BENEFITS TO FARMERS FROM SPOT & FUTURES EXCHANGES

In Indian Agricultural marketing, the cost of intermediation is too high wherein

the farmer often fails to recover his input cost of the produce while the consumers
end up paying high price for agro produce. This is more than often due to farmer’s
ignorance about the spot prices and what prices his produce could fetch him in
future.

In this scenario, the spot exchanges, with their high degree of sophistication &
linking up with local panchayats are empowering farmers with access to real-time
information on commodity prices and are creating an improved and efficient price
discovery mechanism. Ultimately, the farmer today is able to get an idea of the
ruling prices before he takes the produce to the mandi. Therefore, the farmer is
fully equipped to take an informed decision rather than carting his produce all the
way to a nearby mandi to know a down price but still sell the produce at a distress
price as he cannot carry the same back home for adding up of transportation costs.
Spot trading, therefore would help farmers get better prices for their produce and
prevent distress sales.

Also for procurement of commodities by major agri-business enterprises from

production centres, these spot exchanges create better efficiency in procurement
systems with necessary infrastructure support, thereby bringing down the number
of intermediaries and reducing the cost of intermediation to benefit the farmers a
good remuneration for their produce.

In short, spot exchanges are helping a nationwide price discovery and are acting
as information dissemination tools to help small farmers to take informed
decisions to realize a remunerative price, curtail distress sale, reduce the cost of
intermediation also allowing taking advantage of huge price difference in markets
by allowing to negotiate with a party distant in other market.

On the other hand, futures trading should normally help farmers plan their
cropping pattern, based on forward prices on the exchanges. However, in a
country like India, the ability of farmers to switch from one crop to another based
on forward prices is rather limited. Also, from the time it was sown to the time it
was ready for harvest, farmers would face price uncertainty. A farmer who sowed
his crop in June would face uncertainty over the price he would receive for his
harvest in September. In years of scarcity, he would probably obtain attractive
prices. However, during times of oversupply, he would have to dispose off his
harvest at a very low price. Clearly this meant that the farmer and his family were
exposed to a high risk of price uncertainty. Around the time that his crop is ready
for harvesting, through the use of simple derivative products in futures, it is
possible for the farmer to partially or fully transfer price risks by selling his crop
forward & hedging the risk of fluctuations in the price of his produce.
It was with the objective to deliver benefit to farmers through price discovery and
price risk management that commodity futures trading was thrown open in terms
of the recommendation contained in National Agriculture Policy released in the
year 2000.

While spot prices on the electronic exchange platform would reflect the
fundamentals of demand and supply, to bridge any demand-supply mismatch,
commodity futures market has evolved to enable not only the trader to book
profits, but also extended the same facility to the farmer.

In the case of cardamom, there was a huge price difference between the realised
price for a farmer and the end price for a consumer in North India. After the
introduction of futures trading, the consumer in North and the producer in South
have started negotiating directly through the satellite terminal, and this has
resulted in indirectly raising the level of realisation for the small farmer.

Similarly, as against the target of 16.2 million tones, FCI could procure only 9.2
million tonnes of wheat this year even after Government’s decision to pay a bonus
of Rs 50 a quintal over the MSP of Rs 650 a quintal to the growers. Because the
growers sold their produce to big corporates mainly because of Price
dissemination & Awareness created among them. In this entire process future
exchanges have played a major role in disseminating the present & future prices
through News Channels & Price Tickers.

However, Commodity futures trading cannot exist independent of the physical

market. A strong and free physical market is a prerequisite for a healthy
derivatives market. Therefore hand in hand both spot & futures exchanges are
poised to tremendously benefit the farmers.

Sasi Kiran Lingam

13 September 2006