Post on 14-Jan-2016
description
transcript
Date: 1College of Agricultural Banking, RBI, PUNE
OVERVIEW OF RISKS OVERVIEW OF RISKS IN AGRICULTUREIN AGRICULTURE
OVERVIEW OF RISKS OVERVIEW OF RISKS IN AGRICULTUREIN AGRICULTURE
Manas Ranjan Mohanty MEMBER OF FACULTY
CAB, RBI, PUNE
Where risk arises in agricultureWhere risk arises in agriculture
• Small land holdings• Poor soil quality • Inadequacy / improper quality of inputs (seed/ water/ fertilisers/
pesticides/ credit)• Lack of extension (knowledge/ technology)
Where risk arises in agricultureWhere risk arises in agriculture
• Due to seasonality and the gestation period• Variation in output• Variation in market price
• Post-harvest issues (storage/ transport/ processing/ marketing)
The policy environment is also a source of risk..
Date: 3College of Agricultural Banking, RBI, PUNE
Date: 4College of Agricultural Banking, RBI, PUNE
Major Risks in agricultureMajor Risks in agriculture
Production Risk
Quantity produced affected directly
Natural calamities Weather conditions Pests, diseases Other localised events
Date: 5College of Agricultural Banking, RBI, PUNE
Major Risks in agriculture Major Risks in agriculture
Price (Market) Risk
• Fluctuations in price of agri produce– Markets – local & global– Agri-business/ agri-export and market risk– Market risk in post-WTO scenario
Date: 6College of Agricultural Banking, RBI, PUNE
How production risk is managedHow production risk is managed
Individual level
• Diversification• Crop diversification• Subsidiary commercial activity (including
allied activities)
• Sale of assets• Raising debts
Date: 7College of Agricultural Banking, RBI, PUNE
How production risk is managedHow production risk is managed
System level
• Insurance– Crop insurance – Income insurance – Weather/ rainfall insurance
Date: 8College of Agricultural Banking, RBI, PUNE
How price risk is managed?How price risk is managed?
•Administered price mechanism•Minimum Support Prices
•Contract farming
•Commodity futures market
Date: 9College of Agricultural Banking, RBI, PUNE
Crop InsuranceCrop Insurance
• A means of protecting the farmers against uncertainties of crop yields arising out of natural factors beyond their control.
• Compensation is paid to the farmers when the actual average
yield of an area of a particular crop is less than the guaranteed yield.
Date: 10College of Agricultural Banking, RBI, PUNE
Crop Insurance - conceptsCrop Insurance - concepts
• What is the basis of coverage ? • Individual basis/ area basis• Data availability• Moral hazard issue
• Which crops are covered ?• All crops or some crops
• Who is eligible for coverage ?• Loanee/ non-loanee farmers
• What type of risk is covered ?• Natural calamity and other risks
Date: 11College of Agricultural Banking, RBI, PUNE
Crop Insurance – concepts Crop Insurance – concepts
• How is the threshold yield determined ?• Based on past performance
• How is the premium determined?• Actuarial method? Or arbitrary determination?
