Article_Farmers' Participation in Indian Commodity Futures Markets_ Submitted Version

7/29/2019 Article_Farmers' Participation in Indian Commodity Futures Markets_ Submitted Version

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Leveraging Indian commodity futures for farmers:

a review on present structure and future prospects

Author Details

Author 1 Name: Kushankur Dey

Department: Assistant. Professor, Finance

University/Institution: T.A. Pai Management Institute

Town/City: Manipal

Country: India

Author 2 Name: Debasish Maitra

Department: Finance

University/Institution: Institute of Rural Management Anand

Town/City: Anand

Country: India

Author 3 Name: Debdutta Pal

Department: Centre for Management in Agriculture

University/Institution: Indian Institute of Management Ahmedabad

Town/City: Ahmedabad

Country: India

Corresponding author: DEBASISH MAITRA

Corresponding Authors Email:[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Abstract

Purpose: It has been well received and recognised that literature on farmers participation inIndian commodity futures market is quite sparse. Though futures market is said to have

influential role in price discovery process, it has been underperforming in attracting farmers.

High amount of margin money and dearth of knowledge about the functioning of futures markets

seem to impound them from being benefitted. This paper looks at the possibility of aggregator

model along with concerted new initiatives from the regulator, the government agencies,

collateral management agencies, commodity exchanges and others to achieve the common goals

that are aimed for.

Design: The paper mainly illustrates various modalities and operational nuances of commodity

futures markets by pinning down to both theory and practice. The study reviews and assesses thesituation and necessity of well connected network among exchanges, aggregators and other

agencies by incorporating a few examples.

Findings: The paper takes a call on the participation of farmers in futures markets and proposes

the ways to enhance the participation through aggregators. This cannot be achieved until and

unless all the stakeholders work together for generating faith and belief in farmers mind for

leveraging commodity futures markets for a better price.

Practical Implication: Only opening of exchange will not serve the purpose of benefiting

farmers. It needs a sound network of all the entities. Aggregator model as well as institutional

supports at public and private level is warranted to make farmers more market-linked and

market-oriented. It may not only increase their income but also their decision making ability.

Originality/Value: The paper looks at the various institutional arrangements and the possibility

of new opportunities. It may provide insights to the academia, professionals and also policy

makers.

Keywords: Futures markets, farmers participation, India

Article Classification: General Review


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Leveraging Indian commodity futures for farmers:

a review on present structure and future prospects

1. IntroductionRecent years have witnessed significant growth in Indian agricultural commodity futures market.

This market, in effect, has notched up phenomenal growth in terms of number of products on

offer, participation, spatial distribution, and volume of trade (Sen et al., 2008). Despite this

Indian farmers have been occupying a little share since many years. Undeniably, farmers

participation is a central theme to the discussion in this article. An attempt has been made to

explore some avenues to encourage the farmers engagement in commodity futures markets.

Hence, this article will provide some roadmap to explore the nuances involved in farmersparticipation in this market.

It is believed that derivatives in the form of forward trading existed in India in ancient times, but

in the absence of appropriate record keeping, nothing is known in this sphere till about a century

ago. While commodity derivatives in some form, albeit crude, were prevalent in India since the

late 19th

century, it is only after the turn of the year 2000 that these have been introduced in a

significant and systematic manner.

A study by Naik and Jain in early 21st

century seems to be a good attempt as their study

examined the performance of regional level commodity exchanges until 2002. Post 2002,

commodity futures market underwent a rebirth following the establishment of countrys first

national level demutualised commodity exchange, the National Multi Commodity Exchange

(NMCE, November 26, 2002). Since 2006, efforts have been channelising to achieve the

integration between futures and spot commodity market to a greater extent. Three national level

spot exchanges, the National Spot Exchange (NSPOT) promoted by the National Commodity

and Derivative Exchange (NCDEX), the National Spot Exchange of India (NSEIL) overseen by

the Financial Technology Group (FTG), National Agricultural Co-operative Marketing

