Leveraging Indian commodity futures for farmers: a review on present structure and future prospects

Author Details

Author 1 Name: Kushankur Dey Department: Assistant. Professor, Finance University/Institution: T.A. Pai Management Institute Town/City: Manipal Country: India

Author 2 Name: Debasish Maitra Department: Finance University/Institution: Institute of Rural Management Anand Town/City: Anand Country: India

Author 3 Name: Debdutta Pal Department: Centre for Management in Agriculture University/Institution: Indian Institute of Management Ahmedabad Town/City: Ahmedabad Country: India Corresponding author: DEBASISH MAITRA Corresponding Authors Email: debasishmaitra@gmail.com

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Abstract

Purpose: It has been well received and recognised that literature on farmers participation in Indian commodity futures market is quite sparse. Though futures market is said to have influential role in price discovery process, it has been underperforming in attracting farmers. High amount of margin money and dearth of knowledge about the functioning of futures markets seem to impound them from being benefitted. This paper looks at the possibility of aggregator model along with concerted new initiatives from the regulator, the government agencies, collateral management agencies, commodity exchanges and others to achieve the common goals that are aimed for. Design: The paper mainly illustrates various modalities and operational nuances of commodity futures markets by pinning down to both theory and practice. The study reviews and assesses the situation and necessity of well connected network among exchanges, aggregators and other agencies by incorporating a few examples. Findings: The paper takes a call on the participation of farmers in futures markets and proposes the ways to enhance the participation through aggregators. This cannot be achieved until and unless all the stakeholders work together for generating faith and belief in farmers mind for leveraging commodity futures markets for a better price. Practical Implication: Only opening of exchange will not serve the purpose of benefiting farmers. It needs a sound network of all the entities. Aggregator model as well as institutional supports at public and private level is warranted to make farmers more market-linked and market-oriented. It may not only increase their income but also their decision making ability. Originality/Value: The paper looks at the various institutional arrangements and the possibility of new opportunities. It may provide insights to the academia, professionals and also policy makers.

Keywords: Futures markets, farmers participation, India Article Classification: General Review

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Leveraging Indian commodity futures for farmers: a review on present structure and future prospects

1. Introduction Recent years have witnessed significant growth in Indian agricultural commodity futures market. This market, in effect, has notched up phenomenal growth in terms of number of products on offer, participation, spatial distribution, and volume of trade (Sen et al., 2008). Despite this Indian farmers have been occupying a little share since many years. Undeniably, farmers participation is a central theme to the discussion in this article. An attempt has been made to explore some avenues to encourage the farmers engagement in commodity futures markets. Hence, this article will provide some roadmap to explore the nuances involved in farmers participation in this market. It is believed that derivatives in the form of forward trading existed in India in ancient times, but in the absence of appropriate record keeping, nothing is known in this sphere till about a century ago. While commodity derivatives in some form, albeit crude, were prevalent in India since the late 19th century, it is only after the turn of the year 2000 that these have been introduced in a significant and systematic manner. A study by Naik and Jain in early 21st century seems to be a good attempt as their study examined the performance of regional level commodity exchanges until 2002. Post 2002, commodity futures market underwent a rebirth following the establishment of countrys first national level demutualised commodity exchange, the National Multi Commodity Exchange (NMCE, November 26, 2002). Since 2006, efforts have been channelising to achieve the integration between futures and spot commodity market to a greater extent. Three national level spot exchanges, the National Spot Exchange (NSPOT) promoted by the National Commodity and Derivative Exchange (NCDEX), the National Spot Exchange of India (NSEIL) overseen by the Financial Technology Group (FTG), National Agricultural Co-operative Marketing Federation (NAFED), and National Agricultural Produce Marketing Company (NAPMCL) and innovations on futures platform through Exchange of Futures for Physicals (EFP) and Alternate Settlement Mechanism for Futures (ASMF) are some of the good precedences, perceived to be outcomes of man-made innovations on several occasions in the country, which would augur well