• Whether premium subsidy is available?• For small and marginal farmers
• Who is the implementing agency
Date: 12College of Agricultural Banking, RBI, PUNE
Crop Insurance – Earlier schemesCrop Insurance – Earlier schemes
Crop insurance by GIC (1972-1979)
Individual basis (6 states)
Cotton, groundnut, wheat, potato
Farmers: 3110Premium: Rs 4.5 lakhClaim: Rs 37.9 lakh
Pilot Crop Insurance Scheme (1979-1985)
Area basis (13 states)Loanee onlyVoluntary50% premium subsidy for SF/MFOptional for States
Cereals, Millets, Oilseeds, Cotton, Potato and Gram
Farmers: 6.27 lakhPremium: Rs 1.97 lakhClaim: Rs 1.57 lakh
Comprehensive Crop Insurance Scheme(1985-1999)
Area basis (17 states)Loanees compulsory50% premium subsidy for SF/MFOptional for States
Cereals, pulses, oilseeds
Farmers: 7.6 crorePremium: Rs 403.6 crClaim: Rs 2303.4 cr
Experimental Crop Insurance Scheme (1997-98)
Area basis (5 states, 14 dists)Only for SF/MF100% premium subsidy
Same as CCIS Farmers: 4.5 lakhPremium: Rs 2.84 crClaim: Rs 168 cr
Date: 13College of Agricultural Banking, RBI, PUNE
National Agricultural Insurance National Agricultural Insurance Scheme (NAIS or RKBY)Scheme (NAIS or RKBY)
• Implemented since Rabi 1999-2000
• Implemented by Agriculture Insurance Company of India Ltd (since 2003)
• Cereals, Millets, Pulses, Oilseeds, Sugarcane, Cotton & Potato.– Other annual Commercial / annual Horticultural crops subject to availability of past
Yield data
• States to adopt the scheme– Compulsory for loanee farmers– voluntary for non-loanee farmers
• Coverage on area basis (Target – Gram Panchayat level)
Date: 14College of Agricultural Banking, RBI, PUNE
National Agri Insurance SchemeNational Agri Insurance Scheme
• Comprehensive risk insurance– Area basis for widespread calamities– Individual basis for localised calamities
• Premium dependent on crops– Flat rates for cereals, pulses – High for commercial/ horticultural crops (actuarial basis)– Premium subsidy for small & marginal farmers
• Crop cutting experiments to estimate crop yield
National Agri Insurance SchemeNational Agri Insurance Scheme
• Average yield :– Moving average of yield for past three years (rice, wheat) or five years (other
crops)
• Levels of indemnity:– 90% - low risk– 80% - medium risk– 60% - high risk
• Threshold yield:– Average yield X level of indemnity
Date: 16College of Agricultural Banking, RBI, PUNE
National Agri Insurance Scheme National Agri Insurance Scheme
Sum insured:
• Minimum coverage is the loan disbursed by the bank as per the Scale of Finance.
• Farmers can opt for higher coverage up to the value of Threshold Yield at flat rate. Value of threshold yield calculated by multiplying with MSP or market price (where MSP is not there) during last year.
• Coverage up to value of 150% Average Yield is also available. Premium is charged on actuarial rates for sum insured exceeding value of Threshold Yield.
National Agri Insurance Scheme National Agri Insurance Scheme
• 'Indemnity' to the farmer is calculated as per the following formula :
• Shortfall in Yield X Sum Insured Threshold yield
{Shortfall in Yield = 'Threshold Yield - Actual Yield' for the Defined Area}.
Date: 17College of Agricultural Banking, RBI, PUNE
Date: 18College of Agricultural Banking, RBI, PUNE
National Agri Insurance SchemeNational Agri Insurance Scheme
Rabi 1999-2000 to Rabi 2009 – 2010 (Data as o0n August 31, 2010):
No of farmers covered 15.86 crore
Sum insured Rs 1,86,934 cr
Premium collected Rs 5,266 cr
Claims paid Rs 18,420 cr
Premium subsidy Rs 485 cr
Farmers benefited 4.48 crore
Date: 19College of Agricultural Banking, RBI, PUNE
Issues in crop insuranceIssues in crop insurance
• Product Design
– Pricing – can it be actuarial?– Compulsory coverage – a disincentive?– Credit-based insurance at present– Claims settlement (often a lengthy and cumbersome process)
Issues in crop insuranceIssues in crop insurance
• High basis risk [difference between the yield of the Area (Block / Tehsil) and yield of the individual farmers].
• Delivery channels – Banks at present– Can there be other channels?
Date: 20College of Agricultural Banking, RBI, PUNE
Date: 21College of Agricultural Banking, RBI, PUNE
Weather/ Rainfall Insurance Weather/ Rainfall Insurance
• Indian agriculture is extremely sensitive to rainfall.
• Above sixty percent of cultivated area is heavily dependent on
rainfall.
• Rainfall variations accounts for more than 50% of variability in crop
yields.
• Rainfall problems accounted for 90% of claims under the Crop
Insurance program (CCIS and NAIS).
Date: 22College of Agricultural Banking, RBI, PUNE
Weather/ Rainfall InsuranceWeather/ Rainfall Insurance
• Index-based insurance products (Based on historical data, the yield and rainfall are correlated to arrive at a rainfall index)
• Payout not linked to loss verification – speedy settlement of claims• Use of RFIs/ NGOs/ SHGs for delivery• Not linked to crop loan
• Implemented on a pilot basis by ICICI-Lombard & also by AICI (Varsha Bima) in a few states
Varsha BimaVarsha Bima
• Covers anticipated shortfall in crop yield on account of deficit rainfall• Introduced in 2005; administered by AIC• Aimed at cultivators for whom NAIS is voluntary• Coverage through RFIs• Various coverage options available• Pre-specified sum insured (between cost of production and value of
production)• Payout based on rainfall data within a month of indemnity period.
