Are commodity futures markets responsible for inflation or for fluctuations in the price of agricultural commodities and distress among farmers? Will banning these markets help address the woes of Indian farmers?

Looking back, commodity futures trading was taking place in India for hundreds of years. When economic policy shifted into the control of the raj, commodity futures trading was almost entirely banned. In the last decade, this has gradually come back to life.

In some ways, there is nothing more innocent than futures trading. In a spot market, the buyer and seller agree to do trade at a certain price, and the settlement is done on the spot. In the futures market, the price is agreed upon, but the settlement takes place at a prespecified future date. The classic application involves a farmer who is planting in June and wants certainty about the price at which his goods will be sold at Dussehra. Nobody forces a farmer to use the commodity futures market, but a farmer who chooses to use the futures market in this fashion is happier because of greater certainty.

Normally traders in a region surrounding a town would be the major players in purchase of the product of this region. This trade would typically be dominated by 10 or 20 families. These families would often determine purchase prices. Farmers would have little choice vis a vis the price at which they can sell; indeed farmers might not even know prices elsewhere in the country.

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