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for better price discovery and prudent risk management. Up until now, commodity futures market has witnessed tremendous growth (see table-1) covering more than 800-900 sub-urban or metros via more than 20,000 terminals, and participation of members including professional clearing or/and professional clearing-cum-trading members and institutional clearing members (more than 3000) as reported by a study under the chairmanship of Abhijit Sen in 2008. [Insert table-1 here] It is worth noting that Indian commodity futures market has had a chequered history but has been taking off in a significant way in recent times. Commodity futures markets have been attracting a lot of attention because these markets have been providing avenues to different participants for better resource allocation, risk minimisation as well as information on transaction costs and their minimisation by means of special forms of futures contracts, participants, and market institutions. In India, the volume and depth of research has been limited in the field of commodity derivatives markets in general and agricultural commodity futures markets in particular (Naik and Jain, 2002; Raipuria, 2002; Kolamkar, 2003; Thomas, 2003; Nair, 2004; Kabra, 2007; Ramaswami and Singh, 2007; Sabnavis and Jain, 2007; Roy, 2008; Kumar and Pandey, 2009; and Dey and Maitra, 2011). Newbery and Stiglitz (1981) argued that futures market provides a partial insurance mechanism to the farmers' produces as this market is considered to mitigate the price risk of output only rather than value of total produce. Since producers are not homogenous in nature, their expectations are largely varied with respect to nature of produce, futures contract specifications, delivery month, margin money, and over and above, efficiency of the market. Intuitively, it can be inferred that market integration has improved the process of price formation and transmission following the establishment of national level commodity exchanges in 2003 and until 2010. However, the progress is on anvil to curtail the magnitude of information asymmetry. Price stabilisation is a matter of concern in this regard, which warrants critical review and appraisal with respect to various forms of their merits, say, nonlinearities, disturbance form, risk response, surplus, partial stabilisation, export earnings, optimisation, simulation, and others (Labys, 1980). At microstructure level, moral hazard and adverse selection have been mitigated to some extent because of prudent governance mechanisms, risk compliances, and transparent reporting systems (Ghosh, 2009). These are, probably, a few accepted elucidations of technologymediated-innovations in Indian commodity futures market (Bhattacharjee, 2007). The major
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issue, yet challenging and persisting, has not been addressed in full-fledged manner. A few exchanges, namely, the MCX and the NCDEX have showcased some successful cases which have implemented aggregation models to encourage farmers participation on futures as well as on electronic spot platforms (Berg, 2007; Fernandes and Mor, 2009). Still, these initiatives are in nascent stages. However, benefits of these innovations have not fully permeated at the producers or at the growers level, who are directly or actively engaged in agriculture. In th is regard, models will try to narrate probable avenues that how these can help to rendering services at producers or at farmers level and to what extent these would be scalable. The remainder of this article proceeds as follows. The next section illustrates few concepts and modalities of futures markets. The following sections review the present structure of commodity futures markets and collateral management agencies, and delineate some strategies and avenues which can harness the farmers participation. Last section concludes.

2.

Synoptic view of futures markets

Mechanics of commodity trading has largely been adopted by almost all national level exchanges, at par with the best practices reflected on the platform of global commodity exchanges up until now for better price discovery and price risk management. Trading, settlement, and delivery-these three integral processes have been followed by national level commodity exchanges. Contract design, margin money, mark-to-market, settlement pattern are a few parameters underlying principles of market microstructure, which usually provide performance guarantee monitored by the exchange and the clearing house for both the buyer and the seller (Dey and Maitra, 2011). These are put in place for ensuring liquidity, leverage, and transparency (Kaul, 2007).

2.1. Margin Money and its Cost Margin money is an important pre-requisite by providing a gate pass to enter into this market. For a poor farmer, arrangement of atleast initial margin is difficult, which constitutes about 4% to 5% of total value of the contract traded on exchange platform. Some additional or maintenance, special, incremental margins (see table-2) are also charged by the exchange based on trading frequency, contract size, magnitude of spread (bid-ask) gap, volatility in the market,
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etc. By considering all these factors, this is quite impossible for a farmer to reap benefits by leveraging or harping on futures markets. Arbitraging or short selling can be an alternative, counter-intuitive to shortcomings of the normal trading strategy. Aggregators are who aggregate produce through pooling can make this possible by participating on behalf of a group of farmers on exchange platform. From financial angle, if margin money raised through collateral has a direct impact on number of contracts being purchased. It is said that if margin raised via debt or loan is inversely proportional to purchased contracts (Bailey, 2005). Telser (1981) argued that initial margin requirements do have a cost attached, which is liquidity cost. Once the margin money is deposited, it is no more available to the hedger for any further purposes and it makes the hedger less liquid now than before he/she bought or sold futures contracts. Kalavathi and Shanker (1991) also examined that there is negative impact of initial margin requirements upon the demand for futures contracts by the hedger. The cost of initial margin is the spread between hedgers borrowing and lending rates. Since a substantial portion of liquid cash has been deposited for investing any other high yielding assets or purposes, the person has to borrow again. Thus, the cost of margin is an opportunity cost here. In order to meet liquidity needs and also to make the opportunity for investing being happened in the presence of margin money, the hedger has to borrow. [Insert Table-2 here]

