India suspends futures trading of CPO, soybean oil, other agricultural commodities

The Securities and Exchange Board of India has directed local stock exchanges to suspend trading of seven agricultural commodities, including crude palm oil and soybean oil, with immediate effect for one year, according to a release on the markets regulator's website on Dec. 20.

The commodities impacted were crude palm oil, soybean and its derivatives, paddy (non-basmati), wheat, chana, or chickpeas, mustard seeds and its derivatives, and moong, or green gram, according to SEBI.

Traders will be allowed to square off their positions, but new trades cannot be executed. "The decision to ban trading in these futures contracts are expected to help cool prices, especially of edible oils and the oil complex," an official with India's Ministry of Consumer Affairs, Food and Public Distribution, told S&P Global Platts on Dec. 20.

Domestic prices of food products have been increasing for the past few months, despite the government's recent moves to cut excise duties.

India's retail inflation, which is measured by the Consumer Price Index, in November increased to a three-month high of 4.91%, with food prices also rising, according to data from Ministry of Statistics and Programme Implementation. Wholesale inflation, measured through Wholesale Price Index, during November accelerated to 14.23% from 12.54% a month ago. This was the eight-consecutive month in which it stayed at a double-digit levels.

According to the official, the banning of the trading in agricultural commodities would restrict any scope of speculation over prices and may help check the rising prices.

The weakening Indian currency was also pushing the prices of imported products higher, another official from the same ministry said.

Market participants said the decision could control prices in the short term but may not be effective in the long run.

"I think this has been done to cool prices which have breached multiyear highs this year, but the local prices, especially for palm oil and soybean oil, largely move in tandem with international prices, so the intended effect on local edible oil prices may not be as apparent," a trader said.

While the move may stabilize prices in the short term, it might not work to suppress prices for a whole year, the trader added.

Vivek Pathak, managing director of India-based trading house Athena Tradewinds, said that prices could be lower in the short term due to suppressed speculative activity, but the opposite effect could actually be achieved if the ban was not lifted in the near term.

"The move was instituted to control food prices, but effectiveness could be limited. Price discovery will be challenging and could lead to the formation of cartels," Pathak said

While only used by local players, the (MCX) CPO prices provided a reference price but that will not be available following the order. For CPO, buyers can still take guidance from the crude palm oil contract on the Bursa Malaysia Derivatives, or BMD, but soybean oil buyers will only have the Chicago Board of Trade, or CBOT, prices for reference.

"It might be challenging for some buyers to do pricing calculations using only the CBOT soybean complex prices," said Pathak, who added that some buyers may not be familiar with basis calculations inherent in pricing for soybean contracts.

"The government was worried about food prices and took this drastic step. This will slow the flow of imports into the country as hedging and price discovery will be impacted," Sunvin group CEO Sandeep Bajoria said.

"In the near term, this decision may keep the Indian oilseed complex prices on bearish note," Indrajit Paul, a senior manager at Gurugram-based Origo Commodities told Platts.

"My view is that the government has taken this decision to demoralize stocking of commodities so that prices can be controlled, hence banning futures trading is one of the steps along with imposition of stock limit few months back," Paul said.