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 Agriculture
 
Come clean on futures market tools
The Hindu Business Line, India Thursday, January 27, 2011

Sharad Joshi
Planning Commission and Prime Minister's Economic Advisory Committee made a statement to the effect that the inflation in commodity prices, particularly of vegetables, is not a natural market phenomenon, but one caused by artificial manipulations.Similarly, Sharad pawar argues that the variation in supply and demand, of the order of 2-4 per cent, cannot be the prime cause of high food inflation. Futures markets perform the important function of price discovery and are not vulnerable to shady manipulation, writes Sharad Joshi in The Hindu Business Line.

On January 19, Dr. Saumitra Chaudhari, Member, Planning Commission and Prime Minister's Economic Advisory Committee, is reported to have made a statement to the effect that the inflation in commodity prices, particularly of vegetables, is not a natural market phenomenon, but one caused by artificial manipulations.

Mr Sharad Pawar, Minister for Agriculture, has maintained that the skyrocketing of onion and tomato prices is caused by crop loss on account of unseasonal rains. Dr Chaudhari seems to pooh-pooh this assertion. He argues that the variation in supply and demand, of the order of 2-4 per cent, cannot be the prime cause of high food inflation.

...

Vegetables, as a category, are extremely sensitive to even the slightest changes in both supply and demand. Prices of vegetables are highly sensitive to variations in supply as they are highly perishable, and are affected by climate as also the passage of time. These characteristics hardly lend themselves to artificial manipulation by profit-seeking traders, or recourse to stock-piling or hoarding. It is common knowledge that the destruction of the crop was of the order of 70-80 per cent and not 2-4 per cent.

...

What Dr Chaudhari intended to say came out more clearly in the keynote speech he gave three days later, at the “Future of Financial Markets (FOFM) Summit” in Mumbai .

In his speech, Dr Chaudhari virtually threw a gauntlet at all proponents of futures markets gathered there. He questioned the basic claim that futures markets perform the function of price discovery. “If one claims to make price discovery, one is claiming the ownership of prices,” he said. He appeared to insinuate that the prices established on the futures commodity exchanges are susceptible to manipulation by platform owners and inside traders.

...

The question that Dr Chaudhari has raised is not new. All opponents of markets, and futures markets in particular, in their own way question the price discovery function of markets. Biased Leftist economists have called futures markets a gamblers' den. Their mental apparatus can grasp the possibility of a Commissar in the Planning Commission deciding on allocation of resources and on fixing indicative prices.

...

How do markets function? This is a question that has troubled economists since Adam Smith. With his pastoral upbringing, Smith got away with no better explanation than attributing the miracle of the markets to the working of an ‘invisible hand'.

The less religiously inclined economists have tried to explain the metaphysics of markets through more or less sophisticated mathematics. The key to the mystery was provided possibly by an author who least claimed to being an economist.

P.G. Wodehouse, in one of his hilarious Lord Emsworth novels, marvels at how a young couple engaged to be married communicate to each other the possibility, the convenient place and the time of a rendezvous by a slight movement of an eyelid, an eyebrow or a lip.

That explains how thousands of semi-literate or illiterate operators in the market take a hundred decisions every day on prices and allocations that the Commissars in Planning Commissions, buried deep in piles of documents and reports, simply fail to do. In fact, the planning commissions of the world made the wrong decisions most of the time. This everyday miracle can be attributed to the distinctive capacity of individuals to perceive, analyse and store data.

...


The champions of futures markets have only themselves to blame for the criticism. They have, for some reason, not made this software transparent to the public at large. The vital innards of futures markets platforms are a closely guarded secret.

Dr Chaudhari's challenge can be met by putting in the public domain full details of the software used by different platforms for searching and matching the offers by buyers and sellers. This alone will lend credence to the claim that futures markets perform the important function of price discovery and are not vulnerable to shady manipulation. Kids Clothes for Boys, Girls & Babies

This article was published in the The Hindu Business Line on Thursday, January 27, 2011. Please read the original article here.
Author : Mr Joshi is founder, Shetkari Sanghatana (Farmers' Organisation) & Member of Parliament, Rajya Sabha
Tags- Find more articles on - inflation | Planning commission | price rise

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