how they can attract trading.

Trading in commodity futures in the current financial year has now crossed Rs 12,60,600 crore. Between the last two weeks of July, the total value of trading in commodity exchanges was Rs 1,68,139 crore.