Was it a prudent decision for the government to suspend futures derivatives trading in 2021 to curb the rising prices of seven agricultural commodities such as gram, wheat, paddy, moong, crude palm oil, mustard, and soybean? A recent study conducted by two leading management institutes suggests that this decision not only destabilised the prices of these agricultural products but also made it more challenging to determine fair pricing.
Contrary to the government’s expectations, the move appears to have exacerbated inflation rather than controlling it.
The study, jointly undertaken by the Birla Institute of Management Technology, Noida, and the Shailesh J Mehta School of Management, under Indian Institute of Technology, Bombay, revealed that suspending futures trading of agricultural commodities disrupted the agricultural pricing system entirely.
This led to increased food price volatility and significant losses for farmers and other stakeholders in the agricultural value chain.
Commodity derivatives, such as futures contracts, are financial instruments that provide farmers and traders with a mechanism to hedge against price fluctuations.
These instruments act as a form of safety net, enabling participants to protect their investments by forecasting future prices. The suspension of these contracts, however, directly affected both pricing and price stability.
The Birla Institute of Management Technology analysed trade data for mustard, soybean, soybean oil, and mustard oil from 2016 to 2024. It concluded that when exchange-traded commodity derivatives were suspended for these products, there was no clear reference price available in the mandis (local markets).
This lack of pricing guidance caused considerable price fluctuations, resulting in higher costs for both farmers and consumers. In particular, the prices of edible oils experienced a significant surge.
Additionally, the suspension adversely impacted local mandi pricing and led to an increase in retail and wholesale prices of edible oils. The ability to hedge these agricultural products in international markets was also compromised.
Simultaneously, IIT Bombay conducted in-depth interviews with farmers and Farmer Producer Organisations in Maharashtra, Rajasthan, and Madhya Pradesh to understand the practical implications of suspending futures contracts on pricing and risk management.
Their findings revealed no positive correlation between futures contracts and spot market prices, nor did these contracts contribute to rising food prices. Instead, they played a crucial role in reducing market price fluctuations.
Following the suspension, prices of agricultural products remained elevated and volatile, driven by domestic and international demand-supply dynamics.
Both studies indicate that the suspension of derivatives contracts is not a sustainable solution for ensuring price stability or managing risks in the agricultural sector. Instead, the government should leverage these financial instruments to shield farmers from price risks, allowing them to forecast future prices and participate in the market with greater confidence.