Sonia wants commodities futures trading stopped, so screamed one of the headlines of The Economic Times of 2nd August. The anxiety behind these comments is quite palpable, for the politicians cannot remain silent when aam aadmi is exposed to a price spiral. The inflation has risen to 4.82% of which the contribution of primary articles is said to be 32% plus. The robust domestic demand for agricultural commodities accompanied by erratic monsoon has only added fuel to the fire. All this cumulatively reflected on the rise in prices of food grains, pulses and other essential commodities. The net result is: Congress chief ministers, as press reports indicate, accused futures trading as the key cause for the current rise in wheat prices, while the Left parties demanded total ban on futures trading.

Now the question is, is it theoretically right to assume that futures trading results in price rise? To figure it out, let us start from the beginning. It is commonsensical that rise in prices of any commodity usually results from the shortage in its supply. This shortage could be either artificial - resulting not from supply deficit but more due to speculative hoarding - or natural, which again could be a temporary passing phase or of a long-term nature - which means hiccups in supply logistics resulting in dislocation and thus causing shortage and the consequent price rise only for a short-period or a genuine structural deficit in supply that is likely to last for quite sometime.

As against this, what we are witnessing today in the wheat market is more of a "fundamental" nature arising out of a genuine shortage in its production. Market reports indicate that wheat production in the country has stagnated at around 70 million tons for the last 4 to 5 years. Interestingly, the growth rate in GDP continued to hover around 8% during the same period. It means that while the per capita income rose resulting in a shift of people from consumption of coarse grain such as Jowar, Maize, etc., to finer grains like wheat and paddy, the wheat production remained stagnant, which obviously widened the gap between the supply of and demand for wheat.

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