On Aug 15, gold rose by 0.5 per cent, to trade at $ 1,372.97 an ounce in the Singapore. This was considered to be the steepest hike in the futures market since June 19, 2013. In India, the same day, gold prices crossed Rs 30,000 per 10 grams, rising 3.56 per cent. In the next two days, gold prices surged by Rs 1,310 per 10 grams in India, the highest in the past two years. The sudden spurt in prices followed the Govt's ill-advised decision to raise import duties to 10 per cent.
In the days to come, with the festive season nearing, gold prices will further firm up.
The argument that I hear repeatedly from the Finance Minister is that gold imports have surged in the past few years thereby leading to the widening of the Current Account Deficit. His hypothesis is that investment in gold (or silver) is an 'idle investment' and does not flow back into the economy. By saying this, he is actually wanting the middle class not to invest in gold to park its savings, but to spend it on other consumer durables that will keep the wheels of economy moving.
What he is not telling us of course is that by raising the import duties and curbing the imports, he is helping the futures market in precious metals to literally make a killing. Just in two days after the decision to raise import duties, we have seen a massive jump in prices. For the aam aadmi this is bad news. After all, gold is an important part of Indian marriages (on an average 15 million marriages happen every year in India) and you can imagine the indirect taxation parents of bride and groom have to undergo by shelling out a hefty price. That's what Mr P Chidambaram wants. After all, you should be made to empty your pockets, the underlying principle on which market economy operates.
I fail to understand the economic logic. It is the unbridled consumerism has led the world to the grave environmental and ecological crisis. If the world is nearing a tripping point, if the world is witnessing global warming leading to ecological catastrophe at places across the globe, consumerism in an important reason for it. Nevertheless, what is more important to know here is the selective application of the 'idle money' concept. If investment in gold by the middle class is an 'idle' investment, what about the Rs 10-lakh crore that is being hoarded by the India Inc?
The Reserve Bank of India (RBI) has in a report spelled out that India Inc was sitting over a cash reserve of over Rs 9-lakh crore by the end of March 2012. This year, I am sure the money that is being hoarded by India Inc must have increased many fold (Reliance Industries alone is sitting over Rs 83,000 crores. http://bit.ly/14LzxFp). With India Inc refusing to invest the hoarded cash within the country, isn't this also 'idle money"? Why is that the Govt not making any effort to force the private companies to fork out the hoarded cash? Why is it quiet when it comes to the Corporate sector?
If only the Govt had forced India Inc to take out the massive cash reserves that it is sitting on, and make it invest within the country, which in the process would have created jobs, be assured the rupee down slide would have been in check. The CAD would have come down, and so would have been the fiscal deficit.
The booster shot to futures trading in gold and the inability to make the private sector cough out the hoarded cash reserves has a political link. We all know elections are around the corner. And on top of it, the Govt is unwilling to let Right to Information (RTI) provisions apply for the political parties. Do I need to say more?
Showing posts with label futures trading. Show all posts
Showing posts with label futures trading. Show all posts
Food Corporation of India: Futures shock
At a time when the Global Hunger Index 2012 ranks India 65th among 79 countries, K V Thomas, minister of state for food and public distribution and consumer affairs, has revealed that the Food Corporation of India (FCI) will soon trade wheat in the futures market.
Seeking clearance from the Forward Markets Commission, the minister said: “The market has to perform the economic function of price discovery and price risk management.” Well, what I can see as the basic objective is to replace the open market sales scheme with trading in the futures market. In other words, futures trading will provide an opportunity for FCI to make some profits, which in turn can be ploughed back in its procurement operations, thereby reducing the subsidy outgo.
The issue isn’t as simple as is being made out. In addition to performing the sovereign role of procuring foodgrains, FCI’s relatively lesser known role is to keep a tab on food inflation. Whenever wheat and rice prices shoot up in the domestic market, open market releases are made from FCI stocks to bring down the market prices. For the year ending July 2012, the UN Food and Agricultural Organisation estimates that the wheat price rise in India was the second highest after Sudan. In the case of rice, price rise in India was third largest globally and that too, despite holding massive stocks of grain surplus.
