Commodity Futures Market – A Mechanism for Price Discovery and Price Risk Management

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The Forward/Future Market is not primarily responsible for price rise. The commodity futures market is a mechanism for price discovery and price risk management.

The price of any commodity is determined by actual demand and supply position in the market. The futures market merely discovers the likely prices of a given commodity at future points of time depending on the expectations of supply and demand.

The intermediaries do not get large chunk of profit of farmers due to Forward/Future Market. The future prices are discovered in a transparent manner on the online platforms of the national commodity derivatives exchanges.

Commodity Futures Market: A Mechanism for Price Discovery

The future market leads to reduction in seasonal price volatility which leads to better price realization for the farmer at the time of harvest.

With the help of information on future price trends, and probable supply and demand of various commodities, the farmers can plan their cultivation as well as storage and sale of their produce in advance.

The Forward Markets Commission has implemented a project to disseminate the future prices and spot prices by installing Ticker Boards at important Mandis/Agricultural Produce Market Committees etc. Prices are also being disseminated through SMS alerts and local newspapers.

This has helped to reduce the information asymmetry and enables the farmer in realizing a better price for his produce from the intermediaries in commodity spot markets.

This information was given by the Union Minister of Finance, Shri Arun Jaitley in written reply to a question in Lok Sabha today.

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