Commodity futures trading vs. price rise
Looks like there are conflicting theories to all pressing issues including commodity futures trading and price rises, also called ‘Yooga vanigam’ in tamil.
There are some politicians and intellectuals in Tamil Nadu who attribute commodity futures trading as the leading cause of price rises and inflationary conditions. Maruthuvar Ayya, and the left are examples of the anti-futures trading camp, which makes me get closer to the opposite camp quite naturally.
But they simply say that as a statement, as if like the causal relation has been as proven as ‘The sun rises in the east’. There is one columnist in Kumudham Reporter called Solai (or Cholai) who claims that had rice had not been banned from commodities futures trading, the price of rice per kg. would’ve reached Rs. 100. I am not sure where and how he comes to this conclusion. He does not explain that, maybe we should believe him just like the way we believe Kalaam on N-deal? On the other hand, articles like these give a different view. Yaarai namburadhu?
If commodities futures trading had led to price rises, how come there were no price rises in all the countries where it had been in vogue all along? When did commodities futures trading come into effect in other countries? Is the correlation valid only for India?
I am not very clear on this issue, but from what I read, I am more inclined to the view taken by the Sen committee and in opposition to the view expressed by the maruthuvar ayya camp and the Solai camp whose ideas are decidedly governed by Leftist ideologies. Any pointers welcome.
September 6th, 2008 at 5:39 am
CT is good as long as it is between, say, a farmer and purchaser of goods. When Prabhu and Karthik start meddling with it then it is not CT, it is speculation. How you and I should be regulated in CT is a big question. In US it has been proposed that buyers of CT calls and contracts should take physical possession of the goods themselves. This will eliminate speculators such as Prabhu and Karthik.
Now should speculators be kept out? Possibly because human greed knows no bounds.
September 7th, 2008 at 12:30 am
Karthik
I extrapolated your idea to stocks. Even stocks are bought and sold by ppl who are not involved in the businesses per se.
Human greed evlo critical o avlo critical human fear um. Maybe farmers should be taught how to leverage this to cut their losses.
US idea seems to be sensible. Not sure how things work in India.
September 7th, 2008 at 3:43 am
PK,
good question. Number of shares is limited but no of commodities future contract is unlimited. An apt comparison would be options. Sitting in AshokNagar kuppai, I can write a contract for Sheikh’s oil or Canadian timber over which I have no control. These contracts need not have any tangible underlying products. That is why US is planning to restrict the trade to those who have such tangible assets.
September 7th, 2008 at 9:47 am
Oh ok….
btw oil 200$ per barrel thodum nu josiyam sonaare one thamizhar ( or rather Indian) in Goldman Sachs? adhu epdi solranga?
Bottom line what you suggest is, not let you and me write contracts but let someone who can deliver or take possession of the goods to get into this … sounds fair enough to me
Not sure abt the % of pure play speculators in Indian context…
September 7th, 2008 at 10:55 pm
PK,
I may have to start blogging to explain all this. Now tell me, do you honestly think that any one paid $147 bbl in June-July of this year? Is there any connection between futures price and the actual price that the players transact at?
My view is that futures trading is used to cheat consumers. You and I can now accept the fact that 1ltr of petrol is Rs.60, 1kg of rice is 30 and so on. Who is getting the money everyone including traders, Govt. etc except consumers.
September 8th, 2008 at 12:41 am
karthik
>>do you honestly think that any one paid $147 bbl in June-July of this year
I am slightly confused. If no one paid $147 and there is no connection between futures price and actual price, how come Oil marketing companies say they incur more losses when crude oil prices go up?
September 8th, 2008 at 1:30 am
Only Indian oil companies are incurring losses. Do you see any oil company anywhere other than India losing money? Do you think our PSUs (Navratnas) are efficiently run? How do you sweep such inefficiencies under the carpet. Blame the price at which they have to “procure” their raw materials.
Once you put in bold words that oil is $147bbl it gives them more leverage to raise the prices. Public will not ask why? Does public have the knowledge to ask these PSUs to show them the invoice at which they buy oil from Saudi? Can we take this up using RTI?
September 8th, 2008 at 2:06 am
Karthik
Interesting… Oil prices have gone up in US too, right?
I remember my friends cribbing that it has gone up from sub $2 to more than $3.
Why don’t you start writing on these so that a common person can understand ? I place this as a request. How does F&O work. What is commodities trading in practice, etc.
What do you think?
September 10th, 2008 at 4:49 am
pk,
Market theory 101. Don’t sell a product based on cost price, sell it at a price the consumer is willing to pay. Oil companies have found a new limit to the price the consumer is willing to pay. Around $4.00 per gallon in US or Rs.53 or whatever per litre in India. Now you have to justify this price. Use the Futures market.
The oil companies really envy the water companies. You have all these natural spring water blah blah type of water that sells for god-knows-how-much per litre (Perrier is an example). They don’t need a futures market to justify their price because it is a status symbol.
Oil is a commodity and the only way to push the price up is using futures and that too when a lot of people who have nothing to do with oil pile up for a quick short term profit.