The Indian Economy Blog

January 6, 2007

Introducing Commodity Futures Markets In India

Filed under: Agriculture,Growth,Politics,Regulatory reforms — Nitin @ 4:46 pm

Setting up a commodity futures market is the first attempt to reform agriculture

Why have reforms not improved the lot of the Indian farmer as much as it has improved, say, the lot of an educated city dweller? One blogger (can’t remember exactly who) made the point very succinctly. Well, because there has been no ‘reform’ in agriculture.

There’s one waiting though. According to PRS Legislative Research, a bill to allow futures trading in commodities, introduced in March 2006, is in parliament. The Acorn has advocated futures markets as a means by which farmers can mitigate some of their risks. Ila Patnaik’s op-ed in the Indian Express suggests that the trading families that have traditionally dominated rural spot markets are attempting to throw a spanner in the works.

In some ways, there is nothing more innocent than futures trading. In a spot market, the buyer and seller agree to do trade at a certain price, and the settlement is done on the spot. In the futures market, the price is agreed upon, but the settlement takes place at a prespecified future date. The classic application involves a farmer who is planting in June and wants certainty about the price at which his goods will be sold at Dussehra. Nobody forces a farmer to use the commodity futures market, but a farmer who chooses to use the futures market in this fashion is happier because of greater certainty.

Normally traders in a region surrounding a town would be the major players in purchase of the product of this region. This trade would typically be dominated by 10 or 20 families. These families would often determine purchase prices. Farmers would have little choice vis a vis the price at which they can sell; indeed farmers might not even know prices elsewhere in the country.

The futures market is a powerful tool for breaking the market power of these families. Futures trading — taking place on a transparent, electronic exchange with nationwide access — brings in a host of new players. Indeed, there are hundreds of people in India who are watching world markets, processing information, and putting trades onto overseas commodity futures markets. Physical proximity to the market becomes a non-issue once an electronic exchange is in operation. Someone in Orissa can be trading guar seed, even though he may have never been to Bikaner which is the traditional trading centre for guar. [IE]

There are umpteen parties and politicians who profess to champion the cause of farmers. The passage of this bill will be a test to their claims.

27 Comments »

  1. Getting agreed to a price today that has to be settled in a future date is the conceptual visualization of commodity future. Managerial skill sets to the farmers should be a theme in vogue of agricultural extension community.

    Comment by M.Lakshmanan — January 6, 2007 @ 7:09 pm

  2. Getting agreed to a price today that has to be settled in a future date is the conceptual visualization of commodity futures. Managerial skill sets to the farmers should be theme in vogue of agricultural extension community

    Comment by M.Lakshmanan — January 6, 2007 @ 7:11 pm

  3. Majority of farmers in rural areas are yet to see a computer.

    Comment by Alex M Thomas — January 6, 2007 @ 10:20 pm

  4. It tooks India long enough to implement this, but better late than never. Interesting the concept of future trading started from Farming when a french Wine merchant started locking prices for his wine produce even before his grapes were ready.

    The link below makes a good reading
    http://en.wikipedia.org/wiki/Futures_contract

    Comment by Anil Passi — January 7, 2007 @ 3:44 pm

  5. I guess you’re misinformed.Commodity futures trading has been going on for quite some time in India–every stockbroker worth his salt has branched out into commodities trading, tnaks to the very low margins. At the moment, volumes are driven more by speculators than by farmers.Am also unsure how futures trading is going to benefit farmers, especially small and marginal farmers who form the bulk of the population.

    Comment by akondofswat — January 7, 2007 @ 8:19 pm

  6. Input costs (of fertilisers, diesel, power, pestisides, etc) have risen while prices of output has not kept pace in proportion, mainly
    due to demand and supply issues. The real culprit is defict financing
    of govts which deprecitates the rupee due to chronic inflation.
    And compared to 70s , expenses of education and medication are too
    high for an average farmer ; also dowry and marriage expenses are
    rising. the major portion of the subsidy of central govts are poured
    into the rich states of Maharastra, Punjab and Haryana (and the richer
    farmers grab a major share) ; the co-operative movement has been
    hijacked by vested intersts and hooligans and force the govt to
    buy from the farmers above market price. In the long run govt is
    unable to finance these excesses and bankrupts and defaults on
    payments. Pricing of sugarcane, cotton, etc are examples and results in distortions in normal market forces. Over expansion by farmers
    financed by private lenders add to the misery.

