Commodity Markets Lack ‘Good Intentioned’ Credit Flow

Cash markets in commodities are often marked by price opacity and credit flow constraints. Market modernisation planners often argue to bring price transparency and free flowing credit into spot market -- a very noble cause with a perfect theoretical underpinning.

The lack of “good intentioned” credit flow into the commodity market has also been constrained by limited access of spot markets for the financial institutions. The market modernisation plan implementation will bring in the national common market perspective to the country.

In contrast to financial commodities markets, which are tightly scrutinised by national watchdogs, the physical markets are largely unregulated. The industry relies on common law and on private pricing agencies for price discovery. Even, The International Organisation of Securities Commissions (IOSCO) has told G-20 that physical commodity markets were beyond the jurisdiction of most regulators.

Commercial speculation in agriculture has traditionally been used by traders and processors to protect against shortterm price volatility, acting as a sort of price insurance while helping to set a benchmark price in the cash market. The non-traditional traders who are not interested in the commodities themselves have increased the interdependence between commodity and financial market in the West.

A possibility exist that if not regulated properly, by making the spot window available nationwide the localised commercial speculation will get a chance to translate into a larger financial speculation in the physical space. The increasing demand and at times sudden withdrawal by non-traditional traders is considered by many, to have influenced the demand and supply fundamentals.

If the cash market is opened on a nation-wide scale, the buyers are likely to get multiple location windows to buy. Some argue that the seller producers due to location specificity and a low withholding power tend to have naturally reduced bargaining capacity. The proponent of the electronic markets may argue on the contrary that the sellers get to sell the produce nationwide. Good logic, however, we must recognise that the severe impediments like poor digital-infrastructure, information asymmetries, limited access to affordable credit, weak institutional support and globalisation of supply chains with rising barriers for small producer constraints the producer-seller. Taken together, they all represent a low bargaining capacity. A transaction between unequal cannot be called balanced only by mere increase of virtual geographic space.


Agricultural producers often sell a significant part of their crop soon after harvest in order to obtain cash to cover expenses and other financial obligations. At that time, the prices of the harvested products are most likely lower than later in the season. With efficient financing, farmers do not need to sell their product immediately after the harvest to obtain cash. If goods (in storage) can themselves become a vehicle for obtaining credit, pressure to sell will be greatly reduced.

An electronic cash market can act in a broader range of ways to stimulate trade in the commodity sector. This may be through the use of cash or ‘spot’ trade for immediate delivery, forward contracts on the basis of warehouse receipts or the trade of farmers’ repurchase agreements (repos). The extent to which prospective enhancements are delivered in large part depends on the choice of services offered and the strategic priorities that are pursued. The access to ‘bridge financing’ will facilitate in reducing bargaining inequality in the transactions. 

Published in The Economic Times