The Mandi Goes to the Market

Inspired by liberalisation and penned by the government’s desire to gradually withdraw from the agriculture sector (among others), this is an unusual script: That of farmers changing the way they sell their produce. It begins with these warehouses, goes on to computer kiosks set up in villages and ends at commodity exchanges which allow futures trading at world prices. The postscript: Better profits for them and less dependence on money-lenders.

THE WAREHOUSE, WHERE IT ALL STARTS
Listen to Rakesh Patel, who has come to the Annapoorna Warehouse to check on the 170 bags of tuvar dal that he has stored for three months. He is now waiting for the market price to rise, confident in the knowledge that his produce is safe. To a farmer, this is the difference between profit and desperation.

‘‘This has changed my life,’’ he says candidly. Before ‘‘this’’—the warehouse—came up, he would queue up at the State Warehousing Corporation godown in Suhagpur, discover that it had run out of space, drive to the mandi and sell at the going price.

Now, for the same price—Rs 3.36 a bag—he finds space in a godown with proper ventilation and fumigation. In February, he managed to make a profit of Rs 400 per quintal for wheat he deposited in November.

Seven more warehouses are in various stages of construction around Pipariya, being built under the Gramin Bhandaran Yojana that gives 25 per cent subsidy for rural godowns. And they are just the first link in the long chain that has revolutionised the way farmers in Punjab, Haryana, Madhya Pradesh, Karnataka, West Bengal and Andhra Pradesh can market their produce.

In the last three years, they have added 1.1 crore tonnes of warehouse space to the 7.8 crore tonnes that already existed under the Food Corporation of India (FCI) and the state warehousing corporations.

Once these warehouses are in place, other systems will follow. The produce can be graded; farmers can get loans against what they have stored. There are even plans to make receipts from these godown negotiable, allowing farmers to trade without moving his goods from the godowns. All this can free them from the hold of the money-lender.

EXIT MONEY-LENDER, ENTER BANKS
The main reason Patel could wait for the price to rise is because he pledged his stored grain and get cash in advance, up to 70 per cent of the value of his goods. It took him less than 36 hours to deposit his grain, get a receipt from the warehouse owner, go to a bank and get a loan sanctioned against the receipt.

The government is pleasantly surprised at the way the godown scheme—launched in 2001—has caught on, though there was a slight deviation from what was conceived on paper. Instead of farmers’ cooperatives building the warehouses in remote rural areas, effectively bringing the market to the grower, large traders are the ones financing the godowns. They prefer to site them along the highways.

‘‘We have been in the agri trade and realised the need for something like this, so we decided to invest in the scheme,’’ says Rajesh Bhattar, owner of Annapoorna Godown, which can store 70,000 sacks. ‘‘It has to be in a place where trucks can ply and where the traders can buy,’’ he says, justifying the mushrooming on the highways.

Bhattar is one of the big traders who knows that this is where the future is: His next step is to have an authorised grading system and connect his warehouse to others online. Once he issues a receipt to a farmer like Patel, the latter can either get a loan from the bank or conduct multiple transactions with the same piece of paper.

This connects the warehouses to the futures markets slowly getting happening on the lines of the Chicago Board. It means farmers get a fair idea of the price they are going to get at a future date and can trade even before they have sown the crop. The links are falling in place.

‘We don’t deal in shares that can be bought and sold when traders want, here the product has to be delivered’ Rajesh Bhattar

FROM THE FIELD TO THE GLOBE
Walk up two flights of steps of a noisy paint and hardware store in Pipariya and you will come to an airconditioned, relatively clean attic. There is one computer terminal, two men and three phone lines. Brisk online commodity trading is going on with the two men constantly on the phone selling and buying chana, gwar gum and wheat.

Even when there is load-shedding, work goes on uninterrupted—it is a V-Sat operated terminal for National Commodities Derivatives Exchange (NCDEX).