    Over the decades govts have poured billions into agriculture and
    irrigation sector. But the results do not match the costs. Corruption
    and leakages in all forms of govt intervention has defeated the
    objective. Fertiliser subsidy issue is in a mess and many fertiliser
    companies are deep into red and bleeding while middlemen and bureacrats
    mint money from shady deals and leakages. Poor farmers loose while
    richer farmers make good..

    And costs are borne by the nation in the form of taxes and inflation.

    Land fragmentation due to short sighted land ceiling acts also
    complicate the situation.

    the overall sitation is too complex and is very difficult to
    assess the real causes and solutions….

    Rajaji warned us of all this in the 50s and opposed statism and
    socialistic polices of govt, esp the land ceiling acts and setting
    up of govt PSUs at enormous cost (mostly borrowed or printed money.

    The Nandas (of Escorts) group were running a very successful, high tech, agri-farm in UP in the 70s. (some 800 acres) ; but were forced to
    abandon and dismantle the farm due to opposition from socalistic
    policies of then govt and rural land ceiling acts…

    and the Bhopal disaster (1984) was mainly due to lack of proper
    exit policy for the ailing company, which was not allowed to
    dismantle and sell its factory in spite of losses and being
    unviable. Union Carbide was forced to maintain and run the unit
    relcutantly and half-heartedly. And the cynical bureacrats and
    management reulted in this tragedy which would not have occured
    if there is a rational exit policy for companies…

    Man will do the rational thing after trying all other options…..

    Comment by K.R.Athiyaman — January 8, 2007 @ 1:06 pm

  7. Mr Athiyaman

    Umm… what is the connection between the blog post and your comment?

    Comment by Prashant — January 8, 2007 @ 1:23 pm

  8. to get a wholesome picture about the problems of agri sector in India.
    commodity trading is one step in solving the complex problems.

    Comment by K.R.Athiyaman — January 8, 2007 @ 8:19 pm

  9. Multi Commodity Exchange has been around for the last few years but I am not sure about its accessibility to small farmers.

    Maybe with the advent of Contract farming, poor farmers will finally be able to mitigate some of their risk.

    Comment by Mr. V — January 9, 2007 @ 1:58 am

  10. Here is an interesting paper from the Indian Statistical Institute comparing the Indian soya oil futures market to its more developed counterparts.

    http://www.isid.ac.in/%7Eplanning/workingpapers/dp06-03.pdf

    Comment by Nanubhai — January 9, 2007 @ 2:02 am

  11. Also, see:

    http://www.ft.com/cms/s/830e2432-9a50-11db-bbd2-0000779e2340.html

    Comment by Nanubhai — January 9, 2007 @ 2:04 am

  12. and the communists are, as usual vehemently opposing futures trading
    in commodity markets, blaming it for the price rise. How valid is
    their accusation and how much black money and speculation enters
    and distorts the market ?

    Comment by K.R.Athiyaman — January 9, 2007 @ 8:48 am

  13. i would ay that i do not entirely agree.
    fundamental problems of agriculture cannot be resolved with commodity futures.
    how much comodity futures will be helful to illetrate and dying farmers, who mostly do not have access to basic necessities, what about these technologies?
    more importantly, can speculation, short selling or scams be ruled out, and just imagine what will be their impact on the already distressed farming sector.

    Comment by Aashish Gupta — January 9, 2007 @ 6:59 pm

  14. after a 40 year ban, commodity futures were re-introduced in India 4 years ago. there are 2 major exchanges NCDEX and MCX where futures transactions of the order of Rs 12,000 per day (combined)takes place. agricultural commodities account for about 25% of this. it has not yet gained the kind of depth that is desirable, but we are getting there. there is a need for more warehouses to add depth. There is a need to educate farming communities on how to use the exchange to hedge their price risks. i do write on commodity futures on my blog among other things. you can look up at http://www.amitsinha64.blogspot.com

    Comment by amit sinha — January 10, 2007 @ 3:57 pm

  15. To use the modern trading mechanisms, consolidation has to happen in Indian agriculture. You cannot have successful market mechanisms with 500 million people working on small 1 acre fields. Land ceilings need to be raised/removed and significant work has to be done to move the majority of the people from agriculture (but as Singur issue shows, it is a hot-potato for politicians).

    Once agriculture is trimmed & consolidated, such modern trading mechanisms will have greater impact. On a related note, by having organized retail growing at an humangous rate, futures would be made by default MoUs, where companies like Reliance cut deals with farmers much before they sow. So, Organized retail industry can supplement futures indices in a great way.

