There isn’t much from the recent Union Budget as far as new ideas for agriculture goes, yet it sends out a couple of signals suggesting the Narendra Modi government’s intent to integrate farmers better with the markets.
One such signal is the proposal to come out with a ‘model law’ on contract farming for adoption by the states. This would enable farmers to legally enter into long-term production and marketing arrangements with processors, retail chains and other big buyers. The existing Agriculture Produce Market Committee (APMC) legislation of a few states do have provisions for contract farming. But these are restricted to only marketing. Moreover, they provide for an overbearing and intrusive role of APMC functionaries. Not surprisingly, they have excited neither farmers nor organised market players.
The proposed model law, it is hoped, will be reflective of ground realities, providing a framework that protects the rights of both sides and also keeps transaction costs at reasonable levels. How expeditiously it can be drafted, shared with stakeholders, and rolled out at least in a few states will indicate the seriousness of the announcement.
The second signal from the Budget is more ambitious, relating to integration of the spot and derivatives (futures and options) markets for farm produce using the electronic National Agriculture Market (e-NAM) platform. It is tempting to believe that the government has tacitly accepted that e-NAM is not actually firing — enthusing neither farmers nor traders — and, hence, this reinvention of the portal as a bridge between spot and derivatives markets. While no doubt a well-intentioned attempt to push modern marketing ideas, it remains to be seen whether the latest initiative will meet the fate of the Centre’s ‘model’ APMC Act that’s been floating around for over a decade without finding favour with the states. Even the more recent e-NAM has been cold-shouldered, including by states ruled by the BJP!
But skepticism notwithstanding, the proposed creation of an operational and legal framework for integration of the spot and derivatives markets for agri-commodities can be a potential game-changer. Thankfully, we do have examples of farmers’ organisations interfacing with the futures market to build upon, even though they might be just a handful. One of us (Raghav Raghunathan) has been directly associated with the roll-out of an experiment involving a farmer producer company in Madhya Pradesh.
In 2012, Ram Rahim Pragati Producer Company Limited sought the support of Samaj Pragati Sahayog — a grassroots NGO based in Bagli, Dewas district — to deal with price volatility in crops such as soybean and chana (chickpea) grown by its 3,000-plus tribal and women farmer-members. The then regulator, the Forward Markets Commission, allowed the National Commodity and Derivatives Exchange (NCDEX) to list producer companies (PC) as players on their futures trading platform.
In 2014, ahead of the sowing season, Ram Rahim PC locked in a futures price of Rs 4,500 per quintal for soybean at the NCDEX platform. That year turned out to be one of bumper production year, leading to prices crashing in the local mandis to around Rs 3,300 per quintal. But the locked-in price meant that the losses from selling in the spot market were offset by the gains on the futures position taken at the exchange platform. Learning from that successful hedging experience, Ram Rahim PC has evolved a regular mechanism of locking-in prices through NCDEX before every soyabean planting season. Also, by using the futures contract as a form of quasi-collateral, it has been able to raise working capital from financial institutions for funding procurement from farmer-members.
Ram Rahim PC’s experience has inspired a few other PCs in MP to also follow suit. Samriddhi Mahila Crop Producer Company, supported by another grassroots organisation SRIJAN, used an NCDEX soybean futures contract in the last kharif season to secure a price of Rs 3,300 per quintal, which turned out more than the spot mandi rates at harvesting time. This was a revelation for farmers — the PC’s articulate chairperson Savitri Didi included — that modern market mechanisms can work transparently for their benefit.
With over 1,000 functional PCs in India at present, organisations like NCDEX have stepped up efforts to bring as many such bodies on to its trading platform. Since there is a minimum lot size — in terms of quantities/volumes — that can be traded on derivative exchanges, it is obvious that not many Indian farmers would be eligible to individually enter into contracts. However, they can be enabled to do so through PCs taking positions on their behalf.
Given that the e-NAM platform is currently established for spot trading activity, integrating it with futures/options market platforms isn’t going to happen easily. For one, e-NAM is not regulated by the Securities and Exchange Board of India, unlike the derivatives exchanges. But more serious is the likely opposition from the APMC-controlled mandis, which will view any tie-up between e-NAM and commodity exchanges as another threat to their virtual monopoly over agri-produce trading. It is they that have primarily squeezed the e-NAM into an irrelevant corner.
There are only four cropping seasons left between now and the next general election. The proposed model contract farming law and integration of spot with derivatives markets through e-Nam will have to deliver at least preliminary benefits to farmers by the fourth season — before April 2019 — for the Modi government to reap any political gains. Will that incentive be enough to push through these two potential game-changers?
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