Date: 23College of Agricultural Banking, RBI, PUNE
Weather Based Crop Insurance Scheme Weather Based Crop Insurance Scheme (WBCIS)(WBCIS)
• Provides payout against adverse rainfall incidence (both deficit & excess) during Kharif and adverse incidence in weather parameters like frost, heat, relative humidity, un-seasonal rainfall etc. during Rabi.
• Technical challenges in designing weather indices and also correlating weather indices with yield losses. Needs upto 25 years’ historical weather data.
• Weather data as observed at Reference Weather Stations (RWS)
Date: 24College of Agricultural Banking, RBI, PUNE
Modified NAISModified NAIS
• Notified in September 2010 by GOI• To be implemented on pilot basis during Rabi 2010-11 in 50 identified
districts• Actuarial premiums to be paid for insuring crops and hence claims
liability on insurer• Unit area of insurance for major crops to be village/ village panchayat• Indemnity amount to become payable for prevented sowing/ planting
risks and for post harvest losses, due to cyclones
Date: 25College of Agricultural Banking, RBI, PUNE
Modified NAISModified NAIS
• Payment up to 25% of likely claim under MNAIS as advance for providing immediate relief to farmers
• Uniform seasonality norms to be applicable for both loanee and nonloanee farmers
• More proficient basis for calculation of threshold yield (average yield of last seven years excluding upto two years of declared natural calamity)
• Minimum indemnity level in case of MNAIS of 70% will be, instead of 60% as in NAIS.
Date: 26College of Agricultural Banking, RBI, PUNE
Commodity-specific insurance productsCommodity-specific insurance products
• Wheat insurance• Mango insurance• Potato insurance• Grapes insurance• Coconut insurance• Rubber insurance• Coffee insurance
• Mostly rainfall index based schemes
• Several schemes implemented by AICI Ltd.
Date: 28College of Agricultural Banking, RBI, PUNE
Managing Market Risk – Futures MarketManaging Market Risk – Futures Market
Futures contract is a derivative contract.
It is an agreement between two parties to buy or sell a commodity of
a specified quantity and quality at a specific time in future at a
specific price through the Exchange.
It differs from a simple “forward” contractExistence of an Exchange
Standardisation of contract terms
Date: 29College of Agricultural Banking, RBI, PUNE
Futures ExchangeFutures Exchange
Platform for buying & selling of standardized futures contracts of various
commodities.
Clearing house - Guarantees trade
No credit risk
No delivery risk
Governed and regulated by
Own Rules, Regulations, Bye-laws
Regulatory Body (Forward Markets Commission)
Date: 30College of Agricultural Banking, RBI, PUNE
Futures contractsFutures contracts
For the seller of commodities:
• The holder of the contract has acquired the obligation to sell the underlying commodity at the current price.
• He will profit if the market price of the commodity declines before the future date.
Date: 31College of Agricultural Banking, RBI, PUNE
Futures contractsFutures contracts
For the buyer of commodities:
• The holder of the contract has acquired the obligation to buy the underlying commodity at the current price.
• He will profit if the market price of the commodity goes up.
Date: 32College of Agricultural Banking, RBI, PUNE
Futures MarketFutures Market
• Margin requirement
– Initial margin
– Margin call
• Marking to market daily• Margin call if margin balance falls below the initial margin required
• Scope for high leverage in the futures market
Date: 33College of Agricultural Banking, RBI, PUNE
Market participantsMarket participants
Hedgers
• Those who are already exposed to (spot) market risk• Hedgers trade futures for the purpose of keeping price risk in check. • Loss in spot hedged through gain in futures.
– It could be the reverse!
• Profit making is not the motive.
Date: 34College of Agricultural Banking, RBI, PUNE
Market participantsMarket participants
Speculators
• Speculators seek out risk in the hope of turning a profit when prices fluctuate.
• They trade purely for the purpose of making a profit and never intend to take/ make delivery of the underlying commodities.
