Coronavirus Impact: Prices of Essential Commodities on a Bull Run in Futures Markets

The world has been battling a dangerous pandemic since the beginning of this year. The imposed lockdown has had a severe effect on various industries, majorly hospitality, travel, tourism, construction, and some other services. Markets have been volatile and traders have been panic-selling in fear of losing. The Sensex experienced a historic 32% fall between January and March.

In the midst of all this, essential commodity prices have been going up.

What are essential commodities?

As per the Essential Commodities Act of 1955, if central government considers it necessary to maintain or increase the supply of any essential commodity, secure its equitable distribution and availability at a fair price or secure it for the defense of the nation, it could regulate or prohibit production, supply, and distribution, trade and commerce therein.

Some essential commodities are listed in the schedule to the Act. These include foodstuffs- edible oil, oilseeds, drugs, fertilisers, petroleum products, and petroleum. However, the central government has the authority to add or remove commodities from the list in public interest, and hence, hand sanitisers and masks have now been added to the list.

In the wake of the lockdown, the PM had asked for essential commodity production to continue, prices not to be increased, and for hoarding and black marketing to be prevented.

How has the Coronavirus impact on the essential commodities market been so far, in terms of commodity prices?

In spite of the Act, prices of commodities like vegetables have been increasing. This has happened because of disruptions in transportation. Transporters have been increasing prices for taking commodities from one place to another, and this is affecting farmers and retailers. In Delhi’s retail markets, prices of tomatoes and potatoes rose by 25% in just a week. In Mumbai, the prices of tomatoes shot up by a shocking 70% in the same period.

Meanwhile, essential commodity prices of seeds and grains have also been increasing. Soybean prices shot up by Rs. 5,700/MT towards the beginning of April. In the same period, prices of refined soy oil increased by Rs.13,520/MT. Prices of chana also increased from Rs.3,830 to Rs.4,136 per quintal within the second half of March.

How has the Coronavirus impact on the essential commodities market been in terms of spot markets?

A lot of commodity traders had raised concerns over derivatives market operations last year. The SEBI (Securities and Exchange Board of India) had been in discussions with various exchanges to halt trading without spot, as there was no relevance of the derivatives market or of long contract expiry timeline.

As most trades are settled within two days, spot commodities ought to be prepared for sale and delivery immediately. They are basically commodities that are up for instant trade, as opposed to a contract trade for a future date.

How has the Coronavirus impact on the essential commodities market been in terms of futures markets?

While essential commodity prices on ground have been on a rise, there has been a bull run in the futures market. It is operating on a thin volume in the backdrop of very little underlying physical transactions in mandis. The surge has been created by speculators who are in for a quick buck.

They are basically taking advantage of the futures market situation with an increase in rates of commodities like pulses and oilseeds. Meanwhile, the former Forward Market Commission (FMC) had said that the efficiency in the functioning of the commodity futures market calls for active participation of stakeholders in physical markets.

It has been expected that the futures market will be an effective and meaningful platform for discovery of prices and even price risk management, while providing important economic inputs to physical markets. These inputs will be particularly helpful to farmers and aid their decision making process for production and marketing of their crops.

Conclusion :

It is a storm of a time with a lot of volatility in the markets. While as citizens we wish for essential commodity prices to remain low, as investors, we must make careful decisions. It is not the worst time to invest, and nor is it the best if you make decisions without careful research and analysis. Even if you are trying to capture the bull in essential commodity markets, back it up with prudent research.