What agri commodity market is expecting from Union Budget 2023

Now that the ban on seven agri-commodity futures contracts in India is more than a year, it is becoming difficult for the market participants to get a better price discovery mechanism and also find it difficult to operate in physical commodities without having any hedge platform to cover their price risk. The future price trends provided by the exchanges are an important indicator for farmers, traders, and processors. The physical markets or mandis often follow the price trend basis the exchanges. Similarly, even farmers plan their offloading of various crops basis the price trends visible on the exchanges. More than individual farmers, the Farmers’ Producer Companies (FPCs) and Farmer Producer Organizations (FPOs) trade on the exchanges. Hence, the price discovery mechanism should be strengthened by lifting the ban on agri-commodity futures contracts. Also, the larger participation of players like mutual funds, financial institutions, and foreign institutional investors should be allowed to increase the liquidity on our agri exchanges and thereby reducing the chances of manipulating the prices on exchanges by a few selected lots due to minimal liquidity. Meanwhile, all the agri commodity future contract settlements need to be made on the spot instead of compulsory delivery to avoid speculation and these platforms could be used primarily for hedging and price discovery. The options trade should also be reinstated in the agri-commodities.

On the edible oil front, the domestic refining industry is suffering losses as the duty differential between imported CPO and RBD Palmolien is only 7.5% which led to increasing refined palm oil imports. Hence, an increase in the import duty of RBD Palmolein & RBD Palm oil from the current 12.5% to 20% would discourage cheaper imports of refined palm oil and allow higher capacity utilization by the domestic refiners. Meanwhile, we have to achieve self-reliance in the edible oil supply in India in order to reduce the losses to the Government Exchequer by reducing import dependency on edible oils. This could be done by allowing the production of genetically modified (GM) crops after successful trials by Genetic Engineering Appraisal Committee (GEAC) as it could increase the productivity of oilseed crops and improve nutritional content by making the GM crops resistant to climatic changes and more herbicide tolerant. Also, the minimum support price of oilseed crops should be increased in order to encourage the production of these crops by farmers. With the groundwater table depleting in the Northern part of the country increasing the acreages of mustard would also help to sustain the water table from depletion.

Talking about the current wheat prices inflation, one way to control it was to release wheat from the central pool under the open market sales scheme (OMSS) which the government has recently announced to offload 3 million tons of wheat during Q1 2023. The other way of cooling down the prices is by decreasing the import duty on wheat from 40% to 0%. Removing the duty would not create any influx of imported wheat as the international wheat prices are on the higher side and there is no parity even at zero duty, however, this will change the market sentiments. Wheat prices in Delhi touched a record high of Rs.3225 per quintal, prices rallied by over 42% as compared to the same period last year. After the government announced wheat sales under OMSS on 25th January, the wheat prices have corrected by around Rs.200 to 300 per quintal till today in most of the Indian wheat markets. Still, the prices are way higher than the minimum support price of Rs.2125 per quintal and it would be difficult for the government to replenish their granaries by procuring a substantial amount of wheat in the ongoing crop season. The wheat stocks fell to nearly 5-year lows and it would be difficult to run the food security schemes in the coming year if a substantial amount of wheat is not procured which may again add fuel to the food inflation. Hence, a corrective measure should be taken at the right time to control the increase in food inflation.

(The author, Major Rajiv Yadav, is Senior VP (Supply Chain) – Origo Commodity India Pvt Ltd)