‘Linking farmers with futures market can benefit both’

With the Finance Minister’s budget speech announcing the Centre’s commitment to create 10,000 new farmer producer organisations (FPOs) in the next five years, a new study has made the case for empowering these FPOs to trade in the commodities futures market.

Such a move could help farmers make their cropping decisions based on next year’s prices rather than last year’s rates, as well as break the crippling hold of middlemen and traders and ultimately boost income for agricultural families, stated a study published by the Indian Council for Research on International Economic Relations (ICRIER) on Thursday. Lessons are being drawn from China’s success in getting small farmers connected to the commodities market since 2005.

The first futures trade by an Indian FPO took place in 2014 when the Ram Rahim Pragati Producer Company – an enterprise started by 3,000 women belonging to self-help groups in a tribal area of Madhya Pradesh – hedged soyabean price risk on the National Commodity and Derivates Exchange (NCDEX). By May 2018, a total of 69 FPOs had traded on the exchange. However, a whopping 80% of them – 55 FPOs – had only made a single transaction.

Between April 2016, when NCDEX began making formal efforts to directly engage with FPOs, and May 2018, FPOs had a miniscule 0.004% share of the agri-futures trade at NCDEX. More than half of the FPO futures trade of ₹50.8 crore was in soyabeans, while another third was in maize. Bihar, Maharashtra and Madhya Pradesh account for 92% of the trade.

The ICRIER working paper, titled ‘Linking farmers to futures market’ in India, notes that small farmers often do not have the required scale to trade in the futures market as individuals, and also view it with some suspicion, as akin to “satta” or gambling. Instead, they depend on traders in traditional marketing channels who charge high commissions, but provide easy access to credit and market. However, FPOs, as aggregates of small farmers, can provide the scale of production needed if they receive sufficient information and support.

Lessons drawn

Some of the lessons drawn from Indian case studies include the need to focus on commodities with limited government intervention on prices and procurement, and the need to identify production centres and build warehouses and delivery centres around them in order to encourage futures trading in these areas. In China, the state has been helping smallholder farmers by providing customised products and reducing price distortions, said the study.

“Linking farmers with futures market can be mutually beneficial to both,” says the ICRIER paper. “Farmers, when linked with a consistent, liquid and deep futures market will be able to reap benefits of efficient price discovery. Higher farmer participation will provide more liquidity to the market, helping it achieve its objective of price discovery. If farmers start finding that the markets are consistent [i.e. without abrupt interventions], reliable and accessible, their participation will also increase, making markets more liquid and deep.”

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Printable version | Oct 22, 2021 12:08:12 PM |

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