Economic Survey caution against sensitive food commodities in futures trading

The Economic Survey 2023-24 has cautioned against including sensitive food commodities like common rice, wheat, and most pulses in futures trading until markets are more developed, even as the government expands the list of commodities eligible for derivatives trading.

The pre-budget economic survey, tabled in Parliament, stated: "Sensitive commodities may be kept outside the ambit of the futures market until the markets are developed and the regulator has a higher degree of comfort in diversifying the portfolio."

It suggested that agriculture futures markets should focus on "less sensitive commodities" such as oilseeds, cotton, basmati rice and spices.

As part of recent policy initiatives to broaden the commodity derivatives market, the government expanded the list of commodities eligible for derivatives trading from 91 to 104 commodities on March 1, 2024.

The new additions include apples, cashews, garlic, skimmed milk powder, white butter, weather and processed timber products.

The survey emphasised the need for "stable policies with minimal interventions" once regulators provide clear direction on commodity choices.

It also highlighted the potential role of Farmer Producer Organisations (FPOs) in linking small and dispersed farmers with commodity markets.

The survey called for government, Sebi and commodity exchanges to promote FPOs across various agri-commodity segments.

"Skilling and hand-holding the FPOs through financial literacy initiatives can go a long way in encouraging the farmers to benefit from the Agri-derivative markets," the survey noted.

In the long run, as market depth and liquidity increase, the survey suggested that banning futures trading may no longer be necessary to stabilise prices unless there is data-backed evidence of futures trading driving up price volatility.

The survey recommended that regulators closely monitor futures markets and conduct regular reviews, considering fluctuations in domestic production, consumption.