The Forward Markets Commission, Agriculture Department and the National Commodities Exchange recently got together to organize a one day workshop (December 17) on forward markets for agricultural commodities at Kolkata to sensitize leaders and professional managers of producer co-operatives, agriculture department officials, corporates and media about the pros and cons of forward trading in agriculture, but most of all to clear the multiple apprehensions that most people harbour about forward trading in primary commodities. Although most people engaged in the sector have some idea of what forward trading is, many are not aware that there is now a regulatory mechanism for forward trading under the auspices of the Forwards markets Commission.
First things first. What is forward trading? Does it involve speculation? Is it based on ‘rational assumptions’? Can it be manipulated by a few players? What should be the extent of government involvement in this sector? When ‘futures’ are allowed in the global context, is it practical to insulate the domestic market in primary commodities from this trend?
This brings us to the basic issue regarding markets and exchange mechanisms. As societies evolve, and the production function becomes more specialized, it is not possible for the consumer and the producer to be in direct touch with one another. Therefore intermediaries come to play an important role in consolidating the produce and bringing it to locations where the consumers find it convenient to make the transaction. As consumers move from buying primary commodities to goods which are value added, or involve some branding and processing, the markets also become specialized into primary markets and secondary markets. Intermediaries also take a more specialized profile and begin to look at objective parameters of quality, quantity, scale, packaging, durability and storage and transport costs. However before IT and mobile telephones became ubiquitous, the information about most parameters was confined to the specialized guilds, and it was not possible for any single entity to become truly integrated. Thus forward and backward integration in agriculture and other primary commodities) is as much a function of technology, as it is of institutional arrangements like co-operatives and corporates engaged in agribusiness.
What is forward trade? Put simply, it is a transaction in which the commodity is booked well in advance at rates which are mutually agreed upon by the owner of the stock, and the intending buyer. Unlike in a regular transaction, the exchange does not take place immediately. But a forward trade is very much like a contract as it is normally understood in the conventional sense. There is an offer to sell, and an offer to purchase, and the consideration amount and time of transaction is also underlined. In fact, it is more specific than a normal contract, because a normal contract assumes that the exchange will take place within a reasonable time after the ‘consideration’ is paid. Here it becomes more specific, and the transaction dates are stated well in advance.
The obvious question that most people ask is: how does this help the farmer, because given the size and structure of land holdings in our country, it may not be possible for the farmers to transact directly with the larger agribusiness organizations or consolidators. Moreover why would they want to save a few pennies dealing with hundreds of thousands of primary produces, rather than buy from an intermediary they know and trust, which also does the primary level value addition by grading, sorting and making appropriate lot sizes of the produce. The answer is that there are indirect, but definite advantages to the primary producer, because ‘price discovery’ over the next few months becomes clear and transparent. Thus the producer of a wide range of primary commodities gets an idea of what the ruling price is expected to be at the time of harvest, and the farmer can take a considered decision on what and how much to grow. Therefore every time a ‘sowing decision’ has to be taken, the farmer can make a more informed choice. Of the two risks (monsoon and markets) that farmer fears the most; market proofing is more amenable to institutional interventions. Moreover it is not only possible, but also highly desirable that farmer’s organizations like co-operatives take the lead in this direction. AgriMatters is pleased to place on record the pro-active role which NAFED has taken in this regard. NAFED is not only participating in many of these transactions, it has also taken an ‘ownership, promotional and management role’ in some of the exchanges that are currently engaged in this task.
However it must be pointed out that in spite of what has been stated above, there is a fair amount of apprehension regarding the impact of futures trading on current prices. Even the nodal Ministry in which the Forward markets Commission is anchored (The Ministry of Food and Consumer Affairs)occasionally bans forward trade in select commodities, often in response to a political hue and cry when items of mass consumption like onions, sugar, potatoes and cereals become a matter of public concern. However there is little empirical evidence to show any correlation between the ban on futures trading and arresting the price rise. Markets are becoming more mature, and now that satellite imageries of net area sown under different crops throughout the world is available at the click of a mouse, the determination of current prices is a function of rational decision making on the part of informed speculators who hedge their risks. However their ‘speculation’ is based on a feedback loop – anticipated production, consumer choice and preferences, purchasing power, government policy and related issues.
What is preventing us from mainstreaming this into the agriculture marketing system? The answer is familiar. Our old and antiquated APMC Act which prohibits farmers from making any transaction outside the designated ‘markets’. AgriMatters hopes that this hurdle is crossed at the earliest so that farmers can access benefits of new technologies and intuitions to enhance their choices.