Federation (NAFED), and National Agricultural Produce Marketing Company (NAPMCL) and

innovations on futures platform through Exchange of Futures for Physicals (EFP) and Alternate

Settlement Mechanism for Futures (ASMF) are some of the good precedences, perceived to be

outcomes of man-made innovations on several occasions in the country, which would augur well


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issue, yet challenging and persisting, has not been addressed in full-fledged manner. A few

exchanges, namely, the MCX and the NCDEX have showcased some successful cases which

have implemented aggregation models to encourage farmers participation on futures as well as

on electronic spot platforms (Berg, 2007; Fernandes and Mor, 2009). Still, these initiatives are in

nascent stages. However, benefits of these innovations have not fully permeated at the

producers or at the growers level, who are directly or actively engaged in agriculture. In this

regard, models will try to narrate probable avenues that how these can help to rendering services

at producers or at farmers level and to what extent these would be scalable.

The remainder of this article proceeds as follows. The next section illustrates few concepts and

modalities of futures markets. The following sections review the present structure of commodity

futures markets and collateral management agencies, and delineate some strategies and avenues

which can harness the farmers participation. Last section concludes.

2. Synoptic view of futures marketsMechanics of commodity trading has largely been adopted by almost all national level

exchanges, at par with the best practices reflected on the platform of global commodity

exchanges up until now for better price discovery and price risk management. Trading,

settlement, and delivery-these three integral processes have been followed by national level

commodity exchanges. Contract design, margin money, mark-to-market, settlement pattern are a

few parameters underlying principles of market microstructure, which usually provide

performance guarantee monitored by the exchange and the clearing house for both the buyer and

the seller (Dey and Maitra, 2011). These are put in place for ensuring liquidity, leverage, and

transparency (Kaul, 2007).

2.1. Margin Money and its Cost

Margin money is an important pre-requisite by providing a gate pass to enter into this market.

For a poor farmer, arrangement of atleast initial margin is difficult, which constitutes about 4%

to 5% of total value of the contract traded on exchange platform. Some additional or

maintenance, special, incremental margins (see table-2) are also charged by the exchange based

on trading frequency, contract size, magnitude of spread (bid-ask) gap, volatility in the market,


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etc. By considering all these factors, this is quite impossible for a farmer to reap benefits by

leveraging or harping on futures markets. Arbitraging or short selling can be an alternative,

counter-intuitive to shortcomings of the normal trading strategy. Aggregators are who aggregate

produce through pooling can make this possible by participating on behalf of a group of farmers

on exchange platform. From financial angle, if margin money raised through collateral has a

direct impact on number of contracts being purchased. It is said that if margin raised via debt or

loan is inversely proportional to purchased contracts (Bailey, 2005).

Telser (1981) argued that initial margin requirements do have a cost attached, which is liquidity

cost. Once the margin money is deposited, it is no more available to the hedger for any further

purposes and it makes the hedger less liquid now than before he/she bought or sold futures

contracts. Kalavathi and Shanker (1991) also examined that there is negative impact of initial

margin requirements upon the demand for futures contracts by the hedger. The cost of initial

margin is the spread between hedgers borrowing and lending rates. Since a substantial portion

of liquid cash has been deposited for investing any other high yielding assets or purposes, the

person has to borrow again. Thus, the cost of margin is an opportunity cost here. In order to meet

liquidity needs and also to make the opportunity for investing being happened in the presence of

margin money, the hedger has to borrow.

