From plate to plough: Plan for the agri-futures

The futures market is one way to ensure that farmers’ planting and selling decisions are forward-looking. It can help smoothen the boom and bust problem in agri prices.

Written by Ashok Gulati , Tirtha Chatterjee | Published:August 14, 2017 12:00 am
agriculture, agri products, e-NAM, what is e-NAM, agricultural selling, farmer market, agri-futures market, farmer producer organisations, indian express news, india news, indian express opinion The e-NAM aims to create an all-India spot market by creating an electronic platform. (Representational image)

Even after 70 years of Independence, the marketing system for agri-products remains un-supportive to farmers. They can’t discover and realise the best prices possible for their produce across space and time as markets are not sufficiently integrated. They sell in local markets where prices bust in case of bumper harvests, as happened in the last few months, not only for potatoes and onions but also for most pulses and oilseeds. The e-NAM aims to create an all-India spot market by creating an electronic platform.

However, for transactions to take place across mandis and states, one has to do much more than installing a simple software. It needs assaying, grading, sorting, storing, delivering and settling disputes with respect to each transaction. Despite the good concept of e-NAM, creation of an all-India spot market for farmers is still at least five years away, if not more. If the government wants to do it faster, there could be some lessons from India’s nascent and China’s well-developed futures markets.

The agri-futures market is one way to ensure that farmers’ planting and selling decisions are forward-looking, and not based on past prices. This can help smoothen the typical boom and bust problem in agri-prices. However, there are two key problems with Indian agri-futures: One, they are often disrupted by sudden bans or suspensions by the government as many policy-makers have a deep mistrust in the functioning of these markets; and two, very few farmers or farmer producer organisations (FPOs) trade on futures, which in turn reinforces the mistrust of policymakers. No wonder, the overall size of agri-futures in India remains trapped at low levels, and the most worrying part is that since 2012, it has been tumbling down (see Figure-1). Although the onus of reviving this trend largely lies with agri-commodity exchanges and the regulator, it may be worth looking at the Chinese experience in this context, and see if anything useful can be learnt.

Interestingly, India recorded the first trade in futures in 1875 in cotton in the Bombay Cotton Exchange, just 10 years after the first trade was consummated in USA. But India’s agri-futures could not develop much due to a series of suspensions around the Second World War in view of the shortage of essential commodities. This mindset continued post-Independence, and only pepper and turmeric were allowed to trade in 1977. However, it was the bold vision of Prime Minister Atal Bihari Vajpayee that in 2003 three national exchanges were set up and all commodities were allowed to be traded in futures markets. But since 2003, 15 commodity futures were suspended, leading to uncertainty in the market. Despite there being sufficient evidence that spot prices broadly converge with future prices, there remains a mistrust in commodity futures amongst policymakers. No wonder, agri-futures remained at low levels, forming only 2 per cent of 1.6 billion global agri- futures contracts during the triennium average ending (TE)-2016.

In comparison, look at China, which started in the early 1990s, and by TE 2016, it was the largest player in global agri-futures contracts with a whopping share of 69 per cent. (Figure 2). What is the secret of Chinese success? China also did a lot of experimentation in the early years, starting as many as 33 commodity exchanges in 1993, but many of them had to be shut down by 1998, and several commodities suspended. One of the key lessons that China learnt from CBOT experts of the US was that a spot or wholesale market of sufficient size and efficiency has to be developed before establishing a vibrant futures market.

The other takeaways from the Chinese success in agri-futures are: One, state participation in the futures markets through the State Trading Enterprises; two, no abrupt suspensions of commodities; and three, focus on choice of commodities, which are not very sensitive from the food security point of view. As one can see in Figure 2, the Chinese volume of contracts is much higher in soya, mustard, and corn complexes, which are basically for feed. Palm oil, sugar, cotton and rubber are other commodities that China imports in large volumes, and they are not part of the core food security basket.

So, what is the lesson for our regulator and commodity exchanges? The key lesson is: Pick the commodities carefully, and deepen their markets first. SEBI has tried to come up with some indicative criteria in the choice of commodities to be developed for futures markets, but the basic distinction between feed and food commodities is missing. And it is here that the Chinese experience is relevant as they first tried to develop futures in commodities that are non-sensitive from the food security point of view.

In this context, in a larger paper with Siraj Hussain, former Secretary, Agriculture, we carried out a Principal Component Analysis taking several commodity parameters into account with a view to identifying the most promising commodities for futures markets. Our results show that commodities with the highest potential for futures trading are either feed material (soybean meal, rapeseed meal, maize) or fibre (cotton), followed by spices and edible oils. Basic staple food items like rice, wheat, and even pulses get a low ranking due to their food security concerns. India being now the largest importer of edible oils, especially palm and soya oils, these are promising candidates for agri-futures provided global players are allowed to trade in these.

It is thus obvious that a well thought-out strategy to pick the right commodities is a better way to develop agri-futures rather than a frequent stop-go policy. The trust in commodity futures will enhance once more FPOs start trading on agri-futures, and they start gaining directly or indirectly from agri-futures. SEBI can help incentivise the participation of FPOs on the futures trading platform, but the real onus lies with agri-commodity exchanges, and it is here that the progress has been extremely slow.

Gulati is Infosys Chair Professor for Agriculture and Chatterjee is Research Associate at ICRIER

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  1. B
    Bisma siddiqui
    Aug 15, 2017 at 4:07 pm
    Please kindly remove some adds, its too much distraction..I think the purpose of this platform is to display news, not adds...Thankyou
    Reply
    1. V
      Vik
      Aug 14, 2017 at 9:59 pm
      Another academic!!!! What you need is infrastructure, better roads, better storage so farmers have choices when they have to sell their produce. Farmers are being exploited because in each district one or two families with political connections control s markets and dictate prices. Unfortunately most academics in India never leave their offices and this is reflected in their "research".
      Reply
      1. S
        Seshubabu Kilambi
        Aug 14, 2017 at 7:48 pm
        Farmers need remunerative prices for their crops
        Reply
        1. C
          Chaudhary Chaudhary
          Aug 14, 2017 at 4:17 pm
          Until aarahat of 2.5 is done away with, nothing is going to succeed .
          Reply
          1. V
            v b
            Aug 14, 2017 at 12:18 pm
            Futures Contract system should involve farmers entering into contracts with the major buyers like Agri-processing Industries (e.g., ITC) to supply agricultural produce at prices, in quan ies, with quality and within time-frame specified in the contract. A better system for amelioration of the lot of farmers on the one hand and the consumers on the other, the system to be adopted would be as follows: Set up in or near each village (a) a warehouse for storing agricultural produce as soon after harvesting with the warehouse receipt being pledgeable with a Bank for availment of finance, (b) a Unit for grading, sorting and quality certification, (c) a Unit each for processing the produce to make it consumable straightaway and for converting into preservable y form the produce which cannot be marketed at reasonable price. The best interests of all concerned should be ensured giving no scope for negligence or acts of bad faith on the part of anyone concerned.
            Reply
            1. V
              Vishweshwer Mangalapalli
              Aug 14, 2017 at 5:55 pm
              Excellent POV VB Garu... Wondering what the economics of your suggestion would be in a large agricultural country like ours...
              Reply
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