Farmers’ bridge to the future

Farmers’ bridge to the future
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First Published: Mon, Dec 24 2007. 11 56 PM IST

Updated: Mon, Dec 24 2007. 11 56 PM IST
The role of the commodity futures market has been intensely debated in India. The Abhijit Sen Committee, set up by the government to study the impact of futures trading on the rise in prices of farm commodities, is expected to recommend measures to make this market more farmer friendly. But its report has not been made final yet.
Agricultural futures trading volumes have grown at exponential rates (100 times during the last five years with the figure at Rs37 trillion in 2006-07) and new commodities are being introduced at a rapid pace, with the present number at about 70. The most disquieting aspect, however, of this otherwise impressive story is that the farmers—primary stakeholders in the speculator-dominated market —are conspicuously absent.
Therefore, these markets have increasingly come under a cloud of suspicion, prompting an influential section of opinion to even favour banning them. Commodity exchanges have obviously not kept the promise under which these markets were deregulated in 2003, to offer farmers a market-based mechanism for hedging their price risk and facilitating transparent price discovery.
At present, it is the prevailing market price that influences farmers’ subsequent cropping decisions, leading to a “cobweb effect”. Ideally, expectation of future prices should influence their next year’s cropping pattern. But there are serious problems in their use of futures markets.
First, the minimum lot size of transactions is often too large for an individual farmer. For example, the pepper contract size at the Indian Pepper and Spices Trading Association, Kochi, is 2.5 tonnes. This acts as a major “entry barrier” for farmers with small landholdings.
Second, the transactions need the payment of an upfront margin and, depending on subsequent price fluctuations, there are daily “mark to market” margin requirements by exchanges till the settlement date. Such conditions impose a financial burden on the farmer who may find it difficult even to comprehend complexities related to additional margin calls.
Third, on the settlement date, if the farmer decides to use the physical delivery route to settle the contract, he has to move the produce from his village to the designated warehouse at his cost. This cost can be significant because the lack of accredited warehousing facilities in and around villages imposes additional burden while transporting produce to a designated warehouse.
The answers to these problems lie in having “aggregators” who would aggregate the produce of various farmers and provide the required logistical services including transportation, testing and grading, and interaction with warehouses and commodity exchanges. This mechanism is the surest way to bring the benefits of futures trading to farmers. There is, therefore, a need to identify entities for consolidating individual farmer requirements and allowing them to hedge in a consolidated manner all their needs on the exchange platform.
Any of the following entities could do this: companies using the end product, agro-extension service providers, NGOs, farmer associations, producers’ cooperative federations, producer companies, agriclinic or agribusiness centres, primary agriculture cooperative credit societies (Pacs) and warehouse/godown owners.
The role of user companies as aggregators may create a conflict of interest with the farmer’s interest about the price payable for his produce. But given the near absence of effective agro-extension service providers, if user industries are provided the required handholding, they can be enabled to assume the role of aggregators.
Producer companies and farmers’ associations such as the sugar federation, cotton federation, oilseeds growers cooperative federations, the Tea Board, Coffee Board and Spices Board have the capability to act as aggregators. Agriclinics, agribusiness centres and Pacs also appear to be very well placed for this. The units set up under the government’s Agri-Clinics and Agri-Business Centres (ACABC) scheme (about 2,000 units so far), financed by various banks across the country, are seen as an appropriate forum for a pilot project since they are run by agriculture graduates who have been trained by the National Institute of Agricultural Extension Management (MANAGE), Hyderabad. Most of these ACABC units have computers and Internet connectivity. Further, well-functioning Pacs have a substantial reach and credibility among the farming community. They can also have the capacity for risk management after writing hedging products for individual farmers. Many have n added the strength of storage facilities.
A warehouse owner can also be trained to act as an aggregator. In the US, the most common use of price risk management instruments by farmers is through warehouses (elevators) to whom they deliver farm produce. They agree on forward prices with these aggregators, which undertake the hedging on behalf of those customers among their suppliers who want to lock in forward prices.
India needs to give a serious trial to the concept of “aggregators”. To ward off the Damocles’ sword of a market ban, the commodity futures market need to gain credibility by facilitating direct or indirect participation of farmers. Else, for Indian farmers, benefits from futures trading shall remain “so near and yet so far”.
Sunil Kumar is an alumnus of IRMA and IIM Lucknow. He works in the development finance sector. Comments are welcome at theirview@livemint.com
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First Published: Mon, Dec 24 2007. 11 56 PM IST