2.2. Mechanics of hedging using Futures

The exchanges trading futures in any given commodity are indicated followed by a mention of the contracts that have matured during the period. The predominant pattern of the hedge market, namely, contango or backwardation, is indicated. The hedge is said to be in backwardation when current supplies are scarce leading to exhaustion of producers inventories (stock out condition) and opposite phenomenon holds in case of contango. We can describe these two commonly used terminologies in hedging strategy using futures. A situation called contango is said to arise when the futures prices rise over the life of the contract following hedgers and speculators desire to be net long and net short, respectively. Conversely, a falling price where spot price of asset is greater than the futures price of the underlying asset is referred to as backwardation. In case of normal contango and normal backwardation, futures price will be above the expected future spot price and expected spot price will be above the futures price, respectively. Future trade receives
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impetus from increased volatility in the spot market of the underlying commodity. Thus, precisely, both the market needs to be watched and in this context, basis assumes significance. Formally, the basis is defined here as the difference between the spot and futures market price for a commodity, which is negative in contango market or vice versa. It is a signal of market forces at work and will change over time as the cash market price and futures market price converge. Basis occasionally remains constant because local supply and demand conditions continually change through time. Changes in basis are known as basis patterns or basis variations. An improving basis changes from weak to strong. Logically, if basis strengthens unexpectedly then this improves a short hedger position. On the contrary, if basis weakens unexpectedly, the situation improves a long hedger position (Hull, 2007). Basis reflects cost of marketing the commodity, which is storage costs forming an important component; and thus, ought to be less variable than the spot. Economic fundamentals (production, import, export, carryover stock, and consumption) of the asset, liquidity, and return on assets (Roll, 1984) largely affect basis variation either in a positive or negative manner. As agents face more basis risk, they reduce their exposure by reducing inventory level. Hence, the storage level is adversely affected. For better price discovery both spot and futures markets are to be integrated. A fairly good and necessarily positive correlation (>0.5 or 0.5-0.80) and relatively low deviation between the spot and future prices would posit certain degree of integration of two markets. Wherever the basis is not zero, the local supply and demand factors are different from those prevailing in the futures market. Basis variation, in turn, decides the magnitude of hedge-effectiveness or degree of variance minimising hedge-ratio (Roy, 2008). The simple efficiency hypothesis of futures market postulates that the future price is simply the expected and technically called the unbiased predictor of the future spot price implying that spot and futures prices share one-to-one long-run equilibrium. The expectations hypothesis treats the future prices as the consensus (indicative) forecast of the future spot price. To a great extent, this is dependent upon the method of collection of spot quotes by the exchanges. Biased collection procedures present distorted patterns in the spot quotes and, for this reason, two do not seem to converge at the expiration of contract. To solve the issue of settlement, a due date rate (DDR) is fixed by the exchanges which is simple average of spot prices during delivery period, which
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should take place within 11 days after settlement at the exchange-notified warehouses (FMC, 2002). In India, a study conducted under the chairmanship of Abhijit Sen (2008) illustrated comprehensively that the magnitude of basis pattern for wheat varies from high to low followed by moderate to weak for chickpea and for others, variation seems to be moderate. Hedgeeffectiveness (HE) is found relatively high in case of pulses, namely, chickpea, 36%), red gram, 44%, and black gram, 43%. In case of guar seed, sugar and wheat, this is 58%, 32%, and 15% respectively. These numbers implicitly throw some lights on suspension of trading of commodities, namely, red gram and black gram.

3.

