IN March this year, the Pakistan Mercantile Exchange listed wheat futures for trading to provide stakeholders of physical wheat market a tool for price discovery.
Conflicting estimates of wheat crop has not led to as much price volatility this season as in the past, perhaps partially helped by PMEX operations. The beginning of actual trading in sugar futures in February is believed to have helped sugar prices from falling too steeply despite reports of huge growth in sugar output.
The addition of wheat has increased the number of tradable items on PMEX to seven. The other six are gold, silver, crude oil, palm olein, rice and sugar. Top officials of PMEX say they would hopefully begin maize futures trading before the end of this year, after getting approval from the Securities and Exchange Commission of Pakistan.
Presently, PMEX is facilitating the trading of wheat futures in lots of 10 metric tons. The response from wheat traders to the tradable lot size is positive. “When we handle physical wheat we normally buy and sell in even bigger lots, mostly in terms of truckloads,” said a Jodia Bazar-based commodity trader.
“Futures’ trading helps in price discovery for big wholesalers, importers and exporters. But it doesn’t help small growers because for them the futures market does not exist. They either haven’t heard of PMEX or even if they have, they don’t exactly know what it is and how it works.”
That really is a big challenge. Spreading knowledge about futures trading of food commodities among farmers can guide them in setting market-based prices for private sector buyers.
“But it would take time. Literacy in rural areas is dismally low. And there are issues at our end as well” conceded a PMEX official.
Though the PMEX index dropped about five per cent in 2011 the value of the total volumes traded during the year rose 435 per cent to Rs802 billion. “The slight fall in index could be linked to easing of international prices of silver, rice, palm olein and sugar and to the not-so-bullish trends even in crude oil and gold,” explained another PMEX official.
But the fact that the traded volumes jumped fourfold “reflects the increasing interest of investors in commodities as an asset class.”
The PMEX has expanded its business volumes by adding new commodities to the list of tradable items as well as offering new products of the same commodity for futures trading. For example, it initiated trading in 10-ounce gold futures contracts towards the end of April in addition to several smaller-quantity contracts of the precious metal already on its trading platform. The most popular among individual investors are 10-gram future contracts.
The PMEX has seen lots of activity in gold, silver and crude oil contracts primarily because of the hedging requirements of corporates just before and immediately after the August 2007 financial crisis in the US.
But PMEX officials believe that the future lies in food commodities. A senior PMEX official informed Dawn that “trading of future and spot contracts of food crops like rice, wheat, sugar and maize would bring about a change in the dynamics of agricultural economy. One should appreciate that growers started getting better-than-before market-based prices for paddy and sugarcane when rice and sugar futures contracts began to be traded at PMEX. We hope the same for wheat growers this season.”
Farmers say there is a whole array of items whose listing on PMEX can help growers if the Exchange can expand its list of trading members and if literature on the commodity exchange business is made available in Urdu and regional languages.
“PMEX currently allows trading in palm olein which we import. So its trading on the exchange basically helps edible oil millers. But whynot list our own edible oilseeds like sunflower,” wondered a former president of Sindh Chamber of Agriculture.
“In Mumbai almost all Indian oilseeds, oilcakes and even de-oiled cakes are traded on their commodity exchange. Trading in our own edible oilseeds and consequent ease in future price discovery will encourage growers to cultivate more of oilseeds. And that will give local edible oil manufacturing a further boost.”
Farmers lament that they fail to get a fair price for their produce chiefly because of a powerful nexus between big landlords and crafty commodity brokers or middlemen. Some members of the new generation of farmers who are more familiar with the market movements dobelieve that listing of commodities on mercantile exchange could help in setting benchmarks.
They feel dejected that cotton prices crashed this year because of a bumper cotton crop and the absence of any mechanism to ensure fair prices to growers.
“Had cotton futures been listed on PMEX it would have been of some help in benchmarking the prices during various stages of cotton arrivals into ginneries,” said Irfan Arain, a Hyderabad-based farmer. Listing cotton on PMEX has been under discussion for some time but opposition from cotton brokers’ powerful lobby is a big stumbling block.
Investment in the products listed on PMEX has so far been dominated by institutional investors, including commodity funds of brokerage houses, and individual investors’ interests have remained confined to gold. PMEX officials say that to facilitate registration of investors, offices of PMEX members in over 20 cities across the country have invited online applications while offering “in-house consultation on how to get registered.”