Challenges and the way forward in Integration of Spot & Derivatives Market

Challenges and the way forward in Integration of
Spot & Derivatives Market
Presentation to Expert Committee on Integration of Commodity
Spot and Derivatives Markets
21-08-2017 Blog:Vijay Sardana Online 1
Presentation By:
Vijay Sardana
PGDM (IIM-A), M.Sc. (Food Tech.) (CFTRI), B.Sc. (Dairy Tech.), Justice (Harvard),
PG Dipl. in Int'l Trade Laws & Alternate Dispute Resolution (ADR) (ILI), LL. B (in Progress)
Specialized in Food & Consumers Laws, IPR & Contract Laws
Agribusinesses Value Chains, Commodity Markets & Innovation Management

Terms of Reference of the Expert Committee on Integration of Commodity Spot
and Derivatives Markets
1. Better price realisation for farmers by creating liquid and transparent spot as well as derivatives markets.
2. Better access for farmers and businesses to agricultural goods and services across
3. Empowerment of farmers with knowledge, information and capability to undertake market-driven production.
4. Improved efficiency, competitiveness, supporting infrastructure and strong Institutional mechanism by
integrating spot with commodity derivatives markets.
5. Recommend measures to achieve operationally seamless Interconnectedness between fragmented physical
commodity markets / commodity Exchanges / Electronic platforms, the supporting infrastructure, institutions
and the various participants.
6. Development of regulated electronic spot exchanges both for agricultural and non-agricultural commodities
like gold, silver, base metals, energy products for better price discovery and disseminating reference prices
for derivatives markets,
7. Ease of doing business in the commodities market and related areas In the country.
8. Any other matter that Government may specify or the Committee considers relevant in this regard.
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Blog:Vijay Sardana Online
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Scope of crop with decide meaningful integration
S.No. Scope Example
1 Regional / Localised Crop Castor
2 National Crop Mustard
3 Global Crop Rapeseed and Soybean
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Mustard Value Chain
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Castor seeds
• Castor is a plant that produces seeds (beans). Castor oil is produced by pressing ripe seeds that have had
their outer covering (hull) removed. The hull contains a deadly poison called ricin. Castor oil has been used
as medicine for centuries.
• Castor seeds without the hull are used for birth control, constipation, leprosy, and syphilis.
• Castor oil is used as a laxative for constipation, to start labor in pregnancy, and to start the flow
of breast milk.
• Some people apply castor seed paste to the skin as a poultice for inflammatory skin disorders,
boils, carbuncles, pockets of infection (abscesses), inflammation of the middle ear, and migraine headaches.
• Castor oil is used topically to soften skin, bunions and corns; and to dissolve cysts, growths, and warts. It is
also applied to the skin for osteoarthritis.
• Castor oil is used in the eyes to soothe membranes irritated by dust or other materials.
• In manufacturing, castor seeds are used to make paints, varnishes, and lubricating oils.
• Ricin from the hull of the castor seed has been tested as a chemical warfare agent. Weapons-grade ricin is
purified and produced in particles that are so small they can be breathed in. The smaller the particle size, the
more poisonous the ricin. You may remember that ricin was found in letters sent to some Congress members
and the White House, and in the possession of people linked to terrorist and antigovernment groups.
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Factors affecting Price Discovery in Soybean Complex
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Global Soybean Situation till 2025
Blog :Vijay SardanaOnline
WORLD
SOYBEAN
Unit
Avg.
2013-15
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Production Mt 298.7 318.7 324.5 334.7 342.9 351.3 358.9 367.9 377.6 384.4 393.9
Consumption Mt 298.8 320.9 326.7 334.9 343.2 351.9 359.0 367.2 376.6 384.0 393.9
Crush Mt 268.1 289.0 294.5 302.2 310.3 318.8 325.5 333.4 342.3 349.5 359.0
Closing stocks Mt 34.6 36.2 33.9 33.7 33.5 32.9 32.7 33.4 34.4 34.8 34.8
Price USD/t 433.3 347.5 370.7 373.5 381.1 390.5 414.2 423.7 416.1 430.0 427.3
Global Soya Production is likely to increase and
Global Soya Prices are likely to remain under pressure.
USD 433.3 per tons means about Rs. 29 per kg (Soybean, U.S., CIF Rotterdam)

