Wheat farmers stand to lose from futures ban

Wheat farmers stand to lose from futures ban
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First Published: Thu, Apr 12 2007. 12 24 AM IST
Updated: Thu, Apr 12 2007. 12 24 AM IST
Ludhiana: Sixty-two-year-old Gurdev Singh looks astonished when asked about a recent government ban on the trade of wheat futures. “I never knew that people bet on grain, let alone anything about a ban. Such news only reaches the cities,” said Singh, a farmer, standing in his wheat field in Punjab, the state which produces the most wheat in India.
India, under pressure to cool inflation, running near a two-year high, banned new wheat and rice futures contracts in its fledgling exchanges in February in a bid to check speculation and—hopefully—tame prices. But while farmers are unfamiliar with electronically-traded futures, the ban could be bad news for them because there could be less price transparency and fewer private buyers.
“Even though the farmer does not directly benefit from the futures trade, he gains indirectly as private traders fix their prices based on futures,” said D.H. Pai Panandiker, an economist with the RPG Foundation, a private think tank.
Analysts say the February ban, along with a move to limit the size of wheat stocks that can be held by private firms, could scare away many private buyers.
For Singh, it does not matter who buys his crop—as long as someone does. “I don’t care who buys my wheat— government agencies or private trade,” he said, sweeping his hand over his wheat crop, washed clean by light rain in the village of Bhukri Kalan, on the outskirts of Ludhiana. “All I want is a good price for my produce and then maybe I can get my roof repaired.”
But Garry Booth, an Australia-based grains trader at Man Commodities, said a competitive futures market is what ensures that farmers get a fair price for their crops. “The great thing about futures markets is there is a great deal of transparency on prices. Without that, farmers are in a vacuum on what the prices are.”
Singh, who didn’t have a chance to go to school and doesn’t feel comfortable using a computer, depends on word of mouth from fellow farmers, dealers or a visit to a wholesale market to get a fix on prices.
Last year, Singh’s produce was bought for Rs650 per 100kg (quintal) by private traders, who sell it at home or ship it abroad. Sometimes they store the stock until prices rise. He gleaned a monthly income of about Rs5,000 from the sale of his crops last year, just about enough to keep the kitchen fire going.
The ban on the futures market also prevents farmers from optimizing their resources as the lack of advance information on crop prices means that farmers can’t determine whether they should plant wheat or opt for other crops such as cotton which might be more lucrative when harvest time comes around.
This year, many farmers have sold their wheat crops to brokers and middlemen even before the harvest, hoping the advance will help as they struggle to cope with rising fertiliser and fuel prices.
“More than 70-80% of people in our village have taken an advance for their crop,” says Avtar Singh, a farmer in nearby Tajpur village.
The government, which also buys wheat for private stockpiles, has raised its offer price this year to Rs850 per quintal, but rising costs threaten to gobble up the gains on offer.
Jaswant Singh, another farmer in Bhukri Kalan, said he has trouble making ends meet with his tiny inheritance of land.
“My father owned six acres of land, but when he died it was split between me and my three brothers,” he said, sipping a glass of tea as a chilly breeze blew over his fields.
“The cost of everything from fertilizer to seeds are so high that I am earning only about as much as I am spending.”
Commodity markets have been around for centuries but futures trading in farm goods took root in Chicago in the 1840s as a way for farmers to sell “forward” their goods.
Farm prices used to be ruled by boom and bust cycles before the introduction of futures in Chicago, with prices shooting up during the scarce winter months, similar to what happens in India. This cycle gradually vanished as futures trading spread.
Electronic futures trading is in its infancy in India, getting under way only five years ago on two exchanges in Mumbai. When the trading began, there was optimism that the more sophisticated approach to buying and selling commodities would help raise the living standards of India’s 600 million farmers. But the recent ban on wheat futures was seen by analysts as playing to an electorate worried about rising prices and more akin to shooting the messenger because the rising prices simply reflected shortages in the market.
Since the ban on futures on 28 February, spot prices have fallen, but recently, world prices are on the march again on expectations of a weak crop in North America.
At Asia’s largest grain market in Khanna, a small, bustling rural township close to Bhukri Kalan, an angry debate about futures trade goes on amid the roar of passing trucks and the creak of bullock-carts crammed with sacks.
“Last year, private firms were buying everything in sight,” said trader Brij Lal, as he looked up from a huge weighing scale, surrounded by a pile of account books. “Not many would come this year because of the government’s drive to check prices. It always helps to have more players in the market.”
But Gurmeet Singh Sekhon, a farmer in a nearby village, said he was not worried about the ban on futures trading. “In our village, people would stop going to someone’s house if they thought he was in some kind of betting. That is why, hardly anybody takes interest in futures trade here.” Reuters
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First Published: Thu, Apr 12 2007. 12 24 AM IST
More Topics: Money Matters | Commodities |