With soaring food inflation, some people have already started blaming it on futures trading in commodities. Commodity futures trading has always been a favorite whipping boy for some sections of the media & a few unemployed politicians.
As far as I know, there is no credible research that suggests that futures trading causes higher prices. Sure, they can cause spiky price moves but that can happen on the up as well as on the downside and get faded away pretty quickly. And this can happen in any market that is leveraged. Not just commodities. The price of crude oil went as high as $150/barrel and came crashing back to around $50. The lesson: Prices driven up purely by speculative futures trading without fundamental support cannot hold for long.
If any, a liquid market generally causes better price discovery. Look at what happened to some high-profile IPOs in the past. The illiquid grey market price and the very liquid futures price on the listing day. Which price was closer to fair value?
Globally, futures in Agri-commodities have been trading without any problems.
The govt. has already banned futures in a few agro-commodities in the past but that didn't stop those commodity prices from soaring.
If the market crashes, we blame it on short-sellers and ban them. If the market soars, we blame "excessive speculation" in futures and ban them again!
It is time for us to rethink & stop skirting this very important issue of food inflation by simply blaming it on hoarding and/or futures trading.
The food inflation in our country may be pointing at deeper supply-side issues than we are ready to accept.
Would love to hear from you on this issue. Do share your thoughts on the same in the comments section.
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Dear Sir,
ReplyDeleteYou have put up a perfect point. For example take Sugar, which is presently not traded in futures. But it has turned bitter for the common man.
Regards
Dharmesh Shah
Interesting view point.
ReplyDelete