[Insert Table-2 here]

2.2.Mechanics of hedging using Futures

The exchanges trading futures in any given commodity are indicated followed by a mention of

the contracts that have matured during the period. The predominant pattern of the hedge market,

namely, contango orbackwardation, is indicated. The hedge is said to be in backwardation when

current supplies are scarce leading to exhaustion of producers inventories (stock out condition)

and opposite phenomenon holds in case ofcontango. We can describe these two commonly used

terminologies in hedging strategy using futures. A situation called contango is said to arise when

the futures prices rise over the life of the contract following hedgers and speculators desire to

be net long and net short, respectively. Conversely, a falling price where spot price of asset is

greater than the futures price of the underlying asset is referred to as backwardation. In case of

normal contango and normal backwardation, futures price will be above the expected future spot

price and expected spot price will be above the futures price, respectively. Future trade receives


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impetus from increased volatility in the spot market of the underlying commodity. Thus,

precisely, both the market needs to be watched and in this context, basis assumes significance.

Formally, the basis is defined here as the difference between the spot and futures market price

for a commodity, which is negative in contango market orvice versa. It is a signal of market

forces at work and will change over time as the cash market price and futures market price

converge. Basis occasionally remains constant because local supply and demand conditions

continually change through time. Changes in basis are known as basis patterns or basis

variations. An improving basis changes from weak to strong. Logically, if basis strengthens

unexpectedly then this improves a short hedger position. On the contrary, if basis weakens

unexpectedly, the situation improves a long hedger position (Hull, 2007). Basis reflects cost of

marketing the commodity, which is storage costs forming an important component; and thus,

ought to be less variable than the spot. Economic fundamentals (production, import, export,

carryover stock, and consumption) of the asset, liquidity, and return on assets (Roll, 1984)

largely affect basis variation either in a positive or negative manner. As agents face more basis

risk, they reduce their exposure by reducing inventory level. Hence, the storage level is adversely

affected.

For better price discovery both spot and futures markets are to be integrated. A fairly good and

necessarily positive correlation (>0.5 or 0.5-0.80) and relatively low deviation between the spot

and future prices would posit certain degree of integration of two markets. Wherever the basis is

not zero, the local supply and demand factors are different from those prevailing in the futures

market.

Basis variation, in turn, decides the magnitude of hedge-effectiveness or degree of variance

minimising hedge-ratio (Roy, 2008).

The simple efficiency hypothesis of futures market postulates that the future price is simply the

expected and technically called the unbiased predictorof the future spot price implying that spot

and futures prices share one-to-one long-run equilibrium. The expectations hypothesis treats the

future prices as the consensus (indicative) forecast of the future spot price. To a great extent, this

is dependent upon the method of collection of spot quotes by the exchanges. Biased collection

procedures present distorted patterns in the spot quotes and, for this reason, two do not seem to

converge at the expiration of contract. To solve the issue of settlement, a due date rate (DDR) is

fixed by the exchanges which is simple average of spot prices during delivery period, which


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should take place within 11 days after settlement at the exchange-notified warehouses (FMC,

2002).

In India, a study conducted under the chairmanship of Abhijit Sen (2008) illustrated

comprehensively that the magnitude of basis pattern for wheat varies from high to low followed

by moderate to weak for chickpea and for others, variation seems to be moderate. Hedge-

effectiveness (HE) is found relatively high in case of pulses, namely, chickpea, 36%), red gram,

44%, and black gram, 43%. In case of guar seed, sugar and wheat, this is 58%, 32%, and 15%

respectively. These numbers implicitly throw some lights on suspension of trading of

commodities, namely, red gram and black gram.

3. A review on present structuresExchange usually provides fairly an improved and a sophisticated platform for price discovery

and price risk management. But nuances involved in trading are complex ones, if not, being

understood by agents or investors properly. Same is also applicable to Indian farmers. Tiny

landholdings, poor productivity, exorbitant interest rates on informal credit, lack of access to

formal credit, and lack of marketing acumen are few impediments which impound them from

realising better price rather than experiencing good yield. This is true for almost 70 % of Indian

peasants. Other obstacles could be market driven. Poor infrastructure relating to market yards,

(Agriculture Produce Market Committee Act, 2003), poor trade practices (auctioning), limitedinitiatives for increasing awareness about commodity futures markets, spot markets across

regional centers have been delimited the growth of agricultural commodity markets in particular.

