CB mulls commodity sector hedging

Hiran H. Senewiratne

The Central Bank has appointed a steering committee covering the entire sector to discuss certain issues on it.

This forum was held under the patronage of the Central Bank Governor Ajith Nivard Cabraal. Top officials discussed with the stakeholders in the sector.

The Central Bank Governor said the importance of fast tracking this concept of Futures Market and Commodity Exchange in Sri Lanka to create a strong agriculture sector in the country. All over the world the agriculture sector is stabilised due to the futures markets. Therefore, the country needs to broad base this concept to benefit all the stakeholders in the country, he said.

"Hedging is buying or selling futures contracts as protecting against the risk of loss due to changing prices in the cash markets especially in the commodity sector," Karunaratne said at a forum on the topic of 'Establishment of a Futures Market and a Commodity Exchange. The forum was organised by the Central Bank.

He said that due to the fluctuation of commodity prices, sellers want to protect his revenue against falling prices in the cash-sells futures in the commodity exchange. Therefore having a some risk management system like hedging would be able to help to control the price fluctuation in the market for some extent, he said.

According to Karunaratne commodities suitable for futures trading in the country are paddy, rice, maize, green gram, soy bean, black gram, sunflower seeds and spices which are frequently subjected to price fluctuation.

In 1999, CBSL introduced Forward Sales Contract (FSC) system which is an agreement between a buyer and a seller to purchase or sell a specific amount of a commodity on a fixed future date at a predetermined price.

The commodities that are mostly sold under FSC are paddy and maize. Karunaratne said unstable prices give conflicting signals to buyers and sellers in the market which is not healthy situation for the smooth function of the business.

Therefore, it is the need of the hour for hedging through trading commodity of futures in a commodity exchange to control the price flection. Karunaratne said futures markets provide three vital economic functions in price discovery, price risk management and stabilisation of commodity prices.

Further having a trading organisation like a commodity exchange like other countries will formulate rules for the trading of commodities, which will provide a place to traders and supervise trading practice.

Therefore hedgers would be one of the participants in a commodity exchange will act like the facilitator for the smooth function of the business benefiting to farmers. This will help for inventory control, improving export competitive and credit accessibility, he said.

Managing Director/ CEO of National Commodity and Derivatives Exchange Limited India P.H. Ravi Kumar said that futures markets will encourage farmers to go for crops that will give good return to them and it could create a shortage of other crops that will not give good return for farmers in the country.

India uses modern technology for the futures market activities which has had a positive impact on the entire agriculture sector, he said.