Wheat Futures: India's early success on CBOT
Although trading in wheat futures overseas under the aegis of the government has been limited, the gains made so far would mean the cost of imports would be lower to that extent.
By Shaji Vikraman, TNN |
The baby steps taken by the country in commodity futures trading in the global markets seem to be succeeding.
India���s policymakers are, for now, buoyed by the efforts which concluded last week in signing off a option on wheat futures on the Chicago Board of Trade (CBOT).
At a price of $406 a tonne, officials in Delhi reckon that they haven���t done too badly. For Egypt, one of the biggest buyers of wheat, the cost worked out to a far more stiffer $475 a tonne after taking into account the transportation costs.
For a good part of 2006-07, the government through select agencies had got into wheat futures contracts on the CBOT, managing to make some money in the process. Away from public gaze and with a mandate from the Cabinet, a committee headed by UTI Asset Management Company Chairman U K Sinha had been active on the wheat futures front.
The committee had recommended that the government ought to hedge its price risk by entering into both options and futures contracts on the CBOT.
The committee has an ongoing mandate to advise the government on the course of action to be adopted on wheat futures in the global markets and to protect the interests of the country.
If at that point of time procurement of wheat is in line with the government���s expectations (15 million tonnes and a crop of 76 million tonnes), the option contract provides for the government not taking delivery.
That would only mean giving up the option premium which for a sovereign entity is small change. Hedging can help stabilise price at a time when there are major fluctuations and lead to price discovery.
Although trading in wheat futures overseas under the aegis of the government has been limited, the gains made so far would mean that the cost of imports would be lower to that extent.
This is all the more relevant in the context of the increasing import dependence of the country for essential food items.
India���s policymakers are, for now, buoyed by the efforts which concluded last week in signing off a option on wheat futures on the Chicago Board of Trade (CBOT).
At a price of $406 a tonne, officials in Delhi reckon that they haven���t done too badly. For Egypt, one of the biggest buyers of wheat, the cost worked out to a far more stiffer $475 a tonne after taking into account the transportation costs.
For a good part of 2006-07, the government through select agencies had got into wheat futures contracts on the CBOT, managing to make some money in the process. Away from public gaze and with a mandate from the Cabinet, a committee headed by UTI Asset Management Company Chairman U K Sinha had been active on the wheat futures front.
The committee had recommended that the government ought to hedge its price risk by entering into both options and futures contracts on the CBOT.
The committee has an ongoing mandate to advise the government on the course of action to be adopted on wheat futures in the global markets and to protect the interests of the country.
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In an option contract with a call option, the buyer of the option has the right but not the obligation to buy or take delivery of, say, a commodity at a specific price. In April 2007, an attempt was made to lock into options on futures. But the response wasn���t good. Last week, in what is reckoned to be the first try at trading in such options on wheat futures on behalf of a sovereign (thanks to a financial settlement), a deal was struck for 1.8 lakh tonnes of wheat at a price of $406 a tonne from Cargill with the option for delivery in July.If at that point of time procurement of wheat is in line with the government���s expectations (15 million tonnes and a crop of 76 million tonnes), the option contract provides for the government not taking delivery.
That would only mean giving up the option premium which for a sovereign entity is small change. Hedging can help stabilise price at a time when there are major fluctuations and lead to price discovery.
Although trading in wheat futures overseas under the aegis of the government has been limited, the gains made so far would mean that the cost of imports would be lower to that extent.
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The foray overseas and the experience so far is in striking contrast to the policy response of the government in the local markets where trading in wheat futures has been banned. The early success on CBOT also bears testimony to the fact that futures trading in commodities could be an instrument to keep a check on prices and thereby manage the overall food import bill. This is all the more relevant in the context of the increasing import dependence of the country for essential food items.
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