PMEX back to the futures

The Pakistan Mercantile Exchange will have their hands full in the coming few days. After plans for the initiation of futures trading in cotton, the exchange is preparing to add a sugary oomph to the trading with sugar futures.
The industry has conventionally drawn a lot of criticism due to allegations of demand and supply distortions leading to imperfect price determination.
However, the recent move of contracting sugar on a futures-basis is likely to bring some order in the price discovery of the infamous commodity.
These one, two or three-month contracts - also likely to cover longer periods of up to 6 months as the market develops - will be based on actual delivery of the commodity, to be sold in lots of 10 tons each; roughly equal to a truck-load of the commodity. Storage of sugar will be taken care of by sellers and buyers, though designated warehouses of the PMEX will also provide some storage space.
Because the futures contracts will be backed by actual delivery, the risk of speculation is believed to be relatively lower than in a cash-based settlement. Further, the substantial lot size means that small speculators will be siphoned out of the trade with big players such as millers and corporations making up the bulk of the market participants.
Hasan Mehmood, product manager at the PMEX said, "Because the sugar sector is relatively more documented than other commodities, we
e expecting a very positive response for these futures."
Mehmood stressed his point by adding that mostly millers are sellers of the commodity, while nearly 70 percent of sugar consumption in the country is accounted for by corporations. Both millers and corporations fairly document their activities, thus lending support to the initiation of trading in sugar futures with expectations of high volumes to be churned for the commodity.
These contracts will, however, not be linked with any international sugar exchange and will follow local price dynamics. Though the PMEXs rationale for this were the different supply-demand dynamics of the Pakistani market against the global market, the local market will, inevitably, move in tandem with international prices.
Currently, white sugar futures are traded globally on the London International Financial Futures Exchange (LIFFE), and the prices take account of major international events that affect the commodity. These prices also affect local prices to an extent.
Similarly, even though futures trading will not impact spot trading directly, it will have an indirect influence on running spot prices of sugar by providing an indication of the direction of future price expectations of the market.
At the same time, while farmers will not be the direct beneficiaries of sugar futures trading since their main produce is sugarcane; they can gauge an estimate of cane prices from prospective sugar prices indicated in the futures contracts.
Though this move may not be a panacea for all the market distortive practices of the sugar industry like hoarding, it will, nevertheless, bring some order into price discovery for the commodity - indeed, a ray of hope for perpetually-vexed sugar consumers.