Date: 35College of Agricultural Banking, RBI, PUNE
Settling Futures Contracts Settling Futures Contracts
• Futures contracts can be closed by taking/ making delivery of the goods described in the contract.
• All contracts carry a compulsory delivery clause in case contract remains open till expiration.
• Less than 2% of futures contracts are settled with actual physical delivery.– Hedgers : Delivery on futures inconvenient/ more costly– Speculators : Not owning/ intending to own the actual commodity
Date: 36College of Agricultural Banking, RBI, PUNE
Settling Futures Contracts Settling Futures Contracts
• Futures contracts can also be closed• By making an offsetting trade
• The purchase or sale of an equal and opposite position can be used to settle an existing position.
• This makes the futures market a place for “hedging” price risk or “speculating” or “investing”, rather than making physical delivery..
Date: 37College of Agricultural Banking, RBI, PUNE
Functions of futures marketFunctions of futures market
Price discovery
• An expression of the consensus of today’s expectations about the
price at some point in the future.
• The market disseminates in a transparent manner the likely future price of a commodity.
Date: 38College of Agricultural Banking, RBI, PUNE
Functions of futures marketFunctions of futures market
Mitigating price risk
• Purchase in the futures market by those hedging against upward price risk
• Sell in the futures market by those hedging against downward price risk
Date: 39College of Agricultural Banking, RBI, PUNE
Commodities Futures Trading in IndiaCommodities Futures Trading in India
• Futures Markets In India
– Bombay Cotton Trade Association - Cotton Futures (1875)– Oilseed Futures, Gujarati Vyapari Mandali (Groundnut, Castorseed, Cotton)– 1900– Jute Futures, Calcutta Hessian Exchange Ltd. – 1919– Bullion Futures, Mumbai – 1920
• Forward Contracts Regulation Act (FCRA) came into effect in 1952. Forward Markets Commission (FMC) set up in 1953 to regulate forward markets.
• For several reasons, futures trading was prohibited by Government in the 1970s.
Date: 40College of Agricultural Banking, RBI, PUNE
Commodities Futures Trading in IndiaCommodities Futures Trading in India
• The post-liberalisation era • Committee on Forward Markets (1993)• National Agriculture Policy (2000)• Inter-Ministry Task Force on Agri-Marketing Reforms (2002)
• Notification issued in 2003 allowing futures trading in commodities
• Futures trading prohibited in some commodities in 2007 and again in 2008. (The ban has since been lifted).
Date: 41College of Agricultural Banking, RBI, PUNE
Multi Commodity ExchangesMulti Commodity Exchanges
• Multi-Commodity Exchange of India (MCX), Mumbai• www.mcxindia.com
• National Commodities and Derivatives Exchange (NCDEX), Mumbai• www.ncdex.com
• National Multi-Commodity Exchange of India (NMCL), Ahmedabad• www.nmce.com
• Indian Commodity Exchange (ICEX), Gurgaon• www.icexindia.com
• Ace Derivatives & Commodity Exchange (ACE), Ahmedabad• www.aceindia.com
Date: 42College of Agricultural Banking, RBI, PUNE
Commodities Futures Trading in India- IssuesCommodities Futures Trading in India- Issues
• Need for increase in volumes
• Vulnerability of farmers/ trade– Large no. of small/ marginal farmers– Need for aggregation
• Demand-Supply issues– Impacts even the spot markets
• Lack of standardised storage facilities– Role of commodity exchenges
• Accredited warehouses• Collateral management companies
Date: 43College of Agricultural Banking, RBI, PUNE
Role of banksRole of banks
Immediate/ short term• Financing for warehouses/ cold storages• Financing farmers against warehouse receipts
– The Warehouse (Development and Regulation) Act, 2007• Financing related to futures contracts (e.g. margin finance)
In the medium/ long term• Offering standard futures contracts to the farmers to suit their needs• Trading in agricultural commodity futures
Date: 44College of Agricultural Banking, RBI, PUNE
The future scenarioThe future scenario
• More involvement of farmers and consumers (hedging)
• Improving warehouse receipt-based financing
• Allowing “options” in agricultural commodities??
Date: 45College of Agricultural Banking, RBI, PUNE
THANK YOUTHANK YOUTHANK YOUTHANK YOU
For your thoughtful hearing and insightful questioning