A review on present structures

Exchange usually provides fairly an improved and a sophisticated platform for price discovery
and price risk management. But nuances involved in trading are complex ones, if not, being understood by agents or investors properly. Same is also applicable to Indian farmers. Tiny landholdings, poor productivity, exorbitant interest rates on informal credit, lack of access to formal credit, and lack of marketing acumen are few impediments which impound them from realising better price rather than experiencing good yield. This is true for almost 70 % of Indian peasants. Other obstacles could be market driven. Poor infrastructure relating to market yards, (Agriculture Produce Market Committee Act, 2003), poor trade practices (auctioning), limited initiatives for increasing awareness about commodity futures markets, spot markets across regional centers have been delimited the growth of agricultural commodity markets in particular. Of late intermediation of few private agencies, sometimes in public-private-partnership forms, like Institute for Financial Management and Research (IFMR), Adani facilitated aggregation model to encourage farmers participation in Reliance e-mandi, NCDEX-Haryana State Cooperative Supply and Marketing Federation (HAFED) collaboration for hedging of wheat on behalf of farmers, and MCX- Aga Khan Rural Support Programme (AKRSP-I)-Cardinal Edge (CE)-a case of aggregation model to name a few, are welcome initiatives. In different countries including India a set of aggregator models have been established with the help of exchanges, non-governmental organizations and other governmental institutions. However, some succeeded and some failed.

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Case-I: Guetemalan Coffee Growers Association (ANACAFE), a non-government organisation had set precedence by introducing a credit system for small coffee growers in 1980s. By linking the farmers with banks for credit, ANACAFE made it prerequisite to use risk management instrument in order for hedging price risk. So, farmers received only loan amount after assuring banks that they had proper risk management tools like forward price agreement, hedging through futures markets, etc. In this process banks also sanctioned loan amount with lower interest rates which eventually resulted in savings for farmers of more than 10% of loanto- value. Both banks and farmers had become successful to minimise the risk. Case-II: In 1994, Agricultural Products Option Programme (APOP) was introduced in Mxico in cotton and further extended to wheat, corn etc. Here, Support and Services for Agricultural Trading, (ASERCA), a decentralised administrative part of the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Alimentary, acted as an intermediary between producers and exchange, e.g. Chicago Board of Trade and New York Cotton Exchange. ASERCA helped the farmers to participate in the exchanges by buying put option through grouping their production to meet minimum size requirement for which ASERCA contributed 50 % of total option premium. But farmers ought to deposit the same amount in one fund called FINCA. The cost appeared to the farmers was 5-8 % of the strike price of the option. As a result of which APOP covered 11 % of the total wheat production of Mexico. Case-III: In Surendranagar of Gujarat state, the MCX in collaboration with Cardinal Edge for administrative support and Aga Khan Rural Support Programme (AKRSP-I) initiated one programme to make cotton growers aware of the futures markets and its complex operational nuances during 2007. For funding purposes, they sought the help of NABARD and opening of trading accounts was accomplished by Kotak Securities. Case-IV: Centre for Micro Finance (CMF), Self-Employed Womens Association (SEWA) and the NCDEX partnered in 2007. A randomised controlled trial (RCT) had been conducted to examine the impact of providing commodity futures prices to farmers at 108 villages in four districts in Gujarat and its impact on price expectations and sowing decisions. The programme was found to be significant on the formation of price expectations but at the same time, seemed to be insignificant on the decisions in selecting crops or areas cultivated.
Source: UNCTAD (1997) and MCX (2008) for case-I, II and III and Cole, S (2009) (case-IV).

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In 1999, International Task Force on Commodity Risk Management of World Bank (WB) recommended the establishment of one international intermediary which would fill the gap between price insurance providers like banks, brokers or traders, etc. and the service seekers like producers organisations, agribusiness organisations, co-operatives, etc. It would perform three types of functions, (a) facilitation by providing partial guarantees to mitigate risk involved in the transaction, (b) intermediation between service providers and users, and (c) provision of core services and technical assistance-in particular, market information and support to local transmission mechanisms (WB, 1999).

3.1. Availability of Collateral Management Services Agriculture and agribusiness both are highly influenced by the vagaries of nature. Hence, the cash flows become unpredictable. Relatively stable cash flows would ease out the financing process. Seasonality is a major bottleneck which results in a conservative outlook towards credit rationing in agriculture. Pledge financing is an age-old financing technique adopted by most nationalised banks, a few private sector banks and non banking finance companies (NBFCs). This is usually accomplished on the basis of collateral being produced by the borrower to/before the lender. Besides, warehouse receipt (WR) is another example that can be considered as a negotiable instrument under the directives prescribed by the Warehouse Development (Regulation) Act, 2007 and can be used to avail finance from banks. Of late, this kind of financing has been changed to a different nomenclature, which is, collateral (commodity) based structured financing (CBSF).This type of financing, typically, helps to assure predictable cashflows that can be isolated from its originator in order to secure credit on part of the borrower and to mitigate risks on part of the lender. Collateral management agency (CMA) is a third party to ensure a guarantee for both parties with respect to physical risk, market risk, and operational risk. Role of CMAs is well described. Since collateral management is still being in nascent stage, there is hardly any data or information on the exact quantum of agricultural produces and industrial assets financed under collateral management structures. Avanthakrishnan (2011) puts forward
It would be of interest to note that against a gross bank credit of Rs. 3,38,656 crore as at the end of March, 2009, to the agriculture sector, the extent of finance secured by collateral management structures is only 10,000 crore, clearly indicating that there is tremendous scope for such financing in the days to come (Avanthakrishnan, 2009: p. 135).

