India now allows betting on weather conditions: What it means
The Indian government has broadened the range of commodities allowed for derivatives trading, adding items such as weather, cement, and skimmed milk powder to the list. Of the new items, weather derivative is relatively new and lets investors bet on future weather conditions such as rainfall and temperature. This decision, made in collaboration with the Securities and Exchange Board of India (SEBI), now brings the total number of permitted commodities to 104, up from 91.
New additions to the list and criteria for inclusion
Newly added commodities include weather, garlic, apples, manganese, palladium (including coins and bars), processed bamboo products, processed timber products, bitumen, cement, skimmed milk powder, white butter, cashews, and freight options like trucks, waterways, railways, and airways. Interestingly, palladium as a metal is more expensive than gold or platinum and is considered to be a viable option for investors. Derivatives trading allows for commodities with large supply and demand, volatile prices, long shelf-life, standardization potential, and minimal government regulation.
Weather derivative can be used as hedge to prevent losses
Derivatives are financial contracts with their value derived from the market performance of an asset that backs them. In simpler words, they are agreements between two parties to exchange assets based on their speculative future value. Weather is traded as a derivative by speculating on future weather conditions. Investors buy or sell weather outcomes after a certain time period. Investors can profit from betting on weather changes or protect their investments against financial losses due to unfavorable weather conditions.
Derivative trading's impact on prices and inflation
Derivatives trading can help with price discovery and risk management for producers, but it can also influence overall prices. For example, in December 2021, the government suspended futures contracts trading for certain agricultural commodities to control inflation. These included paddy (non-basmati), wheat, chana, mustard seeds, soya bean, crude palm oil, and moong. Initially set for a one-year suspension, the ban has been extended multiple times and is now in place until December 2024.
