NCDEX Institute of Commodities Market and Research (NICR) attempts to analyze the prices of the two pulses viz, Tur and Urad, and two cereals viz, Wheat and Rice which were banned for trade in the futures market in early 2007. The period covered under the price analysis is October 2006 to August 2008. It takes into account the changes in Minimum Support Price (MSP) offered by the government and spot prices of these commodities. The results reveal that while the average monthly price of three out of four commodities have continued to increase driven by fundamentals, the government has also increased quite significantly the MSP for these crops. This does lead to the conclusion that the market driven solution that the MSP has routed for is what the futures market was delivering quite efficiently.
Tur (Arhar)
Over the years, the MSP for Tur has increased in India. But the change in its level was not very significant in the last five years. However, the MSP announced by the government from 2007-08 onwards was significantly higher and relatively more aligned to the market. In fact, the 2008-09 kharif season has witnessed a rise of 29 percent compared to the previous year. It is interesting to note that the price of this commodity just before the ban on its futures trading was in the same range of what the government has fixed today. But, here still the MSP is lower than the spot price though it has been raised quite significantly this time.
Year Minimum Support Price Change (%) (MSP)
2003-04 1360 3.0
2004-05 1390 2.2
2005-06 1400 0.7
2006-07 1410 0.7
2007-08 1550^^ 9.9
2008-09 2000 29.0
Source: Agriculture Statistics, 2007 (For 2003-08) ^^ A bonus of Rs. 40 per quintal is payable over & above the MSP
Even after the ban on trading in futures market, the average monthly spot price has risen by 53 percent from January 2007 to August 2008 due to lower production. This clearly indicates that the rise in price of the commodity was not related to its trading in futures market but guided more by the forces of demand and supply operating in the market. Moreover, it should be noticed that the government has also increased the MSP for Tur by 42 percent from 2006-07 to 2008-09.
Note: Average monthly price for Jan 07 is upto 23 Jan.
Urad
In the pulses category, the MSP of Urad for 2008-09 season has shown a high jump of 48 percent to that level of Rs. 2520 per quintal against Rs. 1700 per quintal in the previous year. The increase in MSP in 2007-08 was also high at 11.8%. However, Urad is the worst hit in terms of acreage for the current kharif season. The crop did not get adequate rains in May (the sowing period). By increasing the support price by such an amount, the government is expecting the farmers to go for more production on the assurance of better prices. This, in turn, will assure availability of pulses in the domestic market and also, check the diversion to other crops. Despite such a high rise, it stands below the spot price prevailing in the market. Average monthly price for Urad in July and August this year has remained around Rs 3000 per quintal.
Year Minimum Support Price Change (%) (MSP)
2003-04 ----- 1370 ------ 3.0
2004-05 ----- 1410 ----- 2.9
2005-06 -----1520 ------- 7.8
2006-07 -------- 1520 -- 0
2007-08 ---- 1700^^ ----- 11.8
2008-09 --- 2520 ---- 48.2
Source: Agriculture Statistics, 2007 (For 2003-08) ^^ A bonus of Rs. 40 per quintal is payable over & above the MSP.
Prior to the ban on this commodity for its trading in the futures market, the prices in the month of January were in the range of Rs 3227- 3550 per quintal. However, its price declined significantly in the year 2007 due to the higher output in the kharif and rabi seasons for 2006-7 as well as the flow of imports. Production was also high at 15.2 lakh tonnes in 2007-08. But, the market price still remains at a high level, which has been mirrored partly by the MSP which is still lower by around Rs 500/quintal.
Note: Average monthly price for Jan 07 is upto 23 Jan.
Wheat
At the end of February 2007, as per the official directive no new wheat contract was allowed to be launched. In respect of running contracts in this commodity, no new position was allowed to be taken; only squaring up of positions was permitted. However, after banning the trade of Wheat in futures market, its price has not witnessed any major decline till date. But the MSP offered by the government has risen by 33.3 percent for the latest year as compared to the previous season. The level of MSP offered is quite near to the average monthly price of Wheat prevailing in the market in February 2007 i.e. Rs 1022 per quintal. In fact, over the last 2 years the increase in MSP has been over 50%.