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In India there are only a few number of collateral agencies like, National Collateral Management Services Limited, National Bulk Handling Corporation limited, Arya collateral, Star Agri, India Commodities are present.

2.2. Present status of commodity futures

On the contrary, commodity futures or derivative markets have witnessed exponential growth in recent times. Evidently, total turnover and value of futures trading of agro commodities were approximately 291.0 million tonnes in volume and Rs.9.02 lakh crores in value till December, 2010 respectively (Economic Survey of India, 2009-10) despite the invocations of ban at several occasions on many commodities (see table-3). Researchers opine at several occasions that Indian futures markets are ill-developed as the major stumbling block for the development is due to the fragmented and unorganised underlying physical or spot markets (Nair, 2004). As commodity is distinctively different from a financial asset with respect to crop selection, staggered planting, cropping intensity, inputs, and credit requirement etc. are important factors closely associated with the degree of participation in commodity futures market. Presently there is a dearth of primary research which should be conducted at the producers level to promote the speed of price dissemination and would meet out the expectations of 11th Five Year Plan (200712)-at the behest of the Ministry of Consumer Affairs, Food, and Public Distribution. Theory of storage, convenience yield, and risk premium or liquidity preference theory succinctly warrant some action-research, which needs to be conducted at participatory level in this market. Hedging is not as effective as theoretically illustrated in the first section of this article. Sometimes spot and futures markets fail to converge due to high basis risk. RBI (2005) advocated that banks can offer non-standard contracts to the farmers and cover them in the commodity futures trade as for farmers it is difficult to take positions directly in futures markets. In this regard, RBI decided that banks can offer tailor made products to the farmers like Non-Transferable Specific Delivery (NTSD) and Transferable Specific Delivery (TSD) which are only allowed under FCRA Act, 1952. Although there are significant development happened regarding commodity futures markets so far however, more changes are required. Recently, price dissemination of both spot and futures prices of agricultural commodities has been identified as one of the important activities by Planning Commission in its XIth Five Year Plan. The initiative had undertaken by the FMC in collaboration with Ministry Agriculture and five national level exchanges [NMCE,
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NCDEX, MCX, India Commodity Exchange (ICEX), Ace Derivatives and Commodity Exchange (ACDE), Universal Commodity Exchange (UCX) ] and 18 regional exchanges where futures and spot prices of commodities of national exchanges and spot prices of Agricultural Marketing board (AGMARKNET) are operated and shown on the ticker board installed in APMCs networks under the aegis of AGMARKNET and the National Informatics Centre (NIC). By disseminating a spectrum of instantly observable prices, these exchanges have transferred the pricing power to the farming community and enhanced institutional development like grading, warehouse receipt etc., supply chain integration and farm credit facilitation (FAO, 2007). [Insert Table 3 here]

4. Constraints and future scopes through well connected net Commodity futures markets could not achieve the goal to benefit the farmers. It is argued that the futures markets came into being only in 2003, so it would take long way to engage farmers in this market. It is also true that Indian farmers are mostly indebted to the middlemen and tiny landholdings, which made them handicapped from realising the marketable surplus. Farmers usually grow or take one to two crops in a year as mono-cropping or rice-wheat cycle has been in vogue in India. An alternative may be aggregation of produce on lot basis in order to fulfill the criteria of contract specifications as directed by the exchanges being the self-regulatory organisations (SROs). Aggregator model should be implemented in a manner that some subject matter specialists can intervene in the network of aggregator and exchange. This will help to achieve both the backward and forward integration and thereby, economies of integration. Cooperatives or NGOs who have been engaging in the present structure of the model, awareness and some hands-on-exposure should be rendered at their disposal by national level commodity exchanges. Contract specifications like lot size, margining system, and delivery processes should be understood by the aggregator properly. Quality of the produce at e-auction centres or on futures-platform should be examined with deployment of right entities, say exchanges deployed product managers. In this backdrop a set of modified modus operandi and avenues are proposed here to promote farmers participation. The following avenues can be explored based on their merits for

