Under the spot-light

Futures trading has come under fire from various quarters in recent times for pushing up prices of essential commodities. The criticism may or may not be justified— the debate is still on—but commodity futures exchanges have already drawn up a game plan to deal with the situation. They are now gearing up to launch electronic spot exchanges. Their contention is that it will lead to better price discovery.

NCDEX, the second-largest commodity exchange in the country, was the first to commence spot trading when it launched its 100 per cent subsidiary called NCDEX Spot Exchange in December 2007. This exchange, though, only permits trading in sugar and steel. The Multi Commodity Exchange (MCX), the largest among the three commodity futures exchanges, has also launched its spot trading arm called the National Spot Exchange (NSEL) and will start trading in a number of agricultural and non-agricultural commodities by the end of August.

The latest to join the bandwagon is the Ahmedabad-based National Multi Commodity Exchange, which plans to set up a spot exchange for agricultural products, called the National Agriculture Produce Marketing Company of India (National APMC), along with Reliance Money in Gujarat and Rajasthan.

The commodity exchanges argue that an efficient spot market is imperative for a healthy and vibrant futures market. Indeed, unlike the stock markets, where the stock derivative prices are determined by the spot market price, this isn’t the case with commodities prices. The commodity pricing mechanism is still very unstructured and region-specific. Says Sudip Bandhyopadhay, CEO, Reliance Money: “The entire market can work efficiently if commodity spot prices are integrated fully with the futures market.”

In India, despite the absence of a uniform spot pricing mechanism for commodities, the futures market is huge. According to Forward Markets Commission data, the commodity exchanges recorded trading volumes of Rs 16.54 lakh crore during the April-July period. But analysts say the government may have jumped the gun by giving the go-ahead to futures trading without a structured spot market in place.

“The government first introduced commodities futures without addressing the problems of the spot market, which is highly fragmented,” points out G. Chandrashekhar, Associate Editor, Business Line (and an advisor to government on policy related issues) A spot commodities market, then, can revolutionise trading, particularly in farm commodities. It will allow farmers to deal directly with purchasers, without having to go to a mandi. The exchanges promise to reduce the intermediaries between the farmer and the end-consumer, and help farmers find the best prices. But teething problems remain. Many states still have to amend the Agriculture Produce Marketing Committee (APMC) Act to give recognition to spot exchanges. Another obstacle is the unfamiliarity of farmers with the advantages of the new trading system. Clearly, a lot of spadework still needs to be done to ensure that the venture is a success.

—Rachna Monga