Reaching the Benefits of Commodity Derivatives

to Indian Farmers

S Sivakumar, ITC Limited May 2006

 Risk: Farmers’ Perspective

Need: It will be good if I can be assured of my post-

harvest price when I am making my planting decision

 Solution: Sell Futures

Need: God forbid, my crop production suffers because

there is too little rain, or too much rain, or rain at wrong
time, or some pest / insect attack. Market price goes up,
but I get stuck with smaller crop and lower price

 Solution: Buy Put Option

 Recommendation: Permit Options

S Sivakumar, ITC Limited May 2006

 Execution: Farmers’ Perspective

Need: My objective is price protection for what I am
producing, I can’t manage Exchange margins etc., I
would simply want to deliver my goods & settle
 But: My lot size is too small to take it all the way to one of
the Exchange delivery centre. Cost is too high for that
long distance

Also: The variety / quality that I produce is not the
Exchange “grade”. In fact my grade fetches me better
price
 Solution: I want to sell & deliver to my regular buyer, if he
can give me an option embedded forward price
 Recommendation: Permit Cash Market Contracts where
pricing could be in the nature of OTC Options
S Sivakumar, ITC Limited May 2006
 Option Pricing: Farmers’ Perspective

Need: While I understand the logic of Option premium,

very often the premium is so high, the option doesn’t look
worthwhile

 Solution: I don’t mind giving up some upside to reduce

the premium

Possibility: Write options in coupled transactions to

reduce the cost by getting some premium

 Structures: Caps, Barriers, Averages etc

 Recommendation: Do not restrict writing options, in case

of coupled transactions
S Sivakumar, ITC Limited May 2006
 Selling: Farmers’ Perspective

Need: I end up selling immediately after harvest, as I do

not have storage capacity, or because I need cash,
although I know that the price will be higher a few weeks
later

 Solution: Delink Product Delivery, Cash Payment,

Pricing transactions

 Possibility: I can then deliver soon after harvest, take

cash when I want, price when I think it is highest

 Recommendation: Reform APMC Act to facilitate

flexibility to delink. Warehouse Receipt negotiability is a
precondition too.
S Sivakumar, ITC Limited May 2006
 Downside of ignoring these needs

Uncertain Cash flows to farmers shall result in people
moving away from farming business resulting in:
– lower domestic production leading to higher inflation
– higher dependence on imports, leading to trade
imbalances for the Country (larger deficits in BoP)

Not paying attention to these needs of farmers shall
increase disparity between rich and poor in the country
resulting in:
– Social unrest
– Political tensions

As 57% of Indian workforce is in agriculture, uncertain
cash flows to farmers shall result in lower growth rates
for the sector slowing down the economy
S Sivakumar, ITC Limited May 2006
 Conclusion

Fragmented Size, Geographic Dispersion, and

Heterogeneity in Circumstances are the fundamental
characteristics of Indian farmer

Market institutions (futures, options, insurance etc) and

Regulatory Framework (APMC, WHR etc) need to be in
place to make the Indian farmers globally competitive

Need Institutional Intermediaries who can bundle (i) cash

market transactions, (ii) gateway to exchange
transactions, (iii) OTC options (iv) physical reach into
the villages

S Sivakumar, ITC Limited May 2006

ITC eChoupal is one such potential Intermediary

S Sivakumar, ITC Limited May 2006

 What is eChoupal?

A two-tier infrastructure, specifically designed…

– to deliver multiple services for both farming and farm
produce marketing in an integrated manner
– to suit the unique character of rural India,and
– to cater to the evolving needs of demand driven food
& agriculture value chain

More importantly…
– Farmers can access information and knowledge free
of cost,
– and have a freedom of choice when it comes to
transactions
– ITC recovers the costs by unlocking value from
streamlining the supply chain
S Sivakumar, ITC Limited May 2006
 Characteristics of Rural India

Farmers are small

– impacting their bargaining power

Villages are geographically dispersed
– impacting real-time access to information

