Opening new vistas for agri-commodities
Integration of commodities and securities derivative markets from October to spell new vitality

As 2017 comes to an end and commodity market investors and other stakeholders start looking at 2018 with new hopes, vigour and vitality, the Securities and Exchange Board of India (Sebi) has come up with possibly the most significant and fundamental change in the market – giving its nod to the convergence of both equities and commodity-backed stocks on exchanges from October.

The move that came almost at the fag end of the year – December 28 –aims at helping in cross-listing and providing investors with access to various asset classes. It will also allow major players like the BSE and the NSE to introduce commodity-backed financial instruments on their platforms, while MCX and NCDEX will be allowed to list equities and equity F&O.

It’s part of the proposal to further integrate commodities and securities derivative markets spelt out in the budget for 2017-2018.

The convergence will certainly help an individual to have one account to trade in all asset classes. Exchanges brass thinks it will provide market participants with a highly regulated, safer, more transparent trading, clearing and settlement framework when implemented fully.

Meanwhile, the National Stock Exchange (NSE) has started preparing for entering asset classes like agricultural and non-agricultural commodities. NSE chief executive officer Vikram Limaye said they would be ready to offer commodity derivative products by October. He, however, refused to divulge the type of products the bourse will be rolling out.

According to commodity market analysts, the series of reforms kicked off by Sebi through 2017 augurs well for the commodity derivatives markets. Taking over the regulatory reins from the Forward Markets Commission, Sebi took some bold steps by allowing re-launch of some agriculture contracts that were suspended due to manipulation. For instance, in January 2017, Sebi allowed NCDEX to re-launch castor seed contract after almost a one-year gap.

The exchange had suspended trading in the contract due to excessive speculation, testing the integrity of market. Sebi had stepped in to clean the stable and ordered a forensic audit that led to banning of 16 entities from accessing the market.

Similarly, chana contract was re-launched in July to bail out farmers facing a bumper crop and weak prices in the spot market. Analysts said the price-sensitive agriculture commodity had hogged the limelight for the all the wrong reasons as the regulator and the government were worried more about large-scale speculation in online commodity exchanges, which in turn, had been sending wrong price signal to the spot market.

In 2017, agri-commodities with relatively lower production and concentrated in a handful of states were the hotbed of speculation. Though dealing with delivery in agriculture commodity was a new ball game for Sebi, it has done well by making the exchange responsible for quality and quantity delivered on its platform.

Again in 2017, Sebi lifted the long-standing ban on some commodities. The idea was to widen the market by allowing new participants to trade on the exchange platform. Towards the end of the year, the regulatory body gave permission to category III alternative investment funds to take trading position in commodity markets. These funds, which collect money from high net worth investors (HNIs), deploys them in risky assets to generate high returns. A majority of market observers and analysts think mutual funds could be the next to enter the commodity market.

The somewhat conducive regulatory environment notwithstanding, the turnover in the commodities market remained lacklustre, thanks to drop in most agriculture commodity prices and weak trends in bullion. For record, MCX turnover declined 17 per cent at Rs 50.47 lakh crore, down from Rs 61.11 lakh crore logged in the same period last year. Similarly, the agriculture-focused commodity exchange NCDEX’s turnover was at Rs 5.31 lakh crore, down 18 per cent from Rs 6.51 lakh crore in the previous year. The re-launch of two agriculture commodities – chana and castor seed –minimised the impact of the sharp fall in commodity prices, analysts said.

Cotton

Cotton, another agricultural commodity, witnessed a roller-coaster ride in 2017 and analysts feel prices would be range-bound with an upward bias from current levels in 2018. In December, raw cotton prices increased by Rs 1,000 a quintal from the lows of Rs 4,300-4,500 a quintal in Gujarat markets.

The upside is attributed to the political uncertainty and lower arrivals at mandis despite robust crop estimates. The assembly polls in the largest cotton growing state also prompted farmers to postpone selling stocks in anticipation of some government assistance to lift the prices.

According the Cotton Advisory Board data, cotton output is estimated to be 37.7 million bales with lower yield of 523.83 kg per hectare for 2017-18 against 540.80 kg per hectare in 2016-17. Cotton acreage, however, has increased from 10.84 million hectares in 2016-17 to 12.23 million hectares in 2017-18. It is likely reflect in the increased production of the fibre crop from 34.5 million bales last year.

Some analysts say the domestic cotton prices are closely connected with the global sentiment, especially with the price movement on New York’s Inter-Continental Exchange (ICE). Going by International Cotton Advisory Committee (ICAC) estimated, in 2017-18 global cotton production is projected at 25.57 million tonnes against 23.05 million tonnes estimated for 2016-17. The global cotton consumption is expected to be at 25.22 million tonnes lower than production.

“Any volatility in New York Cotton futures (ICE Cotton) will immediately be reflected on Indian cotton prices. Considering the crop and stock scenario, there is no doubt that there will be increased availability but one has to keep in mind that mill consumption will also increase and yarn demand will also go up. Therefore, considering everything, although there will be some volatility, mostly thanks to speculators’ activities, 2018 will mostly remain in balance for cotton sector,” a senior analyst said.

ritwikmukherjee@mydigitalfc.com

Columnist: 
Ritwik Mukherjee