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Why is trading in Kapas Rubber and some other agri commodities not allowed

26 Jul 2023

Introduction

  • An agri-commodity market is a modern form of commodity trading market.
  • More than six exchanges support agri-commodity trading. Out of these six, two are primarily focused on agri-commodities.
  • These exchanges are the National Commodity and Derivatives Exchange (NCDEX) and the National Multi-Commodity Exchange.
  • However, recently, the Security and Exchange Board of India (SEBI) banned the trading of some agricultural commodities, including kapas, rubber, crude palm, moong, mustard seeds, and more, on the NCDEX.

What is an Agri-Commodity Market?

  • Agricultural commodities, or agri-commodities include crops and livestock that are sown and harvested to provide food and raw materials.
  • Agri-commodities are generally 12 per cent of the total trade in commodities.
  • The agri-commodity market includes tradeable products such as spices, cereals, fibres, jute, and cotton.
  • However, the regulatory body, SEBI, banned the trading of some agri-commodities. These include kapas, rubber, cotton, and candy, among others. 

 

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What are the Benefits of Trading in the Agri-Commodity Market?

  • Agri-commodity trading offers a feasible diversification option and allows investors to hedge against risks.
  • Investors can profit from the difference between future prices and spot prices.
  • Agri-commodity trading acts as a price mechanism for the buyer and seller, giving them an idea of future prices.
  • Understanding demand and supply is crucial when trading in an agricultural commodity market.
  • A thorough understanding leads to good returns on capital. 

Why has SEBI Suspended the Trading of Some Agri-commodities?

  • The regulatory body, SEBI, has suspended trading in some of the agri-commodities by not allowing any new contracts to be introduced.
  • Even in the existing contracts, no new positions are allowed. Traders can only close their existing open positions in the contracts. 
  • SEBI took these steps because of the illiquidity in agri-commodity trading. The contracts are traded very rarely and involve high risks, such as: 
  1. Many traders could not exit the position, which marked the position for physical delivery. 
  2. The difference in the bid-ask spread got high, indicating the execution of orders at far-off prices. 

 

Given below are some key reasons why SEBI suspended trading in Kapas, cotton, candy, rubber, and some other agri commodities:

  • To curb food inflation 

Given the rise in food inflation, the retail inflation rate in India was affected. It rose to a three-month high, because of which the trading became highly risky and volatile. Therefore, SEBI suspended trading in some agri-commodities to cool off food inflation. 

  • Double-digit wholesale price index-based inflation

The wholesale price index-based inflation was high for a few consecutive months due to the higher prices of food items. Therefore, the government is trying to lower these prices by suspending agri-commodity trading. 

  • To reduce future price shocks

Some parts of the country faced fertiliser shortages, which affected total agricultural production. Less production can lead to a future price shock affecting the entire commodity market. Therefore, it became important to reduce the price shock by suspending future trade options in some agri-commodities. 

How to Trade in the Agri-Commodity Market?

  • Agri-commodity trading is done by buying and selling futures contracts on any of the six exchanges. 
  • The NCDEX and the National Multi-Commodity Exchange are two agriculture-focused exchanges. Before 2017, it was complicated to trade in agri-commodities, but SEBI allowed it through regular DEMAT accounts.
  • Investors looking to invest in the commodities market need to do thorough research on a commodity and its price. 
  • If future prices seem confident to the investor, they can buy the future contract by paying the margin price to the broker. 
  • However, agri-commodity trading is a bit risky compared to trading in stocks. Therefore, investors must know the risks before investing in the agri-commodity market. 

Conclusion

  • To summarise, agricultural commodities are commodities harvested to provide food and raw materials to industries.
  • Trading in these commodities comprises twelve per cent of the total trade in commodities.
  • However, some of these commodities, such as kapas and cotton, have been banned by SEBI due to various financial risks associated with their trade.
  • So, if you are planning to invest in agri-commodities, you need to know which commodities are banned by SEBI. 

 

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