Of late intermediation of few private agencies, sometimes in public-private-partnership forms,

like Institute for Financial Management and Research (IFMR), Adani facilitated aggregation

model to encourage farmers participation in Reliance e-mandi, NCDEX-Haryana State

Cooperative Supply and Marketing Federation (HAFED) collaboration for hedging of wheat on

behalf of farmers, and MCX-Aga Khan Rural Support Programme (AKRSP-I)-Cardinal Edge

(CE)-a case of aggregation model to name a few, are welcome initiatives. In different countries

including India a set of aggregator models have been established with the help of exchanges,

non-governmental organizations and other governmental institutions. However, some succeeded

and some failed.


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Case-I : Guetemalan Coffee Growers Association (ANACAFE), a non-government

organisation had set precedence by introducing a credit system for small coffee growers in

1980s. By linking the farmers with banks for credit, ANACAFE made it prerequisite to use risk

management instrument in order for hedging price risk. So, farmers received only loan amount

after assuring banks that they had proper risk management tools like forward price agreement,

hedging through futures markets, etc. In this process banks also sanctioned loan amount with

lower interest rates which eventually resulted in savings for farmers of more than 10% of loan-

to- value. Both banks and farmers had become successful to minimise the risk.

Case-I I :In 1994, Agricultural Products Option Programme (APOP) was introduced in

Mxico in cotton and further extended to wheat, corn etc. Here, Support and Services for

Agricultural Trading, (ASERCA), a decentralised administrative part of the Ministry of

Agriculture, Livestock, Rural Development, Fisheries and Alimentary, acted as an intermediary

between producers and exchange, e.g. Chicago Board of Trade and New York Cotton Exchange.

ASERCA helped the farmers to participate in the exchanges by buying put option through

grouping their production to meet minimum size requirement for which ASERCA contributed 50

% of total option premium. But farmers ought to deposit the same amount in one fund called

FINCA. The cost appeared to the farmers was 5-8 % of the strike price of the option . As a result

of which APOP covered 11 % of the total wheat production of Mexico.

Case-I I I :In Surendranagarof Gujarat state, the MCX in collaboration with Cardinal Edge for

administrative support and Aga Khan Rural Support Programme (AKRSP-I) initiated one

programme to make cotton growers aware of the futures markets and its complex operational

nuances during 2007. For funding purposes, they sought the help of NABARD and opening of

trading accounts was accomplished by Kotak Securities.

Case-I V:Centre for Micro Finance (CMF), Self-Employed Womens Association (SEWA) and

the NCDEX partnered in 2007. A randomised controlled trial (RCT) had been conducted to

examine the impact of providing commodity futures prices to farmers at 108 villages in four

districts in Gujarat and its impact on price expectations and sowing decisions. The programme

was found to be significant on the formation of price expectations but at the same time, seemed

to be insignificant on the decisions in selecting crops or areas cultivated.

Source: UNCTAD (1997) and MCX (2008) for case-I, II and III and Cole, S (2009) (case-IV).


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In 1999, International Task Force on Commodity Risk Management of World Bank (WB)

recommended the establishment of one international intermediary which would fill the gap

between price insurance providers like banks, brokers or traders, etc. and the service seekers like

producers organisations, agribusiness organisations, co-operatives, etc. It would perform three

types of functions, (a) facilitation by providing partial guarantees to mitigate risk involved in the

transaction, (b) intermediation between service providers and users, and (c) provision of core

services and technical assistance-in particular, market information and support to local

transmission mechanisms (WB, 1999).

3.1. Availability of Collateral Management ServicesAgriculture and agribusiness both are highly influenced by the vagaries of nature. Hence, the

cash flows become unpredictable. Relatively stable cash flows would ease out the financing

process. Seasonality is a major bottleneck which results in a conservative outlook towards credit

rationing in agriculture. Pledge financing is an age-old financing technique adopted by most

nationalised banks, a few private sector banks and non banking finance companies (NBFCs).