This is a new way of trading in agricultural commodities called the futures market. At present, 17 commodities are being traded in three national exchanges, including the Mumbai-based NCDEX and the Ahmedabad-based Multi Commodity Exchange (MCX).

They work just like the stock market does, with the exchange and its network of members, traders and brokers. The potential is estimated to be as much as Rs 30,00,000 crores, multiplied 10 times.

The purpose of setting up these exchanges is to allow producers and processors to sell their produce in advance to protect them against possible fall in prices. In this way, they ‘‘hedge’’ their price risk, that is ‘‘lock-in’’ a price which they will receive and pay. It is believed that this mechanics brings out the ‘‘best price’’ for a commodity.

THE MISSING LINK: THE FARMER
In the year since trading was allowed in agriculture produce, one phenomenon, though, has gone unnoted: As in the NCDEX terminal in Pipariya, manned by computer-savvy online traders and servicing a local clientele with a similar profile, farmers are left completely out of the loop that gathers momentum after they deposit their produce at the warehouses.

‘‘There is little awareness among farmers about these markets. At present, only those who have some experience with the stock market come here,’’ says Bhattar. Earlier a stockbroker with NSE, he is now an authorised broker of NCDEX and the owner of a godown. Incidentally, NSE is a partner of NCDEX.

Right now, agricultural produce trading is a bit like online satta—the people trading have not seen gwar gum or chana in their lives but are buying and selling, creating an artificial price. This is where the need for supportive mechanisms for the infant market comes in.

SHAKY SUPPORT STRUCTURE
“This is not a share that belongs to the company that can be bought and sold as and when the trader wants. As an agricultural product, the produce has to be delivered to someone at a particular stage,’’ Bhattar explains why the futures market needs to be propped up.

In these markets, deals close on the 20th of every month and if the buyer wants delivery, he can have it on a 15-day notice. Deliveries are a small percentage of deals for farmers the world over but, in India, it could be a good way of involving the farmers, experts suggest.

This increases the government’s responsibility in setting up a delivery mechanism that allows the benefits to reach the farmers.

At present, the government has just about begun recognising warehouses where deliveries can be made. ‘‘With delivery, comes the question of quality. From the figures on the computer, there is no guarantee of the quality that will be delivered to the buyer. For this we need government-certified agencies to grade,’’ says Bhattar.

There’s also the question of the warehouse receipt. As in the Chicago Board, the receipt is legally an instrument that can be traded without the produce having to be physically moved.

Aware that once the wheel is set in motion, all cogs will need to be in place, the government claims it is working on these issues. ‘‘Our next step is to set up a grading and standardisation system. We will use Agmark. The proposal to make warehouse receipts negotiable is going to the Cabinet,’’ says P K Agarwal, Adviser in the Ministry of Agriculture.

WANTED: A WATCHDOG WITH BIG TEETH
The responsibility doesn’t end with that. As in the stock market, the futures exchange, too, requires a regulator. In the Ministry, there is talk of merging the Forward Market Commission, the existing regulator, with SEBI.

At present, NCDEX has almost the same brokers for its commodity exchange as its share market, and they playing it the same way as the stock market. ‘‘It is like gambling, we keep playing and the prices reach an abnormal high,’’ says Sanjay Samiyya, director of the Indore-based Exclusive Securities. He has set up 15 terminals in Madhya Pradesh and Rajasthan.

But agricultural commodities are different from regular shares, point out experts, calling for in-depth knowledge of the commodity and how it reacts to weather changes or soil conditions or pest incidence, rather than balance sheets and input prices.

The recent experience with gwar gum emphasises the need for an effective regulator. In August this year, the volumes for gwar gum touched an abnormal high—80 per cent more than the actual production, and four times the price it would fetch in the actual market. The traders were left high and dry when the time came to make the deliveries. There was no gwar gum to deliver, certainly not at that high a price. Eventually, the exchange had to intervene to square up deals.

