Futures contracts: stakeholders unimpressed

Pakistan Mercantile Exchange has been as busy as a bee-hive over the past two years introducing new and diverse product offerings from gold futures contracts - based on physical delivery of the yellow metal - to cash-based futures contracts on rice.
As a result of a broader range of contracts on offer and the globally increasing importance of commodities in investment portfolios, PMEX has experienced mushrooming interest from investors. Based on these factors, the value of trades at the exchange during the month of April tallied an impressive Rs68.1 billion, surpassing the same for all three stock exchanges of the country, which witnessed a cumulative trade value of Rs66 billion.
The latest offering by PMEX is futures contracts for cotton. SECP approved the cash-based contracts that will be based on international prices and traded in denominations of 5,000 pounds of cotton, each.
Both PMEX and the apex regulator have asserted that this offering will benefit farmers among other stakeholders. In the official release, SECP has commented that the cotton futures contract "will benefit the cotton industry, the agricultural sector in particular".
However even a tertiary look at the current market participants and the framework of PMEX; provide little evidence in support to this assertion. Local farmers are primarily unable to make use of the electronic trading facilities of the exchange due to lack of knowledge, access and resources, among other constraints.
On the other hand, ginners appear to have a more ideological opposition to futures contracts. Having termed such contracts to be un-Islamic, Pakistan Cotton Ginners Association (PCGA) lodged a case in Shariah court against the trading of cotton futures on 27th May 2010. While the decision in this case is still pending, it is pertinent to note that the ginners are opposed to a futures contract which is culminated through the exchange of cotton at the maturity of the contract.
If local ginners balk at the concept of a physical delivery-backed futures contract; it seems unlikely that they will embrace a cash-settled derivative instead. "This product has very little relevance to cotton growers, ginners or others in the value chain of this crop," said member PCGA Ghulam Rabbani. "It has no linkage to the delivery of cotton, nor is it accessible to a majority of the growers," he added.
For its part, PMEX has done well to add another option to its trifle of derivatives for prospective investors. However, the notion that this will serve the interests of cotton farmers appears misconstrued.
Providing enhanced bargaining power to farmers and improving their access to markets is the responsibility of the government, while the SECP has the onus of providing an enabling environment to this end.