This is usually accomplished on the basis of collateral being produced by the borrower

to/before the lender. Besides, warehouse receipt (WR) is another example that can be considered

as a negotiable instrument under the directives prescribed by the Warehouse Development

(Regulation) Act, 2007 and can be used to avail finance from banks. Of late, this kind of

financing has been changed to a different nomenclature, which is, collateral (commodity) based

structured financing (CBSF).This type of financing, typically, helps to assure predictable

cashflows that can be isolated from its originator in order to secure credit on part of the borrower

and to mitigate risks on part of the lender. Collateral management agency (CMA) is a third party

to ensure a guarantee for both parties with respect to physical risk, market risk, and operational

risk. Role of CMAs is well described. Since collateral management is still being in nascent stage,

there is hardly any data or information on the exact quantum of agricultural produces and

industrial assets financed under collateral management structures. Avanthakrishnan (2011) puts

forward

It would be of interest to note that against a gross bank credit of Rs. 3,38,656 crore as at the endof March, 2009, to the agriculture sector, the extent of finance secured by collateral managementstructures is only 10,000 crore, clearly indicating that there is tremendous scope for suchfinancing in the days to come (Avanthakrishnan, 2009: p. 135).


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In India there are only a few number of collateral agencies like, National Collateral Management

Services Limited, National Bulk Handling Corporation limited, Arya collateral, Star Agri, India

Commodities are present.

2.2. Present status of commodity futures

On the contrary, commodity futures or derivative markets have witnessed exponential growth in

recent times. Evidently, total turnover and value of futures trading of agro commodities were

approximately 291.0 million tonnes in volume and Rs.9.02 lakh crores in value till December,

2010 respectively (Economic Survey of India, 2009-10) despite the invocations of ban at several

occasions on many commodities (see table-3). Researchers opine at several occasions that Indian

futures markets are ill-developed as the major stumbling block for the development is due to

the fragmented and unorganised underlying physical or spot markets (Nair, 2004). As

commodity is distinctively different from a financial asset with respect to crop selection,

staggered planting, cropping intensity, inputs, and credit requirement etc. are important factors

closely associated with the degree of participation in commodity futures market. Presently there

is a dearth of primary research which should be conducted at the producers level to promote the

speed of price dissemination and would meet out the expectations of 11th

Five Year Plan (2007-

12)-at the behest of the Ministry of Consumer Affairs, Food, and Public Distribution. Theory of

storage, convenience yield, and risk premium or liquidity preference theory succinctly warrantsome action-research, which needs to be conducted at participatory level in this market. Hedging

is not as effective as theoretically illustrated in the first section of this article. Sometimes spot

and futures markets fail to converge due to high basis risk. RBI (2005) advocated that banks can

offer non-standard contracts to the farmers and cover them in the commodity futures trade as for

farmers it is difficult to take positions directly in futures markets. In this regard, RBI decided that

banks can offer tailor made products to the farmers like Non-Transferable Specific Delivery

(NTSD) and Transferable Specific Delivery (TSD) which are only allowed under FCRA Act,

1952. Although there are significant development happened regarding commodity futures

markets so far however, more changes are required. Recently, price dissemination of both spot

and futures prices of agricultural commodities has been identified as one of the important

activities by Planning Commission in its XIth Five Year Plan. The initiative had undertaken by

the FMC in collaboration with Ministry Agriculture and five national level exchanges [NMCE,


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NCDEX, MCX, India Commodity Exchange (ICEX), Ace Derivatives and Commodity

Exchange (ACDE), Universal Commodity Exchange (UCX) ] and 18 regional exchanges where

futures and spot prices of commodities of national exchanges and spot prices of Agricultural

Marketing board (AGMARKNET) are operated and shown on the ticker board installed in

APMCs networks under the aegis of AGMARKNET and the National Informatics Centre

(NIC). By disseminating a spectrum of instantly observable prices, these exchanges have

transferred the pricing power to the farming community and enhanced institutional development

like grading, warehouse receipt etc., supply chain integration and farm credit facilitation (FAO,

2007).

