India's Agricultural Commodity Futures Market Ecosystem: An Overview

Abstract

As it is the responsibility of the government, exchanges and the regulator to ensure that suitable measures are taken to ensure delivery, some new revolutionary steps are designed by the FMC and the largest agri-commodity exchange NCDEX, in the larger interest of the farmers and to curb excessive speculation (Money Control, 2012). Staggered Delivery facility: In a move which gives the seller an option to tender delivery much before the expiry of the contract, the Regulator has introduced a system of staggered delivery in Compulsory Delivery contracts which could go a long way towards easing pressures towards the expiry of the contract and facilitate convergence in the futures and underlying physical markets. Under this system, the Seller can tender delivery any time from the 5th of the expiring month and the expiry date (for contracts expiring in June 2012 onwards). This would have twin benefits of facilitating smooth closure of the contracts as deliveries would be spread over a period of two weeks and permitting the Seller to tender delivery and exit his position, thereby reducing his holding and margining costs. It would also ensure that only buyers who intend to take delivery would remain in the expiry month contract during this period, thereby reducing speculative interest towards the expiry of the contract. Reduction in Delivery Default Penalty: Hitherto, the penalty on Seller in case of delivery default in a Compulsory Delivery contract was at 3% of the Final Settlement Price plus the difference in the Settlement Price and the average of three of the highest spot prices during five days after expiry of the contract. In scenarios of shortage of goods in the Exchange accredited warehouses, when sellers were not in a position to effect delivery, this led default penalty being priced into the futures prices. The penalty has been reduced to 1.5% plus the difference in the Settlement Price and the average of three of the highest spot prices during five days after expiry of the contract in select commodities "Chana, Mustard Seed & Pepper". Relaxing the penalty percentage would reduce the probability of non-convergence between spot and future prices and ensure more orderly expiries of the contracts. One problem remains with compulsory delivery more specifically in cases of narrow commodities (like pepper) whose production is less. At times, producer could not make deliver of the commodity as per the contract designs due to crop damages while cultivation (caused by erratic weather etc.,) resulting in quality issues. The only way to square off the deal is to deliver the produce at a discount on the contracted price. There can be much more problems which could create a mismatch between the interest of the buyers and the sellers at the time of delivery. It is the duty of the regulator to find suitable solutions (as that of the staggering delivery facility introduced recently) as long as the need for compulsory delivery mechanism holds well.