India’s future disruption of trade in certain foods is hampering supplies Business and Economic News

India’s annual suspension disrupts future trade in key agricultural products reduces the use of risk management tools such as hedging in the food supply chain, and encourages inventory cuts as short-term purchases are reduced.

Monday’s stalemate on issues such as soybeans, edible oils, wheat, rice and chickpeas, as inflation has been rising by the authorities, was one of the most significant steps India has taken since launching its commodity futures in 2003.

But a ban on access to futures contracts could increase volatility in domestic markets by depriving retailers of key decision-making tools, reducing stocks, delaying long-term purchases and sales, and limiting imports.

“In the absence of a future, the markets will be clear about shortages and abuses,” said Govindbhai Patel, managing partner of GGN Research’s edible oil retailer. “This could lead to even greater volatility in prices.”

The Finance Ministry did not immediately respond to Reuters’ request for comment.

Patel’s company, which used to buy edible oils for month-long shipments and cover domestic exchanges, will now only meet its needs for 10 days at a time, he said.

“We covered 70 percent and 80 percent of our volumes. With no coverage options available, we are reducing operations, ”said Patel, a trader who has been a trader for almost 50 years.

Critical contracts

India is the world’s largest importer of vegetable oil, meeting more than 70 per cent of its needs with foreign purchases of around 1.3 million tonnes per month.

Future contracts were key to ensuring a smooth flow of imports, allowing buyers and traders to cover part of their shipments after the agreements were signed, said Sudhakar Desai, president of the Indian Association of Vegetable Oil Producers.

“Every supply chain needs to change the way it conducts its operations in the absence of hedging tools and significant prices,” he added.

The price-finding process could be further localized in the absence of future national prices, which could potentially be lower in producers and higher in high-consumption regions, Desai said.

Garments such as alternative investment funds and international traders can target foreign markets to cover up risks, said Manoj Dalmia, head of brokerage firm Proficient.

But that alternative is not available to small players who need the approval of the authorities to manage the risk of commodity and currency prices, said a Mumbai edible oil broker.

Problems for farmers

Processors in the region who buy crops from farmers will also feel the pinch, as they eliminate pre-sales through future contracts.

Manoj Agrawal, managing director of Maharashtra Oil Extractions, said his company could not cover soybean oil in commodity exchanges after buying soybeans from farmers.

“If we can’t cover the finished products, we can’t take the risk of having large quantities of raw materials,” he added. “We would operate at a limited capacity.”

Also, a smaller inventory of vendors and processors could be detrimental to farmers, said Nitin Kalantri, a legume processor based in Latur city in the western state of Maharashtra.

Farmers are flooded with produce after harvest, but usually find willing buyers among processors and warehouse users to build enough inventory for a year, Kalantri said.

“If everyone reduced their operations due to uncertainty, farmers would have difficulty finding buyers and prices could fall.”

Soybean farmers are also concerned about the inability to use future reference prices to set harvest sales on time.

Easy access to future prices across the nation forced traders to offer comparable prices to producers across the nation. But without a future, there is no way to cross prices, said farmer Sudhakar Kale, who harvested two tonnes of soybeans in September but is holding back sales in hopes of raising prices.

Other farmers, such as Ashish Naphade, said future prices also helped them decide which crops to sow.

“The future gave us a hint of possible prices at the time we harvest,” Naphad added.

Banks and financial institutions that lend against deposit receipts said the future would help them estimate stocks to determine loan sizes.

“Now we have to be very careful when we are lending,” said a State bank official.