What can India learn from Indonesia, China and other countries in agriculture commodity market?

The capital markets regulator, the Securities and Exchange Board of India (SEBI), halted trade in seven commodities on December 20, 2021, and again in December 2022.

India is one of the largest producer of wheat. (Photo credit: Wikimedia Commons)
Key Highlights
  • India is the biggest producer of jute, milk, and pulses in the world, as per the Food and Agriculture Organization.
  • In terms of producing rice, wheat, sugarcane, groundnuts, vegetables, fruit, and cotton, it comes in second place.
  • In addition, it is among the top producers of plantation crops, fish, poultry and spices.

New Delhi: India will shortly celebrate 150 years since the Bombay Cotton Trade Association was founded in 1875 to trade cotton derivatives contracts, marking the beginning of organised futures trading in agricultural commodities. Institutions for trading food grains and oilseeds in futures were established in the years that followed. Between the first and second world wars, the futures trade in several agricultural commodities, including cotton, groundnuts, jute, castor seed, wheat, rice, sugar, gold, and silver, flourished. However, in the middle of the 1960s, allegations of widespread manipulation led to a ban on the majority of farm futures trade.

Ever since agricultural commodities futures and forward trading remained controversial and the government consistently intervened. However, India could learn a lesson or two from Indonesia as it took charge of its domestic market in recent years and being the largest edible oil producer, it could control the supply. It is just one instance, Indonesia may also pioneer in ‘green commodities’. Green commodities are the ones that have been used in sustainable power generation. It, however, failed to do so as of now. But India, just like China is currently excelling in majorly two commodities and can dominate in several commodities.

China, Indonesia and other countries

At about the same time as India, China began trading in agricultural futures on two agri-commodities exchanges. Since then, China has emerged as one of the major global players, impacting even the pricing of crops in the US and Europe.

Now think about India. The nation is among the top three producers of wheat and rice, the largest importer of edible oils, and a virtual monopoly producer of turmeric, mentha oil, castor seed, guar seed, isabgol, and many other agricultural products. It is also the world’s largest producer and consumer of chana (chickpea) and many other pulses. Yet, the price of castor oil is determined in Rotterdam or influenced by China, while the cost of guar gum is frequently set by importers in the West, writes Shrikant Kuwalekar in an opinion piece in Money Control.

Sometimes, Canada or Australia, which export yellow peas, chickpeas, and lentils to India, have an impact on the prices of pulses in the Indian market. Canada even had, in 2020, urged India to be consistent with farm trade policies, reported Reuters.

Despite being the biggest consumer of edible oils, Malaysia and Indonesia, as well as Brazil and Argentina for soy oil, are the main drivers of palm oil prices. Even though China is the second-largest importer of gold with over 1,000 tonnes, gold prices are set in London or the US.

India’s inconsistency

The capital markets regulator, the Securities and Exchange Board of India (SEBI), halted trade in seven commodities on December 20, 2021, including wheat, non-basmati paddy, moong, chana, soyabean and its derivatives, mustard seed and its derivatives, and palm oil and its derivatives. It is to fight inflation. The SEBI order had said that new contracts would not be permitted in certain commodities but permitted the squaring of existing contracts.

Chana and mustard seed were already prohibited at the time, out of the seven commodities. Trading was initially prohibited for a year, but in December 2022, the prohibition was extended for an additional year, making it effective until December 20, 2023.

Farmers woes

Several farmers voiced their disapproval of the SEBI judgement and dubbed it anti-farmer. Essentially, according to SEBI’s decision, trading on the National Commodities and Derivatives Exchange was prohibited (NCDEX).

Farmers pay close attention to the exchange’s predictions of future developments. Farmers base their unloading strategies on the trend, which is frequently followed by physical markets or mandis. The Farmers’ Producer Companies (FPCs) trade on the markets rather than individual farmers.

Commodities that need to be delivered at a later time might be sold on the NCDEX’s futures trading platform. After paying a modest charge, any party — the buyer or the seller — can end the transaction.

The SEBI, on its part, banned trades to investigate such allegations. Trade participants talked about the need to control inflation before the elections to the seven states as the main reason for the ban. The price of pulses and edible oil shot through the roof which saw multiple control measures.

India has another challenge in dealing with price manipulation.