[Insert Table 3 here]

4. Constraints and future scopes through well connected netCommodity futures markets could not achieve the goal to benefit the farmers. It is argued that

the futures markets came into being only in 2003, so it would take long way to engage farmers in

this market. It is also true that Indian farmers are mostly indebted to the middlemen and tiny

landholdings, which made them handicapped from realising the marketable surplus. Farmers

usually grow or take one to two crops in a year as mono-cropping or rice-wheat cycle has

been in vogue in India. An alternative may be aggregation of produce on lot basis in order to

fulfill the criteria of contract specifications as directed by the exchanges being the self-regulatory

organisations (SROs). Aggregator model should be implemented in a manner that some subject

matter specialists can intervene in the network of aggregator and exchange. This will help to

achieve both the backward and forward integration and thereby, economies of integration.

Cooperatives or NGOs who have been engaging in the present structure of the model, awareness

and some hands-on-exposure should be rendered at their disposal by national level commodity

exchanges. Contract specifications like lot size, margining system, and delivery processes should

be understood by the aggregator properly. Quality of the produce at e-auction centres or on

futures-platform should be examined with deployment of right entities, say exchanges deployed

product managers.

In this backdrop a set of modified modus operandi and avenues are proposed here to promote

farmers participation. The following avenues can be explored based on their merits for


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implementation. Few are already in place but they can be improved further. The following

arrangements need a synergy among policymakers and industry professionals.

4.1. Strategy of short selling, hedging and options

Aggregators can adopt short selling strategy. In that case, margin money and payoff should be

calculated meticulously. Stop loss strategy based on price condition can also be adopted by the

agents in absence of arbitraging mechanism followed by a reverse cash and carry model (see

Bailey, 2005).

While simple hedging is not working then it is always better to have tailed hedging than untailed

hedging from economic perspective. As in tailed hedging the difference between the time future

gains or losses and the time the gains or losses from spot markets position realised are

considered. Thus, it well considers the cost of financing or returns due to variations in margin

settlement. In this case, every day the hedge ratio is multiplied by the daily spot to futures price-

volume ratio.

Options could be introduced. Unlike futures contracts, it gives the aggregator the right to sell

without any obligation. In this regard, FMC can promote options for certain commodities, which

have users-specific demands and have relatively high asset-specificity in the industry, namely,

rubber, black pepper, crude palm oil, cotton, guar seed, etc. These commodities have their

regional importance as productions are limited to a few states, but consumptions are observed

profoundly round the year. Aggregators can enter into an option contract with exchanges by

buying a put option (long put) whereas the FCI and other private agencies, viz., ITC, Ruchi,

Reliance, Glencore, Australian Wheat Board, Louis Dreyfus, and Cargill etc. can exercise the

option by selling a put (short put). Aggregators would pay the premium and can delimit the

potential losses in a way that option holders can hold the produce until the maturity or till the

contract expiration (Fernandes and Mor, 2009). European option would be better in order to

avoid the temporal risk or liquidity risk between the time value of option price or premium and

intrinsic or theoretical value of the option. Thus, arbitrage opportunity, if any, exists during the

time period of option contract until the maturity can be avoided to some extent. Hence, call-put

parity argument holds. In this case, exchanges should devise some indices for agricultural

commodities which can minimise excessive spikes or volatilities for both the spot-futures prices

of the notified commodities (like MCX-AGRI, NCDEX-Dhaanya). Moreover, indices should

incorporate the changes in prices being reflected on tick-by-tick basis improvising some robust


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mechanisms with international exchanges indices, say, Goldman Sachs Commodity Index

(GSCI). As an alternative of MSP, option can be introduced as several merits pointed out by

Fernandes and Mor (2009).

