Impediments cleared; challenges yet to be addressed

BUDGET 2009-10 COMMODITIES

The nuisance called CTT (Commodity Transaction Tax) has been put to rest. The momentum was which murdered and the fundamentals which got flawed have been put back on the rails. Immediately after the last budget, the national exchanges as well as FMC, the regulator, pitched for withdrawal of CTT. The prime minister’s economic advisory council promptly examined the matter and the government apparently buckled under the legitimate reasoning of the commodity industry. The abolition of CTT will allow futures markets to play a more meaningful role in helping India’s farmers to do a price discovery for their produce. Robust price discovery is essential for creating the conditions conducive for such investment in commodity and most importantly in agricultural infrastructural sector.

The agriculture sector faces several challenges. Like the previous years the govt has not done any stimulus policy package announcement for boosting acreage and production.

Investments in warehousing, storage facilities and testing laboratories have also been left out. Only investment on setting and operating of businesses of ‘cold chain’ warehousing facilities for storing agricultural produce tax incentives has been announced for. The issues of farm-gate losses have been conveniently ignored with the announcement of cold-chain incentive which is likely to benefit certain corporate rather than farmers in general. Micro-warehousing at the farm-gate is something which all governments have ignored and the losses are equivalent to 10% of the production which in monetary terms shall be equivalent to India’s food and allied product imports.

Allocation under accelerated Irrigation Benefit Programme (AIBP) increased by 75% BE 2008-09. Allocation under Rashtriya Krishi Vikas Yojana (RKVY) stepped up by 30% in B.E. 2009-10 over B.E. 2008-09. However in absolute terms for a country like India these are very small outlays.

To ensure balanced application of fertilizers for increasing agricultural productivity, Government intends to move towards a nutrient based subsidy regime so as to cover larger basket of fertilizers with innovative fertilizer products available in the market at reasonable prices. The government also intends to move to a system of direct transfer of subsidy. With unique identity number (UID) to be rolled out in 12 to 18 months, the intended system is unlikely to be executed immediately.

The icing on the cake in the budget is the increase in farm credit flow to Rs 3.25 trillion. Assuming that there is 10% real growth (instead of 13.25% targeted growth) from the current level of Rs 2.87 Trillion, the credit flow will benefit a large number of additional households, agri-based corporate and farmers in general.

To borrow from the FMs speech quoting Kautilya…….. perhaps in the interest of the prosperity of the country, a King (FM) shall be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state.

Published in The Financial Express

ET Now 24 June 2009

Abhijit Sen Committee Report on Commodity Futures

Impact of Futures Trading on Agriculture Commodity Prices (Abhijit Sen Report) Link

Small commodities brokerages closing shop

Dilip Jha (C) The Business Standard

Mumbai  Sep 18, 2008

It’s shakeout time in the commodity brokerage space. Many small trading firms, which came up five years ago, alongside the commodities exchanges, have shut shop.

The latest addition to the long list of such companies is Jamnagar-based Madhusudan Commodities, which informed the exchanges a month ago that it has halted trading operations.

These closed brokerage firms are now selling their membership cards and are making a neat profit.

Soon after obtaining the regulator’s permission to launch commodity trading in 2003, exchanges had distributed cards to clients directly at a low price of Rs 2-2.5 lakh. Many individuals had also bought these cards as the exchange’s main focus at that time was to lutre more players into commodities trading.

The small brokerages are now selling these cards for Rs 20-25 lakh.

In contrast, large brokerages are prospering because of their good risk management capability and extensive knowledge dissemination. Religare Enterprises, Kotak Commodities and Angel Broking, for example, have almost doubled their commodities business turnover in the past few months.

“With limited resources adding little value to clients’ investments, smart investors have switched to bigger firms,” said Navin Mathur of Angel Broking.

“In the futures market, intermediation plays a dynamic role in updating customers with the current happenings and alarming about possible future developments. While big broking firms do have good intermediation practices with steady future growth plan. Small broking firms lack this expertise and jumps into execution directly to make a quick buck,” Shyamal Gupta, head, institutional business of Kotak Commodity Services, said.

Regional exchanges may fail FMC accreditation test

Dilip Kumar Jha  (c) The Business Standard

Mumbai August 19, 2008

Even as the Forward Markets Commission (FMC) is all set to introduce norms for regional commodity exchanges to obtain accreditation as national bourses, the move is unlikely to succeed in the prevailing market conditions.

The commodity markets regulator is finalising the norms which will allow regional exchanges to convert to national commodity exchanges, without losing their identity and core competence. FMC sources say the norms will be finalised within a fortnight.

Since the introduction of national online trading platforms, regional commodity exchanges have almost become defunct, as members switched to online trading from the inherent open outcry on regional bourses. With no new members added in the past 3-4 years, trading volumes have dried up.

“Not only did they possess appreciable domain knowledge in the respective regional commodities, they also kept futures trading alive for ages in India. So, protecting their interest is of prime importance to policy-makers,” FMC chairman B C Khatua had said recently.

In the recently-listed norms for accreditation as a national platform, the regulator had introduced a clause that the minimum net worth should be Rs 100 crore. If this is extended to regional commodity exchanges as well, almost all of them will close down.

An analyst from a broking firm said that all of them put together would scarcely have Rs 50 crore of net worth. That means barring the three national commodity exchanges — MCX, NCDEX and NMCE — most of the regional commodity exchanges would have to shut shop.