Till the regulator gets its much-needed teeth, the brokers are trying to do their best by teaching farmers what this concept is all about. ‘‘The most important thing is awareness. That’s why, apart from talking to them, we also conduct slide shows and presentations for farmers,’’ says Samaiyya.

THE DUMMIES’ GUIDE

Futures trading in agri-produce is a spin-off of liberalisation. With the government trying to ease out of various sectors and their simultaneous opening to world trade, it is an alternate system that is projected to help farmers and traders cope with price volatility.

How did futures trading evolve in India?
The concept is actually old: Organised futures markets were born in India with the establishment of the Bombay Cotton Trade Association Ltd in 1875. The Gujarat Vyapar Mandal dealt in oilseeds, including groundnut and castorseeds. In the ’70s, most of these markets became inactive in view of national food scarcity. In 1980, the Khusro Committee recommended reintroduction of futures trading in most commodities.

With economic liberalisation and the gradual withdrawal of the government from procurement and distribution in the ’90s, a market mechanism was required to perform the economic functions of price discovery and risk management. Notifications were issued in 2003 permitting futures trading.

Who needs futures trading anyway?
Futures trading performs two important different functions: price discovery and price risk management. It is useful to the farmer because he gets an idea of the price likely to prevail for a commodity at a point in the future and therefore can decide whether he wants to cultivate it. It is useful to exporters as it provides advance indication of the future price, and thereby helps in quoting a realistic price and securing export contracts in a competitive market.

It also means that a countrywide integrated price, helps balance the supply and demand position throughout the year and stabilises prices in times of violent price fluctuations.

So how many commodities get traded this way?
At the moment, 17 commodities and their derivatives are traded in 20 recognised exchanges.

And how is the trade regulated?
It is conducted under a three-tier regulatory system. The exchanges themselves are first tier regulators, responsible for orderly conduct of trade. The second is the Forward Markets Commission, which approves exchanges and conducts surveillance. The third is the Department of Consumer Affairs in the Government of India, which formulates the appropriate policies.

What’s the difference between the stock exchange and commodities exchange?
It lies in the nature of delivery. In stock markets, only cash is settled, here the physical delivery of the agri-produce can take place. Even though it is enforced in just 1-2 per cent of the deals, the threat of delivery is the equiliberating force in avoiding wild swings.

In gwar country, virtual trade is a sticky business

ANURADHA NAGARAJ

NOKHA | RAJASTHAN: His land is parched and his gwar plants are struggling to survive under the warm autumn sun. Sitting on his haunches in the middle of the tiny plants, Krishna Singh is predicting his doom. ‘‘Absolutely nothing, that’s what this land is going to yield this time,’’ the well-built farmer from Ambasar village in Bikaner says matter-of-factly.

‘‘This 12 bigha of land is going to give me very little moth and even less gwar. I spent about Rs 5,000 on the seeds and tractor but will get back barely Rs 2,000. We were happier when gwar was just grown for cattlefeed and nobody had discovered its gum-like properties.’’

Across the arid desert, farmers are echoing Singh’s concerns. With gwar and gwar gum riding the commodities market wave, they say their stakes have also been raised. ‘‘But we have so much more to lose,’’ Singh says, pointing to the murkiya (earring-shaped) gwar. ‘‘Farmers don’t sow too much gwar because that brings down the prices by 50 per cent in one go. The fluctuation is prices is literally killing.’’

Sixty-odd km from Krishna’s farm, Mahender Singh refuses to listen or take his eye off the monitor. Behind him, a group of young men nervously watch the flashing numbers on the screen. Beads of sweat are wiped as the small room gets oppressively hot. The phone rings, shattering the uneasy calm. The caller wants to know how the gwar seeds are trading. Mahender’s fingers fly on the keyboard, short exchanges are made on the phone and a deal is struck.

All through the telephonic transaction, his father, Paras Mal Sancheti watches in wonder. ‘‘I don’t understand what the hell is going on,’’ he confesses. ‘‘But what I do know is that gwar prices are hitting the ceiling and the going is good. Trade is on three months in advance, the prices are good and we will earn our profit.’’

