In a study published by the Indian Council for Research on International Economic Relations (ICRIER), on August 8, 2019, it was found that there is a need to empower the Farmer Producer Organisations (FPOs) to trade in the commodities futures market.
In her speech for the Union Budget of FY20, the Union Finance Minister, Nirmala Sitharaman, set a target of creating 10,000 FPOs in the next five years (by 2024). The National Bank for Agriculture and Rural Development (NABARD) has already been involved in setting up FPOs in the last few years, having more than 3,000 FPOs. The National Commodity and Derivatives Exchange (NCDEX), for the past few years, has been trying to deepen FPOs’ participation in markets.
Farmer Producer Organisations (FPOs)
Farmers, especially small and marginal ones, do not directly trade in agri-futures market in India. Their small size, lack of trust and understanding of futures market, and dependence on middlemen, are some of the main deterrents. An FPO is thus a legal entity formed by primary producers, such as farmers, milk producers, fishermen, weavers, rural artisans, craftsmen, who take on the role of collectivisation of producers to address the challenges of agriculture such as improved access to investment, technology, inputs, and markets. The FPO can be a production company or a cooperative society or in any other form that provides sharing of benefits among the members.
The FPOs are generally mobilised by promoting institutions/ resource agencies (RAs). The Small Farmers Agribusiness Consortium (SFAC) provides support for the promotion of FPOs. The resource agencies collaborate support from governments and agencies like NABARD to promote and nurture FPOs.
Future Trading in India
The first futures trade by an Indian FPO took place in 2014 when the Ram Rahim Pragati Producer Company—an enterprise started by 3,000 women belonging to self-help groups in a tribal area of Madhya Pradesh—hedged soybean price risk on the National Commodity and Derivatives Exchange (NCDEX).
Between April 2016 and May 2018, when NCDEX began making formal efforts to directly engage with FPOs, the latter had a miniscule 0.004 per cent share of the agri-futures trade at NCDEX. More than half of the FPO futures trade of ` 50.8 crore was in soybeans, while another third was in maize. Bihar, Maharashtra, and Madhya Pradesh account for 92 per cent of the trade.
Some 69 FPOs had traded on the exchange by mid-2018, though 80 per cent of them had only made a single transaction.
Future Market
In futures market, futures contracts are used as hedging instruments in agricultural commodities to safeguard the farmer against a poor harvest. Futures contracts are purchased in the same commodity for the purpose. The Forward Markets Commission (FMC), set up as a regulatory authority for commodity futures market, was merged with the Securities and Exchange Board of India (SEBI), effective from September 28, 2015.
Linking farmers with futures market can be mutually beneficial to both.
* Efficient Price Discovery for Farmers Farmers, when linked with a consistent, liquid, and deep futures market will be able to reap the benefits of efficient price discovery.
* More Liquidity to Market Higher farmer participation will provide more liquidity to the market, helping it achieve its objective of price discovery.
* Removing Middlemen The trading in futures market will help farmers make their cropping decisions based on next year’s prices rather than last year’s rates, thereby doing away with the hold of middlemen and traders and ultimately boosting income for agricultural families.
Study by ICRIER The paper published by ICRIER puts forward a few suggestions for the FPOs, NCDEX, as well as the government for better results.
- Both FPOs and NCDEX need to focus initially on commodities that are not perceived by the government as ‘sensitive’ from the point of view of food security so that minimum disruption takes place in futures markets. This would help them gain confidence in the functioning of futures markets.
- NCDEX needs to identify production centres, build delivery centres around them, and encourage futures trading in these areas.
- Resource institutions involved in educating and hand-holding FPOs in futures trading, themselves need to upgrade their knowledge and skills about the functioning of futures trading.
- Government initiatives like that of Bihar and Rajasthan can help scale the efforts of linking FPOs to futures markets in other regions.
- There is a need to take hints from China, in as to how the country has provided state support in linking small landholding farmers to futures, provided customised products, and reduced price distortions.
- Government’s trading arms can also be encouraged to directly participate in the futures market to give confidence to many others, including FPOs.
The Government of India should have limited intervention in prices and procurement of commodities. The government needs to identify production centres and build warehouses and delivery centres around them in order to encourage futures trading in these areas.