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Thursday, February 10, 2011

The sad story of the sugar futures ban-a regulator's perspective

During his talk at IIM-A, Mr BC Khatua stressed upon the price discovery and policy tinkering aspects of the commodities futures market(specially in the Indian market where spot prices are imperfect). He cited the sugar industry as an example of how the 'messenger was shot'(my words). He deplored the 'ignorance'/'narrow mindedness' of some of his colleagues on that topic. 

Everyone and his uncle(then) has analyzed the sugar futures issue and I do not wish to repeat their excellent analysis.Suffice to say that post a harvest failure and international supply crunch in Brazil etc, sugar prices had shot up to Rs 27-28(from Rs 13-14) by Sep-08 and futures traders were blamed for the same. When the regulator was asked for an explanation, he gave a detailed analysis citing crop statistics, global trends etc and forecasted a price of Rs 39-40 IF preventive action was taken now by encouraging farmers to grow more or allowing import of the nearly 3 million tonnes requirements @ $300/ton(prevailing rate).He did not want to shut off the price signals by suspending the sugar futures contracts.

But under pressure from the Agriculture Secretary, he gave in and decided to suspend the contracts. Another reason was that he did not want the fledging commodities futures market to be blamed for the inevitable price rise. And in less than two years, the price levels(retail) had touched Rs 50. The 3 million tons gap was imported at $700-850/ton. This gap may have been filled domestically but farmers had not got the price signals to act by sowing. If they had sown, given the 12 months crop cycle, the gap would have lasted 1 yr instead of the 2 yrs it did.

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