Variation in circumstances (agro-ecology, resources)
– impacting costs & scope of customisation

The infrastructure is also weak, and still evolving

– Physical, Social, Institutional

S Sivakumar, ITC Limited May 2006

 And historically, the markets evolved
in this context

The traditional middlemen…
– made up for the lack of infrastructure
– lent money, sold inputs and bought output
– but, created an exploitative cycle of dependency

The subsequent institutions set up by the Govt…
– were more appropriate for the supply driven value
chains in an economy of shortages
• e.g. mandi (a fair price discovery mechanism, but
the sunk cost of transport limits choices)
• e.g. agri extension system (delivered great results
during Green Revolution days, where the
communication needs were more generic)
S Sivakumar, ITC Limited May 2006
 Demands of the globalising trade
1. Transition from supply-driven to demand-driven value
chains
– Quality as per customer needs (& changing diets)
– Traceability to farms & farm practices (SPS, TBT)
2. Competitiveness in Price / Value equation
– Increased farm yields
– Lower transaction costs along the chain
 Further accentuating the need for…
– Customised knowledge
– Real-time & relevant information
– Access to quality inputs at competitive prices
– Effective vertical coordination of the value chain
– Efficient Price discovery & risk management
S Sivakumar, ITC Limited May 2006
ITC eChoupal, by leveraging Information
Technology, takes on these challenges

By virtually aggregating the small farmers and linking
them to various entities in the supply chain
• Improving transaction efficiency

Delivering real time information to many farmers

directly across geographies
• Facilitating informed choices

Provide customized solutions for a farmer’s specific

need with the help of experts
• Increasing farm yields

S Sivakumar, ITC Limited May 2006

 Reaching IT to the Farmer – Tier 1

eChoupal @ Village Level (Within 5 KM reach of all
target farmers)
– Sanchalak, a farmer selected from within the
village & trained, interfaces between Computer
and the Community
– Computer with Multimedia & Internet Access
– Additional investments in Solar Power & VSATs to
overcome weak infrastructure

S Sivakumar, ITC Limited May 2006

 Reaching IT to the Farmer – Tier 2

Choupal Saagar @ Cluster level (within 30 KM from all
Choupals)
– Samyojak, a trader appointed by ITC, provides
various services under ITC supervision e.g. Quality
Testing, Electronic Weighment, Storage, Payments
– New made-to-design hubs being built, to overcome
the shortage of space in the traditional warehouses
for parking (tractors / trollies) and farmer utilities,
besides many operational problems

S Sivakumar, ITC Limited May 2006

 ITC eChoupal Services - 1

Direct Marketing
– Price discovery in Village Video
• Quality assessment by the Sanchalak Video

– Produce delivery at Choupal Sagar

• Transparent weighment & instant payment
• Sanchalak aggregates and organises transport for
very small farmers

– Links Commodity Futures Exchanges

• Currently price dissemination
• Gateway for transactions at appropriate time
S Sivakumar, ITC Limited May 2006
 ITC eChoupal Services – 2

Training the Sanchalaks in appropriate production
technologies
– who in turn disseminate to other farmers

Custom built local language web portals contain
– weather conditions forecasts together with
recommended actions & contingent plans
– frequently asked questions on farming

Web casting of specially prepared video films on best
farming practices Video

Testing facilities (new as well as access to existing)
– Soil, germination, virus etc

Supply chain for quality farm inputs Video
– Innovative schemes like self reliance in soy seed
S Sivakumar, ITC Limited May 2006
The Financial Products Portfolio

Insurance
– Life
– General
• Weather
• Crop
• Motor
• Health

Credit

Credit Rating Services

S Sivakumar, ITC Limited May 2006

All these services are delivered through
Collaborative effort

18 Agri Input Companies (from both

Public & Private sector)

State Departments of Agriculture

State Agricultural Universities

Some Krishi Vigyan Kendras

National Research Centers of ICAR

Indian Meteorological Department

S Sivakumar, ITC Limited May 2006

Thank You

S Sivakumar, ITC Limited May 2006