Sucheta Dalal :Rising speculation grips commodities market
Sucheta Dalal

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Rising speculation grips commodities market  

Oct 30, 2006

The National Commodity and Derivatives Exchange (NCDEX) shut down twice on Saturday, causing several commodity prices to plummet to their lower circuit breaker. The panic among commodity speculators fuelled by rumours about a possible payment crisis triggered a meltdown in several speculative positions.


Although the bourse says that the shutdown was due to technical problems, informed sources say that at least two brokers, one from Delhi and Mumbai have suffered losses of Rs 35 crore and Rs 15 crore during the day. While this is not a big crisis, the plunging prices reflect excessive speculation in the commodities market; on the ground, this excess is evident in soaring retail prices across a range of grain, oil, pulses and now potatoes.


If onion prices in the past had cost the Bharatiya Janata Party (BJP) a State election, the Congress led government literally has the hot potato to contend with. Tuber prices in the retail market have shot up from around Rs 12 a kilo to over Rs 20 and still rising. There are also reports about large scale hoarding by retail traders in anticipation of short term profit.


The steep rise in commodity prices is a global phenomenon; but it is interestingly predicated upon the expectation of insatiable demand from the booming economies of India and China. A commodity analyst from a Swiss bank is quoted by an international website saying, “If you agree with me that China, India and the other nations will continue to grow at double digit rates, then you will agree that demand for many commodities from oil to copper to name a few will remain strong, driving prices higher”.


Another says, “With both China and India growing at breakneck speed, it’s hard to see how supply will ever be able to keep up with demand across a whole range of raw materials”.


Julia Finch of The Guardian of London reports grain traders as saying that a “structural shift is underway”. Price of corn and wheat have risen 60 per cent this year, driven partly by the shift to bio-fuels in several countries. Oil and metal prices are also on a high. And again, grain merchants worldwide are pointing to “burgeoning demand from


China and India”. Drastic swings in climate have also affected crops across several continents, triggering off shortages. For instance, an unusual drought in Australia has hit production and pushed up global wheat prices.


This is a perfect situation for hedge funds to jump in and make a killing by driving prices even higher. As Finch puts it: Another force behind the recent price rises has been an influx of more speculative investors - including hedge funds, institutional and even retail investors. They trade aggressively, increase price volatility and are bringing a whole new meaning to the phrase ‘bet the farm’ —commodity index funds are another set of investors hoping to profit from a commodity boom.


In India, where foreign investment is not yet permitted in the commodities market, it is rich farmers together with capital market speculators who are jumping into commodity speculation and actively ramping up prices. A lot of the trading and hoarding of physical stock is funded by political slush funds. So brazen are the operators that they are even attempting to drive up prices of commodities such as maize and guar gum in the futures market through spot purchases, despite a bumper yield in both the commodities. Ironically, guar gum, an icecream additive is among the hottest contracts on India’s commodity futures market and accounts for a big chunk of turnover.


International commodity speculation based on the expectation of increased consumption in countries such as India and China is bad news for a democratically elected government. Here, poor distribution systems and outdated legislation allows traders and hoarders to drive up prices at the retail level. This is further exacerbated by the absence of large retailers.


Consequently, the relentless rise in retail prices of basic food grain, oil, pulses and now potatoes is affecting every household in a country which already spends a disproportionately high proportion of earnings on food and basic essentials.


While speculators around the world drive up prices based on India’s overall growth numbers, they ignore the vast disparity between the top 5 per cent of the population, which has been the biggest beneficiary of the economic growth and the majority of India’s 110 crore population, which is just beginning to see financial gains percolate down to them.


The good news is that the government is sensitive to the implications of rising prices and the public distrust about commodity speculation. That is why, despite persistent lobbying by the commodity bourses, large foreign brokerage firms and banks, the government has kept foreign investment out of the commodity markets. But that is not enough; nor is it really feasible to use a policing mechanism to go after hoarders and black marketeers. The government will have to work overtime to change legislation, remove geographical restrictions to the movement of food products and encourage large format retailers. This will cut several layers of the distribution chain, offer better returns to producers and farmers while keeping retail prices in check.


-- Sucheta Dalal