Reinstatement of sugar futures will spur volumes and hedging

Experts say the removal of the ban on Indian sugar futures trading will spur volumes and is an important step towards reducing government control on its commodity futures market

India's commodities market regulator, the Forward Markets Commission (FMC), lifted the ban on sugar futures last week, in a move that market experts say will spur Indian appetite for hedging.

The FMC banned sugar futures in May 2009 under the belief that speculative trading was responsible for pushing up food prices. Keeping food prices under control is a central issue for the Indian government, as 42% of the population are below the international poverty line and live on less than $1.25 a day.

Now that sugar prices have dropped substantially, the FMC agreed to lift the ban, and contracts have been re-introduced. Sugar prices have dropped to 30 rupees ($0.67) per kilogram since they peaked at Rs50/kg in January this year.

Industry experts say this is an important step towards lifting all government controls over the industry, as it demonstrates that price volatility and futures trading are not interlinked. The government has also implemented bans on futures contracts for wheat and lentils, and more recently for electricity.

"The re-launch of sugar contracts on the futures market makes it evident that futures trading was not the prime mover of sugar prices. Rather, the demand and supply situation mainly affected the price trend," says Naveen Mathur, associate director of commodities and currencies at Angel Broking.

According to data from Angel Commodities, sugar output dropped by 45% to 14.5 million tonnes in 2008–09  from 26.5 million tonnes in 2007–08. "Sugar prices rose mainly because of the drop in output," says Mathur.

Sugar cane production for 2010-11 is estimated at 3,249 lakh tonnes, up from 2,777 lakh tonnes in 2009-10. Sugar output from 2010-11 is expected to rise to 24.5-25 million tonnes from 18.5 million tonnes in 2009-10.

"The move is definitely going to offer some sort of assurance to producers and would permit hedging against a possible price fall," says Mathur. "India's bumper crop will push supplies and the lifting of the ban will lead to the pricing mechanism becoming more efficient. The decision is expected to further help the crisis-ridden industry and facilitate decontrol of the sugar sector. We expect volumes to pick up very soon once the contracts are launched," says Mathur.