To ease the pressure on market prices, FCI had made open market releases of 2.6 million tonnes of wheat for tender sales to bulk consumers and to small private traders in July-August. This helped stabilise domestic wheat prices.
I, therefore, see no economic justification and political wisdom in doing away with this crucial role that FCI plays in taming food inflation. In fact, it is the other way around. By entering the futures market, and trading available surplus wheat at higher prices, fixed in advance, FCI will eventually emerge as the biggest player in fanning inflation. It will be able to swing the futures market by the sheer power of the huge volume of physical stocks it holds. The resulting domino effect will see wheat market prices panicking.
Let’s take a look at the international markets and see if we can draw any inferences. In 2007, when the global food crisis was it its peak, with 37 countries witnessing food riots, the UN Special Rapporteur on Human Rights had said speculation in food was primarily responsible for the spike in food prices. Food prices were no longer driven by supply and demand, but by the actions of financial speculators and their investments. Profiteering on human misery and hungry stomachs had brought in a huge windfall for some of the biggest agri-business giants.
Global food prices are again on the upswing in the second half of 2012. The looming drought in the US, followed by a production shortfall in Russia and Ukraine, has already turned the fortunes for Cargill Inc, the world’s largest grain trading company. Its earnings in the first quarter of 2013 (ending August 31) reached a record $975 million compared to $236 million a year ago. Glencore, another giant trading firm, is ready for the kill. “The environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, and a lot of arbitrage opportunities,” Chris Mahoney, Glencore’s director of agriculture, was quoted as saying.
Turning FCI into a commercial entity is, therefore, fraught with dangers. In a country like India, which holds the dubious distinction of having the largest population of hungry people in the world, FCI performs essentially two roles. First, it provides an assured price to farmers by buying at the pre-fixed procurement price. For the Indian farmer, it is the procurement price that makes him realise a remunerative price for his harvest. Although procurement prices are announced for some 22 crops every year, it is only for wheat and rice that FCI makes purchases. And, it is primarily for this reason that production of wheat and rice has grown steadily.
Withdrawing the procurement and market intervention roles of FCI would see agriculture collapsing. Farmers in several parts of the country where FCI is not active have to resort to distress sale of wheat and rice. Even in Punjab, the food bowl, all efforts to diversify the cropping pattern have come to nought simply because farmers see an assured market only existing for wheat and rice. Price discovery and price risk management, therefore, are roles FCI plays. To expect the futures market to perform these economic functions is simply a fallacy, if we were to look at the American experience.
In the US, which hosts the biggest commodity exchange in Chicago, commodity trading has not helped farmers realise better prices. It is primarily because of the failure of commodity trading to convert agriculture into an economically viable proposition that the US provides for massive federal support to agriculture every five years. The Food Bill 2008 had made a provision of $307 billion, which includes direct income support, subsidies for land improvement, environment protection and crop insurance.
There is no denying that grain handling, storage and distribution are mired in corruption. But that is also true for the futures market. A recent multi-crore scandal in commodity trading of guar seed and guar gum had resulted in a temporary ban on a number of agricultural commodities. And, despite Thomas promising to initiate an enquiry by the Central Bureau of Investigation, it is business as usual for the commodity exchanges. FCI’s functioning, therefore, has to be improved, but to turn it into a commercial venture would be the first step to destroy the country’s hard-earned food self-sufficiency. It will also acerbate hunger.
Source: A futures shock from FCI Business Standard, New Delhi, Nov 10, 2012
bit.ly/Xrdo0g
Seeking clearance from the Forward Markets Commission, the minister said: “The market has to perform the economic function of price discovery and price risk management.” Well, what I can see as the basic objective is to replace the open market sales scheme with trading in the futures market. In other words, futures trading will provide an opportunity for FCI to make some profits, which in turn can be ploughed back in its procurement operations, thereby reducing the subsidy outgo.