Apparently, the heads of many regional commodity exchanges are ready to meet on a common platform with their respective commodities.

“All regional commodity exchanges should merge to form a national entity, with the margins of the commodity traded on their respective platform passed on to their respective accounts. Otherwise, none of them would be able to survive alone, especially when the three national exchanges are functioning and another one is shortly launching the platform,” said an analyst.

Shyamal Gupta of Kotak Commodity said that with a net worth of Rs 100 crore, it would be impossible to generate a daily turnover of Rs 2,367 crore, with Rs 400 earned per crore of transaction.

Almost all regional commodity exchanges either offer trading in a single commodity or a majority of their small volumes comes from one contract. As the government’s efforts to delist commodities continue, fear remains whether the next victim is the actively-traded commodity on one of these exchanges.

Though the National Board of Trade (NBoT) survived the recent bout of suspension of soy oil because of the support of India’s largest edible oil producer, Ruchi Soya Industries, the launch of alternate contracts of soybean and soymeal failed to generate equal volumes as soy oil. According to analysts, other commodity exchanges may not be able to survive such sudden suspension of trading.

Retail investors make believe for gold guineas

© The Business Standrad

Mumbai June 06, 2008,

The gold guinea contract introduced recently on the country's largest commodity exchange, the Multi Commodity Exchange of India (MCX), is emerging to be one of the most attractive avenues for retail investors with small savings.

The contract maturing on July 31 recorded a 170 per cent jump in open interest in the last two weeks, indicating that small investors are keen to save for the future, especially in assets. Currently, the small gold coin contract is open for trade for July and August deliveries.

Available for trading in as small as one lot (a coin weighing 8 gm), open interest for the July contract jumped sharply to 8,304 lots yesterday as compared with 3,078 lots on May 23.

"Retail participants are either keen on playing on commexes for a long periodor opt for delivery at the expiry of the contract. Being a small-price contract, traders would prefer delivery to feel pride in owning gold," said Naveen Mathur, head - commodities, Angel Broking.

Most importantly, traders may be assured of the quality of the coins delivered through the exchange.

The gold guinea contract on the MCX would be attractive to investors for three basic factors: rate transparency, does not require high holding capacity and having the benefit of cashing in at any point of time, says Jigar Pandit, senior manager - commodities sales, Sharekhan.

Witnessing a daily turnover of between Rs 5-10 crore on this contract, the MCX has exempted vaulting or storage charges on guinea to be delivered via the platform until December 31.

Launched on Akshaya Tritiya, an auspicious day in the Hindu calendar, gold guinea is a comfortable trade option for retail investors.

Trading is simple, where the investor needs to pay just 4-5 per cent of the upfront margin. If the price comes down, he is required to pay less. If the price goes up, the investor earns profit, which will be directly credited to his DMAT account.

Gold guinea contracts will help supplement and complement the electronic spot trading platform, set for launch soon.

"It will make the spot market electronically-transparent, creating a common Indian market, similar to the European Union market," said Shyamal Gupta, head - institutional business, Kotak Commodities.

Meanwhile, retail participation is likely to grow if the mandatory sales tax issue for gold guinea delivery is resolved, said Pandit.

The exchange has been arranging a number of awareness programmes in urban, semi-urban and rural areas to educate the public about this trade.

Commodity traders still wary of futures

Nidhi Sharma  The Economic Times

Mumbai - 01 May, 2008

The long-awaited Abhijit Sen Committee report is out but market participants still seem to be apprehensive of trading in commodity futures. Experts feel volumes at the exchanges can only pick up once the contents of the report are discussed thoroughly at political level and a clear view emerges. 

Although the report mentioning that the rise in wholesale and retail prices of farm commodities cannot be attributed to futures trading, the supplementary note by Mr Sen said the ban on trading in four sensitive commodities — urad, tur, wheat and rice — should continue. He has also called for a discussion regarding futures trading in edible oil and sugar. 
“There is a dilemma in the mind of traders whether they should enter the market. The report, per se, has nothing negative about commodity futures trading apart from the personal note by the chairman of the committee that has left traders indecisive,” Angel Commodities head Naveen Mathur said. He feels market sentiment might improve once a clear view emerges.
Agri-commodity volumes have declined on the exchanges. However, edible oil complex rang in good volumes, especially in the January-March period this year following the strong upside in international markets. During the same period there was also a bull run in the metals counter and crude oil that increased the overall volumes on the domestic exchanges compared to the corresponding period last year.
High volumes in soya oil, soybean and rape-mustard seed may not have gone unnoticed by the committee as Mr Sen made special mention of it in the report. He called for more discussion on the hedging benefits that processors derive from futures markets, and accordingly take a decision regarding edible oils and sugar.

Earlier, high inflation figures and government measures thereafter to control prices had also triggered negative sentiments and affected trading on the futures counter. Government slashed import duties of various edible oils, imposed stock limits on food grains and pulses and banned export of non-basmati rice.
Religare Commodities head Jayant Manglik feels volumes would pick up once the discussion on the Abhijit Sen Committee report are completed. “Agri-commodities volumes have especially been affected and they will reach higher levels once the debate on the report gets over,” he added.
Even Shyamal Gupta from Kotak Commodity Services agrees all is dependent on how the contents of the report are interpreted. “If there is clarity of communication in policy making and the way futures market needs to be taken forward there would not be confusion in the minds of market participants,” Mr Gupta said.