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implementation. Few are already in place but they can be improved further. The following arrangements need a synergy among policymakers and industry professionals. 4.1. Strategy of short selling, hedging and options Aggregators can adopt short selling strategy. In that case, margin money and payoff should be calculated meticulously. Stop loss strategy based on price condition can also be adopted by the agents in absence of arbitraging mechanism followed by a reverse cash and carry model (see Bailey, 2005). While simple hedging is not working then it is always better to have tailed hedging than untailed hedging from economic perspective. As in tailed hedging the difference between the time future gains or losses and the time the gains or losses from spot markets position realised are considered. Thus, it well considers the cost of financing or returns due to variations in margin settlement. In this case, every day the hedge ratio is multiplied by the daily spot to futures pricevolume ratio. Options could be introduced. Unlike futures contracts, it gives the aggregator the right to sell without any obligation. In this regard, FMC can promote options for certain commodities, which have users-specific demands and have relatively high asset-specificity in the industry, namely, rubber, black pepper, crude palm oil, cotton, guar seed, etc. These commodities have their regional importance as productions are limited to a few states, but consumptions are observed profoundly round the year. Aggregators can enter into an option contract with exchanges by buying a put option (long put) whereas the FCI and other private agencies, viz., ITC, Ruchi, Reliance, Glencore, Australian Wheat Board, Louis Dreyfus, and Cargill etc. can exercise the option by selling a put (short put). Aggregators would pay the premium and can delimit the potential losses in a way that option holders can hold the produce until the maturity or till the contract expiration (Fernandes and Mor, 2009). European option would be better in order to avoid the temporal risk or liquidity risk between the time value of option price or premium and intrinsic or theoretical value of the option. Thus, arbitrage opportunity, if any, exists during the time period of option contract until the maturity can be avoided to some extent. Hence, call-put parity argument holds. In this case, exchanges should devise some indices for agricultural commodities which can minimise excessive spikes or volatilities for both the spot-futures prices of the notified commodities (like MCX-AGRI, NCDEX-Dhaanya). Moreover, indices should incorporate the changes in prices being reflected on tick-by-tick basis improvising some robust
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mechanisms with international exchanges indices, say, Goldman Sachs Commodity Index (GSCI). As an alternative of MSP, option can be introduced as several merits pointed out by Fernandes and Mor (2009).

4.2. Linking collateral management agencies with exchanges In order to act efficiently and effectively, collateral management agencies (CMAs) should be cautious and industrious enough to protect both the exchanges and aggregators by mitigating physical, operational, and market risks with differential impacts of their respective risks elements. CMAs should test, validate, and certify the stocks kept in the bonded or accredited warehouses with the help of quality control department (which may be in-house or outsourced). First, CMA can keep the produce of aggregators into accredited warehouses and mark a lien on warehouse receipt (WR) which can be produced before a banker to raise the credit. In addition to, CMAs can take a call to dispose of the produce either at spot or futures platform based on prevailing market prices and other conditions on behalf of aggregators (as per bye-laws, which should be prescribed under the WDRA, 2007 to act accordingly). Hence, CMAs roles are very crucial in making the whole value chain functional. CMAs can look at seasonal calendar and historical prices of traded commodities so that they can deliver end-to-end solutions to aggregators, in turn, the latter can pass on the information to producers. This will help immensely to end users of futures or of spot exchanges for choosing or selecting the cropportfolio and modes of marketing the produces. The agency usually charges a commission or service fee, which is linked with performance guarantee for the collateral overseen by the CMA under its lock-and-key arrangement. 4.3. Connecting government agencies with exchanges Government agencies including the Food Corporation of India (FCI), Food and Civil Supplies Departments, State Agricultural Marketing Boards (SAMBs) can directly procure from aggregators at current market prices [besides entering into Price Support Scheme, i.e., Minimum Support Price (MSP)] in collaboration with spot exchanges promoted by commodity exchanges in the year 2006. FCI, State and Central Warehousing Corporations (SWCs, CWCs) can also store the procured produces after issuing warehouse receipt (WR)-a negotiable instrument as per directives prescribed by the Warehouse Development (Regulation) Act, 2007. Two kinds of strategy can be formulated. If aggregators want to store the harvested produces at exchanges
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notified warehouses at respective locations, then WR can act as a shield by arranging the credit from financial institutions at cheap or at moderate interest rates. In alternative manner, FCI, SWCs, CWCs can issue commodity bonds (like potato) which can provide an assured stream of returns in a stipulated time period to avoid the distress sales or crop failure. What exchanges can do that they can open alternative delivery centers in nearby FCI or SWCs/CWCs depots to expedite delivery processes during the post-settlement period. In that case, brokerage fee can be fixed upto a certain limit so that aggregators can earn reasonably a fair amount of commission based on the value of trade executed.