The issue isn’t as simple as is being made out. In addition to performing the sovereign role of procuring foodgrains, FCI’s relatively lesser known role is to keep a tab on food inflation. Whenever wheat and rice prices shoot up in the domestic market, open market releases are made from FCI stocks to bring down the market prices. For the year ending July 2012, the UN Food and Agricultural Organisation estimates that the wheat price rise in India was the second highest after Sudan. In the case of rice, price rise in India was third largest globally and that too, despite holding massive stocks of grain surplus.
To ease the pressure on market prices, FCI had made open market releases of 2.6 million tonnes of wheat for tender sales to bulk consumers and to small private traders in July-August. This helped stabilise domestic wheat prices.
I, therefore, see no economic justification and political wisdom in doing away with this crucial role that FCI plays in taming food inflation. In fact, it is the other way around. By entering the futures market, and trading available surplus wheat at higher prices, fixed in advance, FCI will eventually emerge as the biggest player in fanning inflation. It will be able to swing the futures market by the sheer power of the huge volume of physical stocks it holds. The resulting domino effect will see wheat market prices panicking.
Let’s take a look at the international markets and see if we can draw any inferences. In 2007, when the global food crisis was it its peak, with 37 countries witnessing food riots, the UN Special Rapporteur on Human Rights had said speculation in food was primarily responsible for the spike in food prices. Food prices were no longer driven by supply and demand, but by the actions of financial speculators and their investments. Profiteering on human misery and hungry stomachs had brought in a huge windfall for some of the biggest agri-business giants.
Global food prices are again on the upswing in the second half of 2012. The looming drought in the US, followed by a production shortfall in Russia and Ukraine, has already turned the fortunes for Cargill Inc, the world’s largest grain trading company. Its earnings in the first quarter of 2013 (ending August 31) reached a record $975 million compared to $236 million a year ago. Glencore, another giant trading firm, is ready for the kill. “The environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, and a lot of arbitrage opportunities,” Chris Mahoney, Glencore’s director of agriculture, was quoted as saying.
Turning FCI into a commercial entity is, therefore, fraught with dangers. In a country like India, which holds the dubious distinction of having the largest population of hungry people in the world, FCI performs essentially two roles. First, it provides an assured price to farmers by buying at the pre-fixed procurement price. For the Indian farmer, it is the procurement price that makes him realise a remunerative price for his harvest. Although procurement prices are announced for some 22 crops every year, it is only for wheat and rice that FCI makes purchases. And, it is primarily for this reason that production of wheat and rice has grown steadily.
Withdrawing the procurement and market intervention roles of FCI would see agriculture collapsing. Farmers in several parts of the country where FCI is not active have to resort to distress sale of wheat and rice. Even in Punjab, the food bowl, all efforts to diversify the cropping pattern have come to nought simply because farmers see an assured market only existing for wheat and rice. Price discovery and price risk management, therefore, are roles FCI plays. To expect the futures market to perform these economic functions is simply a fallacy, if we were to look at the American experience.
In the US, which hosts the biggest commodity exchange in Chicago, commodity trading has not helped farmers realise better prices. It is primarily because of the failure of commodity trading to convert agriculture into an economically viable proposition that the US provides for massive federal support to agriculture every five years. The Food Bill 2008 had made a provision of $307 billion, which includes direct income support, subsidies for land improvement, environment protection and crop insurance.
There is no denying that grain handling, storage and distribution are mired in corruption. But that is also true for the futures market. A recent multi-crore scandal in commodity trading of guar seed and guar gum had resulted in a temporary ban on a number of agricultural commodities. And, despite Thomas promising to initiate an enquiry by the Central Bureau of Investigation, it is business as usual for the commodity exchanges. FCI’s functioning, therefore, has to be improved, but to turn it into a commercial venture would be the first step to destroy the country’s hard-earned food self-sufficiency. It will also acerbate hunger.
Source: A futures shock from FCI Business Standard, New Delhi, Nov 10, 2012
bit.ly/Xrdo0g
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