The Indian agricultural sector, often hailed as the backbone of the nation’s economy, is no stranger to challenges. From monsoon dependency and low productivity to post-harvest losses and limited market access, farmers face an uphill battle. Yet, one issue stands out as particularly pressing and persistent — price volatility. Frequent fluctuations in commodity prices leave farmers at the mercy of unpredictable income swings while also straining consumers’ wallets.

Price volatility is a double-edged sword: when prices soar, consumers bear the brunt; when prices crash, farmers suffer devastating losses. To protect both sides of the equation, the government takes active steps to stabilise commodity prices. These include the Price Support Scheme, which guarantees fair prices to farmers; direct market interventions, where the state agencies such as Food Corporation of India (FCI) releases foodgrains to moderate inflation; and trade policy adjustments, such as export restrictions during price surges or import relaxations to boost domestic supply and curb prices.

One powerful yet often overlooked step at the government’s disposal is the advancement of the futures market — a market that can play a critical role in stabilising agricultural commodity prices. Since its inception, the futures market has served as a crucial shield against price volatility, providing farmers and other agricultural value chain participants with the tools to hedge price risks and stabilise their incomes.

Commodity price risk is the uncertainty that arises from changing commodity prices; farmers can protect themselves from the price risk by taking offsetting positions on commodities derivatives exchanges. This helps them lock-in the prices of input/output and, thereby, protect their margins. The benefits of futures markets extend beyond individual farmers to encompass the entire agricultural value chain. By enabling price discovery and risk management, futures trading equips processors, distributors, and retailers with the tools to navigate volatile markets. For processors and retailers, reliable pricing and supply stability facilitate operational efficiency and meet consumer demand. Moreover, the participation of diverse investors in futures markets, enhances liquidity, reduces transaction costs, and provides easier access to capital for agribusinesses.

The government’s intention behind suspending futures trading in 2021 was to curb rising prices and protect consumers and farmers from any inflationary pressure created by perceived volatility-inducing instruments like futures contracts. However, the results of recent research undertaken by the Centre for Excellence in Commodity Markets (IRMA) highlights the unintended consequences of this regulatory decision on the financial stability of the commodity market participants including farmers, by focussing on the two suspended commodities, mustard seed and soyabean.

The graph illustrates the differences in average monthly spot prices (mandi prices) for soyabeans and mustard, comparing periods before and after the suspension. The period covered pre-ban is January 2018-November 2021 and the post-ban period is from December 2021-November 2024. The graph shows that average prices have increased post-suspension. The ban on futures trading did not effectively control prices, indicating a failure to reduce inflation. While higher prices may provide short-term benefits to farmers, the lack of futures trading removed an essential tool for hedging and price discovery. It increased spot price volatility and disrupted market stability, instead of protecting stakeholders.

This research analysed the pre-ban relationship between spot and future prices (covering a period between January 1, 2010 and December 2023) and created a “counter-factual price”, which estimates what spot prices would have been if futures trading had continued post-ban. Comparing the actual post-ban prices to the counter-factual prices underscores the effectiveness of the futures market in curbing price volatility.

The cost of inaction

The results were striking, revealing that the spot prices would have been lower if futures trading had been in place. Soyabean prices would have been lower by an average of ₹6.05 per quintal (December 2021-November 2024) , while mustard seed prices would have fallen by ₹127.97 per quintal. This tells us that inflation would have been lower without the ban. The rate of increase is higher post-ban compared to the hypothetical situation (increase but at a lower rate), implying higher volatility due to the ban arising out of information asymmetries.

Unbanned commodities

The study also looked at the unbanned commodities such as cotton seed oilcake, jeera and dhaniya to validate these findings.

Using a hypothetical break date (same as the actual ban date for the other commodities, December 21, 2021), the research examined how futures trading impacted these markets. The results were revealing: (i) for cotton seed oilcake: during the hypothetical post-break period, the average price difference was ₹13.57/quintal demonstrating a significant positive impact of futures trading (the ban would have resulted in higher prices) (ii) for jeera: a striking average price difference of ₹459.10/quintal was observed, which implies that the prices would have been that much higher in the event of a ban. This highlights the substantial benefits of futures trading in reducing volatility. For dhaniya the analysis revealed an average price difference of ₹373.05/quintal.

The data highlight that the presence of futures markets has helped secure better outcomes overall, with farmers availing of predictable incomes with less information asymmetry.

A call to action

The government’s decision to suspend futures trading in 2021 was intended to curb rising prices and protect consumers and farmers from potential inflationary pressures linked to perceived volatility in such instruments. However, upon reflection, it seems that maintaining the operation of the futures market could have provided significant benefits to farmers and other value chain participants.

Commodity price volatility is a global phenomenon, with inflation in commodity prices surging worldwide. Yet, no other major economy has resorted to banning commodity derivatives as a strategy to control inflation.

These markets function as critical mechanisms for price risk mitigation, market efficiency and price discovery.

Arrawatia is Professor-Finance, Padmakumari is Assistant Professor, and Sharma is Research Fellow, IRMA