Outside the Sanchetis’ nondescript office, down the bumpy road, there is another young sub-broker operating out of another tiny hole. Further down, there is another and then another. Welcome to Nokha, till now known as one of the ‘‘biggest and best’’ mandis in the desert. Today it is being called the ‘‘gambling den of gwar’’ that will ‘‘bring doom to the tiny town’’.

Since the monsoons failed and the farmer gave up all hope, 12 ‘‘Internet places’’ have opened up in Nokha, their lease lines all connected to Dalal Street. Young, computer-literate, otherwise unemployed boys have taken charge, trading in gwar as older traders watch them in awe as they push the prices up.

‘‘All this excitement on the Internet and not a seed of gwar in the mandi,’’ laughs veteran farmer Hanuman Panchariya. ‘‘I have seen over 30 players destroyed by this gwar trade in the last three years. Nokha has lost over Rs 70 crore in a couple of months in the past. This trade was always risky but now we are pushing the limits.’’

Panchariya is considered to be one of the more progressive farmers in the area. He was the first to make use of government subsidy and switch to drip irrigation, he has fruit orchards and for the last many years has been winning hands down for his apple-sized ber fruit. He also holds court everyday, meeting numerous farmers and trying to figure out their problems.

But since the gwar buzz hit the streets of Nokha four months ago, all anyone wants to know is what all the excitement is about. ‘‘If one cloud forms on this clear sky now, gwar prices will shoot up in anticipation of rain. Similarly it falls at the slightest hint of a failed crop. Most farmers understand the simple demand and supply concept but the rest is funny business,’’ Panchariya says, as the gwar discussion in his tiny dhaba suddenly heats up.

As far as the farmers of this desert belt are concerned, gwar is a no-fuss crop, which just needs a few monsoon showers. In fact, gwar seeds are carelessly scattered across fields when the first monsoon clouds gather in the sky. Around 90 days later, it is harvested.

‘‘It was just cattle feed earlier, but now is too expensive for that,’’ explains Mahavir Purohit of the Bharitya Kisan Sangh. ‘‘In the late ’80s, Rajasthan discovered the qualities of gwar and by the late ’90s, the price shot up to Rs 3,000 per quintal. Everybody was overjoyed but only briefly. When the crash came, it brought down the price to Rs 800 per quintal in one go. Hundreds went bankrupt and the farmer was the biggest loser as always.’’

‘‘Of course it is a gamble,’’ says Sancheti, the trader with a newfound passion for high stakes. ‘‘But then life is a gamble, isn’t it. Everyone who puts their money on gwar knows about the risks. And farmers never have as much to lose as the trader.’’

Sancheti’s younger brother Rajender is a bit more cautious. His worry stems from the fact that besides the big-time Dalal Street players, Nokha’s youth is getting addicted to gwar trading. ‘‘I don’t know how but they are getting the money and they are willing to gamble. If the market crashes, these boys and small time traders will be wiped out. That is the only scary part of this trade, otherwise it is pretty much above board.’’

And so they happily trade, promising customers hundreds of trucks of gwar, knowing fully well that only 20 per cent yield is expected this time when the crop is harvested later in November.

‘‘It is a demand and supply driven market,’’ explains a mandi official. ‘‘This time across Rajasthan, which produces 70 per cent of the crop, there is very little gwar. We are expecting just about 20 per cent production. And everyone knows this.’’

Which is probably why the gum and powder manufacturers are badgering the NCDEX to take their commodity off the list. ‘‘They have orders they will never be able to fulfill,’’ says junior Sancheti. ‘‘When there is no gwar, how will we produce gwar gum or the powder. In fact, there is a petition on this pending in the Kolkata courts.’’

All the 10 gwar gum factories in Nokha have closed shop since June. They have no plans of opening till the end of the year, when they hope there will be some gwar seeds to process. Till then all Nokha is hooked to is the Internet.