Commodity
markets is the place where farmers and other agricultural
producers can effectively hedge themselves against any changes
in the price of the commodity or raw materials. These are
the exchanges wherein forward, futures and options contracts
are traded on all the commodities. India has witnessed the
establishment of organized commodity markets during recent
times, but these markets have been unable to progress, thus
making it impossible for traders to reap the full economic
benefits.
Any
sudden change in the price of raw material in the market increases
the cost of production of a firm as the acquisition cost goes
up. To overcome the impact of such sudden price changes storing
of raw material is a possible solution but could involve a
high cost of carry. Similarly, a firm which has in store large
volume of finished goods will find it difficult if the price
of finished goods falls. In the case of agricultural commodities,
production is seasonal and price volatility can be high on
the face of poor crop production on account of vagaries of
weather. A bumper production could result in huge price losses.
It is for this reason that every farmer has a prayer in his
lips that at the time of harvest and marketing prices should
remain stable and at levels above the cost of production.
Market price, however is largely a function of demand and
supply and an individual producer or consumer of goods will
not be able to influence the market price. If, however information
on future prices were to be available, producers and consumers
of goods should be able to plan their activities. This is
possible if there is an efficient commodity market. It is
said that though price losses cannot be completely avoided,
a reasonably trusted method of managing such price risk is
hedging through commodity markets.
In
repressed financial markets impact of price risk is not apparent
in the financial statements of business. This is because of
lax accounting procedures and poor standards of disclosures.
Also in such repressed systems, Governments are known to intervene
in the form of subsidy and other financial supp1orts. At times
these interventions take the form of trade barriers. Because
of such controls and concessions, production decisions may
not be optimal and efficient. It is not that there is no price
volatility in a financially repressed economy.
Recall
the cases of onion, mango, tobacco, coffee gluts alternated
with short supply and the resultant price volatility on consumers
and producers. Such prices did impact business. These events
were managed, typically in the form of subsidies and grants.
(It is not that market prices alone would give succor to the
farmer and despite effective price discovery certain minimum
price support may still be necessary.) |
