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Agri-Derivatives Market Faces Severe Downturn
The Indian agricultural derivatives market, a critical platform for price discovery and risk management, is experiencing a significant decline. Since December 2021, the suspension of seven key agri-futures contracts has severely impacted market vitality, leading to a sharp drop in trading turnover and reduced participation from essential market players. This situation raises concerns about the market's ability to provide reliable price information and effective risk management tools.
Core Issues Behind the Decline
The suspension of contracts such as soybean, refined soy oil, chana, crude palm oil, and rapeseed-mustard oil has had a profound effect. SEBI annual reports indicate a marginal decline in overall commodity futures turnover, but the agri-derivatives segment has been hit much harder. Notional turnover in this specific segment has dropped by 28.5 percent year-on-year. The National Commodity and Derivatives Exchange (NCDEX) has reported a staggering decrease in its turnover, falling from ₹4.56 lakh crore in the fiscal year 2020-21 to ₹1.35 lakh crore in 2024-25, representing a negative compound annual growth rate (CAGR) of 19.24 percent.
Financial Implications and Market Share
While the turnover in commodity options shows a high CAGR, the NCDEX holds a negligible share, indicating these instruments have not yet gained widespread traction. Agri-commodities now constitute a mere 0.3 percent of the total notional turnover, down from 0.8 percent, with energy and bullion dominating the market. Among the few actively traded agri-futures, contracts like guar gum and castor seed have shown upward price movements. However, others, including turmeric and jeera, have experienced significant price declines.
Reduced Participation and Market Depth
The lack of liquidity is further exacerbated by the declining participation of key stakeholders. The share of turnover attributed to farmer-producer organizations has fallen to a mere 0.2 percent. Similarly, value chain partners and hedgers have seen their involvement decrease. In contrast, proprietary trades have seen an increase, while client participation has dropped below 50 percent, thereby reducing the overall breadth and depth of the agri-derivatives market.
Physical Delivery Trends
Physical delivery volumes in agri-commodities have also seen a reduction, decreasing from 2 lakh tonnes in 2023-24 to 1.7 lakh tonnes in 2024-25. Although this suggests some convergence between futures and spot prices at contract expiry, the overall decline in delivery volume points towards an increase in closed-out positions or the use of cash-settled futures, which can impact market depth.
Expert Analysis and Future Outlook
Experts highlight that the absence of a liquid domestic agri-derivatives market forces agricultural businesses and investors to rely on national spot and international derivatives markets for critical decisions. This situation undermines the fundamental purpose of commodity exchanges. There is a strong recommendation for a comprehensive review of the agri-derivatives microstructure, including contract specifications, margin requirements, and transaction fees. Crucially, experts suggest considering the revocation of existing suspensions to restore the market's much-needed vitality.
Impact
The current state of India's agri-derivatives market significantly hinders effective risk management for farmers and agricultural businesses. This can lead to increased price volatility, reduced investment in the sector, and challenges in efficient price discovery. A well-functioning derivatives market is essential for the stability and efficiency of the agricultural supply chain.
Impact Rating: 7/10
Difficult Terms Explained
- Agri-derivatives: Financial contracts whose value is derived from underlying agricultural commodities such as grains, oilseeds, or livestock.
- Contango: A market condition where futures prices are higher than spot prices, typically indicating expectations of future price increases or costs associated with storage.
- Liquidity: The ease with which an asset can be bought or sold in the market without causing a significant change in its price.
- Turnover: The total value of all trades executed for a particular asset or market over a specified period.
- CAGR (Compound Annual Growth Rate): The average annual growth rate of an investment over a specified period, assuming profits are reinvested.
- Notional Turnover: The total value of all outstanding derivative contracts, calculated by multiplying the contract size by the number of outstanding contracts.
- Proprietary Trades: Trades executed by a firm for its own account, rather than on behalf of its clients.
- Hedgers: Market participants who use financial derivatives to reduce or offset their risk exposure to adverse price movements.
- Value Chain Actors: Entities involved in all stages of a product's lifecycle, from initial production to final consumption.
- Squared-off Positions: Closing out an existing futures or options position by taking an opposite position, thereby avoiding the need for physical delivery or exercise.