Even as farmers across the country are reeling under enormous financial stress due to lack of remunerative prices for their produce despite a bumper harvest, the Securities and Exchange Board of India (Sebi) on Tuesday allowed options trading in commodities, albeit on a limited scale initially.
Though options trading will turn commodities market robust, the move is unlikely to benefit farmers. Instead, it will make them more vulnerable as there will be an increased speculation in the commodity markets.
The market regulator approved options trading in commodity markets in September last year itself but did not frame guidelines till now. With a Sebi circular clearing the air on this aspect, the stage is now set for the options trading in the country.
However, according to Sebi, agriculture and agri-processed commodities will be eligible for options trading if they have a minimum daily turnover size of Rs 200 crore in futures market. For other commodities, the daily turnover limit is Rs 1,000 crore. Besides, commodity selected for this trade needs to be among the top five futures contracts in terms of total trading value for one year.
Keeping these conditions in view, commodity exchanges will have to select commodities and seek approval from the market regular before listing them on the options trading platform. To begin with, Sebi will permit each of the commodity exchanges in the country to go for options trading in one commodity.
The country is home to three commodity exchanges – MCX, NCDEX and NMCE. Therefore, options trading will initially begin in three commodities on a pilot basis.
Experts say MCX will go for gold while NCDEX may zero in on soya bean. It is not yet clear on which commodity NMCE will focus on for the test run. But exchanges are gearing up to carry out awareness drives among commodity market traders to kick-start the options trading once they get Sebi approvals for their respective commodities.
With options trading in place now, commodity market participants will have a new hedging tool at their disposal. This new tool will be available in a cost-effective way. “A combination of futures & options can give market participants the benefit of price discovery of futures and allow simpler risk management through options,” NCDEX said while welcoming the Sebi move.
While the Sebi’s move offers new and safer trading option for commodity market traders, the country’s farmers, most of whom are small and marginal, are unlikely to get any advantage. It is a common practice that small and marginal farmers sell their produce to middlemen instead of taking it to the markets.
Going by the prices that end-users or consumers pay to food products, it’s the middlemen who mint money out of agriculture produce, but not the farmers. For example, there are no takers for chillis brought by farmers to the agriculture markets now, but the price of chilli powder in the retail stores still hovers well over Rs 150.
This goes on to indicate how farmers are being fleeced by middlemen. Then how can such gullible farmers benefit from the options trading, which will only lead to more speculation?