5. Concluding thoughts The fundamental focus of this article was to present the existing debate on farmers participation in commodity markets, as also to present a tentative framework on how the mechanism of participation can be rationalised with some proposed avenues. Every commodity has its own market characteristics, and hence, the avenues narrated here should not be adopted blindly. A primary survey is most important in this regard. It is after only understanding the commodity and its associated market the right framework or model can be adopted. It is indeed realised that for better functioning of futures exchanges in terms of farmers participation, the role of physical markets, collateral agencies, and various government departments cannot be wished away. They can address the challenges of quality assurance and delivery of futures exchanges. While commodity futures markets are expected to play the two important roles of risk management and price discovery, aggregators can reap the benefits of better prices by minimising the risks by either directly participating in the futures markets or indirectly through other agencies. It is further argued that involvement of all the concerned bodies would not only pave the way for better participation of farmers through aggregators but would also harness availability and effective dissemination of information from the futures market. It eventually helps to stabilise and decrease spot price volatility (Dey and Maitra, 2011). It is also understood that availability of different agencies would not serve the purpose; accessibility to them is needed to render the outcome. Nevertheless, stated alternatives presented above are some of the avenues which can accommodate farmers to some extent in the present structures of agricultural commodity futures markets. Policy should weave its strength with industrys inputs to make the implementation
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more effective and efficient. From the authors standpoint, this article would hold its position as a precursor for a reality check in the ground.

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http://ifmr.ac.in/cmf/seminars_conferences/agrisk.html (accessed 20 May, 2011) Dey, Kushankur and Maitra, D. (2011), Price discovery and market efficiency revisited: anecdotes from the Indian commodity futures markets, Commodity Vision, Vol.4 No.4, pp.2234. Economic Survey of India (2009-10), Agriculture and food management, Union Budget and Economic Survey, Ministry of Finance, Govt. of India, available at:

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Newbery, M.G.N. and Stiglitz, J. (1981), The Theory of Commodity Price Stabilization, Oxford University Press, Oxford, pp.1-55. National Commodity and Derivatives Exchange (2011), Margin data, available at http://www.ncdex.com/Market_Data/hist_Margin.aspx (accessed 10 May 2011). Pradhan, R. P. (2009), Stock price and macroeconomic indicators in India: evidence from causality and co-integration analysis, Advanced Data Analysis, Business Analytics and Intelligence Workshop, Indian Institute of Management-Ahmedabad, 6-7 June, 2009, available at: www.iimahd.ernet.in/icadabai2009/DVDBrochure.pdf (accessed 20 May 2010). Raipuria, K. (2001), Report of the group on forward and futures markets, report, Department of Agriculture and Cooperation, Govt. of India, New Delhi, December 2001. Raju, T. and Karande, K. (2003), price discovery and volatility on NSE futures market, SEBIworking Paper Series, 7, available at: http://www.sebi.gov.in/workingpaper/discovery.pdf (accessed 20 Feb 2011) Ramaswami, B. and Singh, J. B. (2007), Hedging and the emergence of commodity futures: the soya oil exchange in India, Review of Futures Markets, Vol.16 No.1, pp.33-54. Roy, A. (2008), Dynamics of spot and future markets in Indian wheat market: issues and implications, Indian Institute of Management, Ahmedabad, available at:

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United Nations Conference on Trade and Development (UNCTAD) (1996), Collateralized commodity financing with special reference to the use of warehouse receipts, report [UNCTAD/COM/84], UNCTAD, Geneva, 2 July 1996 United Nations Conference on Trade and Development (UNCTAD) (1997), The role of farmers associations in commodity price risk management and collateralized commodity finance, available at http://unctad.org/infocomm/francais/academia/docs/farmers.pdf (accessed 2 March 2011). Waugh, F.V. (1944), Does the consumer benefit from price instability? Quarterly Journal of Economics, Vol.58, pp.602-614. World Bank (1999), Commodity risk management in developing countries: a proposed market based approach and its relevance for small states, available at:

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Table 1: Volume (mill. Tonnes) and Value (Rs. lakh crore) of futures trading 2006-07 Commodity Vol. Val. Vol. Val. Vol. Val. Vol. Val. Val. 2007-08 2008-09 2009-10 2010-11

Agricultural Total

502.4 612.9

13.17 36.77

313.9 557.3

9.41 40.66

230.9 686.3

6.27 52.49

291.0 764.9

9.02

14.56

77.26 119.49

Source: Economic Survey of India, Govt. of India

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Table 2: Contract-wise margin requirement MCX

Symbol ALMOND BARLEY

NCDEX

Expiry Initial Tender Expiry Initial Exposure Total Total Date Margin Margin Margin Symbol Date Margin Margin Margin 30-Jun 5 0 BADAM 20-Jun 3.5 1.5 5 5 20-Jun 5 0 BARLEYJPR 20-Jun 5.96 3.25 5 9.21 2020BARLEY May 5 0 BARLEYJPR May 6.06 3.25 5 9.31 GUARSEED 20-Jun 5 0 GARSEDJDR 20-Jun 5.41 2.5 5 7.91 2020GUARSEED May 5 0 GARSEDJDR May 5.46 2.5 5 7.96 MAIZE 20-Jul 5 0 MAIZE 20-Jul 3.9 1.5 5 5.4 MAIZE 20-Jun 5 0 MAIZE 20-Jun 3.96 1.5 5 5.46 2020MAIZE May 5 0 MAIZE May 3.99 1.5 5 5.49 MENTHAOIL 30-Jun 5 0 MENTHAOIL 30-Jun 9.78 2.75 5 12.53 3131MENTHAOIL May 5.83 0 MENTHAOIL May 9.23 2.75 5.83 11.98 POTATO 15-Jul 6.53 0 POTATO 20-Jul 9.51 1 6.53 10.51 POTATO 15-Jun 6.73 0 POTATO 20-Jun 8.39 1 6.73 9.39 1420POTATO May 5.11 5 POTATO May 7.31 1 10.11 8.31 RUBBER 15-Jun 5 0 RBRRS4KOC 20-Jun 4.98 1.5 5 6.48 1420RUBBER May 5 3 RBRRS4KOC May 5.08 1.5 8 6.58 SOYABEAN 20-Jun 5 0 SYBEANIDR 20-Jun 2.78 2.25 5 5.03 2020SOYABEAN May 5 0 SYBEANIDR May 2.81 2.25 5 5.06 SUGARMKOL 20-Jul 5 0 SUGARS150 20-Jul 3.5 1.5 5 5 SUGARMKOL 20-Jun 5 0 SUGARS150 20-Jun 3.5 1.5 5 5 2020SUGARMKOL May 5 0 SUGARS150 May 3.5 1.5 5 5 1919WHEAT Aug 5 0 WHTSMQDELI Aug 3.57 1.5 5 5.07 WHEAT 20-Jul 5 0 WHTSMQDELI 20-Jul 3.61 1.5 5 5.11 WHEAT 20-Jun 5 0 WHTSMQDELI 20-Jun 3.64 1.5 5 5.14 2020WHEAT May 5 0 WHTSMQDELI May 3.68 1.5 5 5.18 Source: compiled from the MCX and the NCDEX on 10.05. 2011, data with respect to margin money are expressed in percentage (%). Bold figures indicate total margin money in %, which shows a sharp contrast in terms of margin amount being imposed by the two exchanges.

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Table 3: Recent imposition of ban on different commodities Commodity Date of suspension/ban Date of recommencement of futures contract Wheat Chana Soy Oil Rubber Potato Sugar Tur Urad Feb, 2007 May, 2008 May, 2008 May, 2008 May, 2008 May, 2009 Jan, 2007 Jan, 2007 May, 2009 December, 2008 December, 2008 December, 2008 December, 2008 October, 2010 Not yet Not yet

Source: Annual Report and Abhijit Sen Committee Report, Ministry of Consumers Affairs, Food and Public Distribution, Govt. of India.

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