India’s suspension of futures trading in key farm commodities is crimping the use of risk management tools such as hedging across its food supply chain, spurring inventory cuts as forward purchases get scaled back.
Monday’s halt, targeting items such as soybeans, edible oils, wheat, rice, and chickpeas as authorities move to cool accelerating inflation, was one of India’s most dramatic steps since it launched commodity futures in 2003.
But the ban on access to futures contracts may fuel volatility in domestic markets by denying traders the tools crucial to planning decisions, forcing them to cut stocks, delay long-term purchases and sales, and even limit imports.
“In the absence of futures, markets will remain clueless about shortfalls and excesses,” said Govindbhai Patel, a managing partner at edible oil trader GGN Research. “This could create even more volatility in prices.”
The Finance Ministry did not immediately respond to a request for a comment.
Mr. Patel’s firm, which used to buy edible oils for prompt and far-month deliveries, and hedge on domestic exchanges, will now only secure its needs for up to 10 days at a time, he said.
“We used to hedge 70% to 80% of our volumes. As the hedging option is not available, we are scaling back operations,” said Mr. Patel.
India is the biggest importer of vegetable oil to fill more than 70% of its needs.
Farmers may be hit
Regional processors who buy crops from farmers will also feel the pinch, as they are deprived of advance sales through futures contracts.
Manoj Agrawal, the Managing Director of Maharashtra Oil Extractions, said his firm could no longer hedge soy oil on commodity exchanges after buying soybean from farmers.