Global Rapeseed-Mustard Production & Price Forecast
Blog :Vijay SardanaOnline
Global RM Production is likely to increase and
Global RM Prices are likely to remain under pressure.
WORLD RM Seeds Unit
Avg.
2013-15
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Production Mt 144.5 143.6 145.9 148.0 149.8 151.7 153.6 155.5 157.1 158.9 160.7
Consumption Mt 143.9 143.4 145.1 147.4 149.5 151.5 153.5 155.7 157.3 159.1 160.7
Crush Mt 119.6 118.8 120.5 122.6 124.7 126.6 128.6 130.7 132.4 134.2 135.8
Closing stocks Mt 9.3 8.3 9.0 9.6 9.9 10.1 10.1 10.0 9.7 9.4 9.4
Price USD/t 444.7 400.5 409.0 391.6 391.0 401.9 412.5 407.2 411.8 422.3 433.1
USD 444.7 per tons means about Rs. 30 per kg (Rapeseed, Europe, CIF Hamburg)

Why there is variation in commodity prices?
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DRIVERS AND
CONSTRAINTS
THAT COULD
AFFECT
FARMERS’
BEHAVIORS.
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Expectations of Stakeholders
S.No Parameters Farmers Buyers
1 Criteria For Prices Fixation Cost Of Production Plus Competitors Price & Speculations
2 Expectations From The Market Maximum Realization Lowest Possible Price
3 Transaction Cost Nil or Least Possible Nil Or Least Possible
4 Quality Concerned Not keen on any deduction Need assured quality
5 Role In Value Chain Actual Producers Actual User Industry / Trade
6 Risk Management Generally Need Assurance Generally Driven By Profitability
7 Dispute Resolution Quick and Low Cost Quick and Low Cost
8 Logistics Should be Short distance and Certain Need assured delivery
9 Storage Production during season Consumption round the year
10 Quality Not keen to , it should be on as it is basis Very concerned
11 Price discovery Driven by local factors International markets impact
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Factors to be Considered for Integration Feasibility
S.No. Issues Spot Future Concern to be addressed in existing
futures from users point of view
1 Commodity Need based on the Spot
decisions
Only Well-planned decisions
2 Grading Need based and linked to price Only Pre-defined, nothing
else
Who will buy the rest and the what is
the benefit in duplicating the system
3 Marketability Every thing is marketable and
bargained
Marketable, only as per
contract
This is the limitation of exchanges &
regulators, not the buyers and sellers
4 Decision maker about
quantity
Buyers & sellers Exchange Kills flexibility and adds to cost, Not
acceptable
5 Delivery lot size Buyers & sellers Exchanges Kills flexibility and adds to cost, Not
acceptable
6 Delivery time Buyers & sellers Exchanges Kills flexibility and adds to cost, Not
acceptable
7 Dispute resolution On the spot Long and expensive process No confidence due to time lag
8 Capital requirement Very less Large commitments Reduces participation
9 Documentations Minimal Maximum Transactions cost goes up
10 Preconditions for trade Minimal Too many Transactions cost goes up21-08-2017
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Integration Drivers of Commodity Trade
Commodity markets are unpredictable by nature.
• Flexibility - in quantity timing & quality
• Credibility & Accountability
• Transaction Cost
• Payment Terms
• Documentations
• Dispute Resolution
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Caution:
• Don’t force integration till Extension services are not upgraded and MSP system is in place.
• Link Customs duty to MSP to make it a success.

Open for Discussion
21-08-2017
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Blog: Vijay Sardana Online

Challenges and the way forward in Integration of Spot & Derivatives Market

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