News reports state that India will ban futures trading in the wheat and rice markets because of rising prices. This is an interesting turn of events on the dynamics of market regulation.
India has concerns that futures markets are driving prices up. Prices of wheat and rise have risen in these markets substantially above the core rate of inflation. This has been occurring in grain markets around the world over the last year. For wheat and rice, global stocks have declined significantly. Futures markets have predicted that prices should move higher on the fundamental supply and demand situation. As has been the case in the past with futures markets, their role of price discovery is frowned upon when the discovery is not to the liking of the government.
Clearly, regulation in many cases is driven by the special interests within a country. In the United States, discussions of banning futures trading have generally surrounded issues of declining prices. Futures market speculators were viewed as destroying farmer income through driving prices down. In the case of India, where the government leans to the left, special interests are focused on the consumer as the end users of grain. Agricultural markets in the United States have been generally driven by the special interests of farmers.
However, this bias against falling prices in the United States may be changing especially when it comes to energy markets. With oil prices and unleaded gas again on the rise, there may be more focus on energy futures trading by the government. The end user or consumer may be a more important driver in the regulatory process over the next few years especially if there is a Democrat president. Of course there should be oversight of the markets to ensure that they are efficient and not manipulated but shooting the messenger if the signal from the markets is not palatable sends a worse message -- we do not like to see markets do their job.
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