How producer firms can help growers by taking part in futures

Farmers access to futures markets for managing price risk appears to be minimal despite aggregation efforts through officially sponsored projects. This is attributable to two things: financial literacy of farmers and the market in general.

Though indirect participation through access of futures prices from price ticker boards or online price portals is an alternative to change the attitude of farmers towards investment and risk management, poor awareness comes in the way of realising the benefits.

However, with a renewed interest on mobilisation of collective groups and market access of smallholders following the emergence of ‘Producer Companies’ (PCs), direct and indirect participation may gain ground.

The Multi Commodity Exchange (MCX) and the National Commodity and Derivative Exchange (NCDEX) have tried to connect farmers with the exchanges through aggregators. For example, HAFED – an apex producer cooperative in Haryana – participated in the NCDEX wheat futures during 2006-2007 to hedge the member-producer risks.

A combination of the closing out position and short hedging helped the cooperative reap profits of ₹108 a quintal.

MCX took the initiative in 2008 to promote awareness among cotton growers in Gujarat. In collaboration with Cardinal Edge, a consultant and Aga Khan Rural Support Programme-I, an aggregator, Nabard funded the project; opening of a trading (demat) account was facilitated by Kotak Securities.

However, the initiative was short-lived due to the loss in daily settlement.

NCDEX also made a similar effort in association with the Institute of Financial and Management Research and the aggregator, Self-employed Women’s Association in Gujarat.

The project aimed to assess the impact of futures price access on the spot price expectation; it observed a significant change in price expectation between treatment and control farmers in project areas of Gujarat. However, the initiative came to an abrupt end.

While direct participation of farmer organisations in exchange-traded derivative markets is yet to take off, some south-based cooperatives are likely to continue their participation, especially in rubber and pepper contracts.

Despite the efforts of MCX to accommodate a group of farmers in mentha oil futures during 2007-2008, the speculative intent of the market agents stopped them from participation.

So, it is clear that after 2010, except for a few plantation cooperatives, the participation of aggregators in the market remains insignificant; this should be an area of concern for researchers and policy makers.

Meanwhile, the Small Farmers’ Agribusiness Consortium started promoting farmer organisations or Producer Companies (PCs) to enhance the market orientation of small growers. As of now, some 483 PCs have been registered to exploit economies of scale and scope of agricultural and allied markets. Amongst a large number of PCs, a few have been exposed to forward/futures markets albeit with a mixed experience.

As thickly (liquid) traded futures markets in the exchange platform include soyabean, refined soya oil, rapeseed-mustard, cumin seed, castorseed, and coriander, among others, farmer organisations in Gujarat, Rajasthan, and Madhya Pradesh could have harnessed the market potential.

Moreover, the traded commodities have mature physical or spot markets in and around these states.

For example, Ram Rahim Pragati Producer Company of Dewas in Madhya Pradesh promoted in 2011 has become a member of NCDEX in forward trading. The organisation took a short position in soya forward trade, although inappropriate order matching could not materialise the trade. However, they entered an indigenous forward contract in (non-pesticide managed) wheat with a Bangalore-based firm.

Samarth Kishan Producer Company is another example that has been capitalised in seed production and certification business since 2006. The collective enterprise is being exposed to forward trading and commodity-based financing.

Ajaymeru Kisan Samruddhi Producer Company of Ajmer in Rajasthan might draw a parallel stance as it is also a member of NCDEX forward trading and intends to participate in the current fiscal.

Development Support Centre of Gujarat, on the other hand, has made efforts to mobilise a group of farmers in castorseed and cumin forward markets.

Commodity exchanges could make the PCs more aware of the utility of exchange-traded products. A prudent regulation put in place by the new regulator could help protect the interests of farmer organisations in the long run.

The writer is Post-Doctoral Fellow at the Centre for Management in Agriculture of IIM Ahmedabad. Views are personal.