    Comment by Balaji Viswanathan — January 11, 2007 @ 7:23 am

  16. the development of the commodity market, is a bit like how the media is shaping the development of policy/ functioning of the government. i believe the commodity market’s effectiveness will improve with time. after all what is it doing – price discovery! but it takes a while for these price signals to transmit themselves into actions by the real world. and if the price discovery interactions dont change the dynamics of the interaction between the sellers and the buyers ( in this case, imports clearly react to these signals readily, spurring domestic production or curbing demand will take some more time or more stable trends in the signals for change to happen because of the same)
    indian agriculture is steeped in tradition quite a lot, for it to change will take time, but when it does, the change is not temporary either (look at our foodgrain security and milk production, to gauge this phenomenon).

    however as there has not been too much of investment or vision of agriculture which is being presented to the agriculture by our leaders (whoever they may be) there has been no grand scale movement either.the indian stock markets have done quite well in channeling investments into the corporate sector. if people cannot give the vision/ direction, maybe the commodity markets should also be given a chance to try and set the same for agriculture !

    Comment by envenkat — January 14, 2007 @ 11:59 pm

  17. It is understood that futures trading in agricultural trading will help in having price certainity. But how it is going to help small and marginal farmers? Big farmers have already access to surrounding big towns to an extent and they also have a say in the fixing up of the prices for their produce as they have little more knowledge than their counterparts. But how the small and marginal farmers who even don’t know about the latest innovations in agriculture and neither have the capacity to use them will use electronic trading platforms for future trading? Is there any othe proposal in the parliament to train the farmers first otherwise it is just another way of exploiting the farmer and benefiting the middle-man.

    Comment by Deepali — January 17, 2007 @ 3:46 pm

  18. Does commodity futures trading automatically mean direct participation by farmers? I thought that there were selling entities that basically consolidated the output of farmers. I can’t imagine even in a country like the US, where commodity futures are the norm, farmers having the access, time, skill and sophistication to directly participate in the market.

    How does it work in India, if indeed commodities trading is still going on as posted by blogger, akondofswat?

    Comment by Sarat — January 17, 2007 @ 11:20 pm

  19. Can’t even small farmers use futures to secure the inputs they need at a fixed price?

    Seeds, fertilizers, etc?

    Comment by alphie — January 18, 2007 @ 4:33 am

  20. What makes you think that the farmer will honour the contract price? If the price goes above the contract price, you will hear protests about the ‘greedy’ speculators who did no work and now are benefiting from the farmers’ hard work. The commies will have a field day.

    All the institutions and tools of the west are useless in India – they need a culture similar to the west which will never ever be achieved in India.

    Comment by raja — February 4, 2007 @ 8:47 pm

  21. i do agree with the opinions stated by you .I need a sort fo help in this matter as i wish to write a paper on it ….kindly send me certain material references onthe same article

    Comment by Ranjeet singh rana — February 15, 2007 @ 1:50 pm

  22. how much does it cost to buy an indian?

    Comment by Jeff Schneider — March 30, 2007 @ 12:34 am

  23. sorry that was a mistake,
    i meant, how much does it cost to buy a car in india, but accidentally deleted it

    Comment by Jeff Schneider — March 30, 2007 @ 12:38 am

  24. i want to do dissertation on this topic need some more informations and a good topic name. can anyone help me regarding this, how can i do the research and what are the informations i would require to come to a conclusion and the result of the impact of commodity future in indian economy.

    Comment by vijay — April 21, 2007 @ 10:07 am

  25. india is india. india is neither china nor usa. india has democracy as vibrant as usa but indian agriculture holdings are not alike usa. china don’t have indian political system. so india needs indian soloutions. reforms has eluded agriculture secor totally in india. whether it is credit , agriculture markets, or water supply etc. what is needed is reforms in agriculture if india wants to be superpower in next 5 yrs.

    Comment by sunil porwal — September 25, 2007 @ 9:07 am

  26. [...] Bonus Link: Setting up a commodity futures market is the first attempt to reform agriculture in India [...]

    Pingback by Ban on edible oil futures won’t help « India, Latin America and Caribbean - News, Views, Opportunities — April 5, 2008 @ 7:18 am

  27. Like Micro finance, maybe we could have micro trading to reach out to small farmers!

    Comment by TVS — May 17, 2008 @ 1:26 am

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