Year Minimum Support Price Change (%) (MSP)
2003-04 ---- 630 ----- 1.6
2004-05 ---- 640 ------ 1.6
2005-06 ------ 650$ ----- 1.6
2006-07 ------ 750$$ ------ 15.4
2007-08 ------ 1000 ------- 33.3
$ An additional incentive bonus of Rs. 50 per quintal was payable over MSP $$ An additional incentive bonus of Rs. 100 per quintal is payable over MSP Source: Agriculture Statistics, 2007 (For 2003-07)
In the last four years, the government has never raised the MSP by the level as it did earlier this year. The government announced minimum support price that is similar to the market price prevailing at the time of the ban, which means that the spot price at that time was really justified given the circumstances. Even though the MSP has gone up to such a high level, it remains below the average spot price of wheat of Rs. 1100 per quintal in this year (Jan-Aug 2008). Also, in the previous crop year, the MSP was below the average price prevailing in the spot market. The MSP appears to be almost the same as the spot price at the time of the ban.
Note: Average Monthly Price of Wheat New (Karnal).
Rice
Along with the ban on trading on Wheat in futures markets in February 2007, ban was imposed on Rice as well on account of rising inflation. However, the price of Rice has not declined throughout the year 2007 after the imposition of ban. Moreover, the government has raised the MSP of Rice for 2008-09 season to the level of Rs 850 per quintal. An increase of about 32 percent in the MSP is quite significant as compared to the last five years. Also, for the Grade "A" Paddy, the increase in MSP in the past years was not very high.
Year Minimum Support Price Change (%)
(MSP) – Paddy Common
2003-04--- 550 ------ 1.8
2004-05 ----- 560 ----- 1.8
2005-06-----570----1.8
2006-07-----580^----1.8
2007-08----645$$-------11.2
2008-09-----850--------31.8
$$ An additional incentive bonus of Rs. 100 per quintal is payable over MSP ^ An additional incentive bonus of Rs. 40 per quintal is payable on procurement between 1.10.2006 to 31.03.2007. Source: Agriculture Statistics, 2007 (For 2003-07)
The average monthly price has increased from Rs 1231 to Rs.1400 during February to December in the year 2007. This was notwithstanding the fact that rice production was at an all time high.
Note: Average Monthly Price of Indian Raw Rice and MSP for Paddy Common.
Conclusions
The MSPs of all the four banned products have been increased substantially by the government in the last two years.
When futures trading were in existence, the market prices were driven by fundamentals, which provided the upward thrust to the prices.
The fact that the government has fixed the MSP in case of wheat and tur to the same level as existed during the ban and nearer to the market price in case of urad and rice sort of vindicates the functioning of the futures markets in these products.
As a corollary, it may be stated that the government should be using the futures prices as a factor determining the MSP for any product as it provides an efficient picture of the market forces, which is pertinent for the farmers.
Aligning the MSP to the market also ensures that the government’s procurement programmes would be successful.
Average Monthly Price (Rs per quintal)
Month -------- Tur-----------Urad---------Wheat---------Rice
Oct-06--------1901-----------3781----------1009----------1,182
Nov-06---------1875---------3618-----------1105---------1,215
Dec-06---------1841----------3389-----------1060----------1,232
Jan-07----------2055----------3331---------1035-------------1,219
Feb-07-----------2,231----------3,273----------1022--------1,213
Mar-07----------2,313---------3,149---------1006-----------1,219
Apr-07--------2,384---------3,108-------------971----------1,258
May-07---------2,359----------2,706----------956----------1,298
Jun-07----------2,432----------2,687----------950---------1,287
Jul-07---------2,608-------------2,670----------1013---------1,323
Aug-07--------2,570----------2,479-----------1006-----------1,315
Sep-07---------2,516-------------2,275---------991-----------1,314
Oct-07----------2,745----------2,324-----------1025-----------1,484
Nov-07--------2,772----------2,282-------------1047---------1,368
Dec-07----------2,583--------2,153----------1038-------------1,400
Jan-08-------------2,292-----------2,113-------------1062--------
Feb-08-------------2,502--------2,384--------------1082-----------
Mar-08----------2,683-----------2,542---------------1101----------
Apr-08---------2,563----------2,466--------------1112------------
May-08-----------2,553---------2,475-------------1124---------
Jun-08-----------2,757-----------2,566-----------1124----------
Jul-08-------------3,089----------3,073---------1114---------
Aug-08----------3,145*----------3,022*----------1088^-----
* Upto 20 August 2008 ^ Upto 27 August 2008 Source: NCDEX
Disclaimer: This report has been prepared by the NCDEX Institute of Commodities Market and Research (NICR) for the purpose of information dissemination. The news reported is from the stated sources and does not necessarily reflect the views of NCDEX or NICR. The facts are reported from publications and have not been checked for authenticity. NCDEX/NICR and its employees will not be responsible for any decision taken by the reader based on this report and are advised to take independent advise on the commodity(ies) dealt in this report .
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