Edible oil trade flags risks to imports, farmers list that could fuel volatility
India’s suspension of futures trading in key agricultural commodities is reducing the use of risk management tools such as hedging across its food supply chain, cutting inventory as further buyouts are scaled back.
Monday’s halving was one of India’s most dramatic moves since the launch of commodity futures in 2003, targeting commodities such as soybeans, edible oils, wheat, rice and chickpeas as officials took steps to quell inflation. .
But restrictions on access to futures contracts can increase volatility in domestic markets, by depriving traders of vital tools for decision-making, allowing them to cut stocks, delay long-term buying and selling, and even that may be forced to limit imports.
Govindbhai Patel, managing partner, edible oil trader GGN Research, said, “In the absence of futures, the market will not know about shortfalls and excesses. “It could create even more volatility in prices.”
The finance ministry did not immediately respond to a request for comment.
Mr Patel’s firm, which used to buy edible oils for quick and far-flung distribution, and hedged on domestic exchanges, will now meet its needs only for 10 days at a time, he said.
“We used to hedging 70% to 80% of our volumes. Since the option of hedging is not available, we are curtailing the operations,” said Mr. Patel.
India is the largest importer of vegetable oil to meet more than 70% of its needs.
Farmers may be affected
Regional processors who buy crops from farmers will also be in trouble, as they are deprived of advance sales through futures contracts.
Manoj Agarwal, managing director, Maharashtra Oil Extraction, said his firm can no longer hedge soya oil on commodity exchanges after buying soybeans from farmers.
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