4.2. Linking collateral management agencies with exchanges

In order to act efficiently and effectively, collateral management agencies (CMAs) should be

cautious and industrious enough to protect both the exchanges and aggregators by mitigating

physical, operational, and market risks with differential impacts of their respective risks

elements. CMAs should test, validate, and certify the stocks kept in the bonded or accredited

warehouses with the help of quality control department (which may be in-house or outsourced).

First, CMA can keep the produce of aggregators into accredited warehouses and mark a lien on

warehouse receipt (WR) which can be produced before a banker to raise the credit. In addition

to, CMAs can take a call to dispose of the produce either at spot or futures platform based on

prevailing market prices and other conditions on behalf of aggregators (as per bye-laws, which

should be prescribed under the WDRA, 2007 to act accordingly). Hence, CMAs roles are very

crucial in making the whole value chain functional. CMAs can look at seasonal calendar and

historical prices of traded commodities so that they can deliver end-to-end solutions to

aggregators, in turn, the latter can pass on the information to producers. This will help

immensely to end users of futures or of spot exchanges for choosing or selecting the crop-

portfolio and modes of marketing the produces. The agency usually charges a commission or

service fee, which is linked with performance guarantee for the collateral overseen by the CMA

under its lock-and-key arrangement.

4.3. Connecting government agencies with exchanges

Government agencies including the Food Corporation of India (FCI), Food and Civil Supplies

Departments, State Agricultural Marketing Boards (SAMBs) can directly procure from

aggregators at current market prices [besides entering into Price Support Scheme, i.e., Minimum

Support Price (MSP)] in collaboration with spot exchanges promoted by commodity exchanges

in the year 2006. FCI, State and Central Warehousing Corporations (SWCs, CWCs) can also

store the procured produces after issuing warehouse receipt (WR)-a negotiable instrument as per

directives prescribed by the Warehouse Development (Regulation) Act, 2007. Two kinds of

strategy can be formulated. If aggregators want to store the harvested produces at exchanges


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notified warehouses at respective locations, then WR can act as a shield by arranging the credit

from financial institutions at cheap or at moderate interest rates. In alternative manner, FCI,

SWCs, CWCs can issue commodity bonds (like potato) which can provide an assured stream of

returns in a stipulated time period to avoid the distress sales or crop failure. What exchanges can

do that they can open alternative delivery centers in nearby FCI or SWCs/CWCs depots to

expedite delivery processes during the post-settlement period. In that case, brokerage fee can be

fixed upto a certain limit so that aggregators can earn reasonably a fair amount of commission

based on the value of trade executed.

5. Concluding thoughtsThe fundamental focus of this article was to present the existing debate on farmers participation

in commodity markets, as also to present a tentative framework on how the mechanism of

participation can be rationalised with some proposed avenues. Every commodity has its own

market characteristics, and hence, the avenues narrated here should not be adopted blindly. A

primary survey is most important in this regard. It is after only understanding the commodity and

its associated market the right framework or model can be adopted. It is indeed realised that for

better functioning of futures exchanges in terms of farmers participation, the role of physical

markets, collateral agencies, and various government departments cannot be wished away. They

can address the challenges of quality assurance and delivery of futures exchanges. While

commodity futures markets are expected to play the two important roles of risk management and

price discovery, aggregators can reap the benefits of better prices by minimising the risks by

either directly participating in the futures markets or indirectly through other agencies. It is

further argued that involvement of all the concerned bodies would not only pave the way for

better participation of farmers through aggregators but would also harness availability and

effective dissemination of information from the futures market. It eventually helps to stabilise

and decrease spot price volatility (Dey and Maitra, 2011). It is also understood that availability

of different agencies would not serve the purpose; accessibility to them is needed to render the

outcome.

Nevertheless, stated alternatives presented above are some of the avenues which can

accommodate farmers to some extent in the present structures of agricultural commodity futures

markets. Policy should weave its strength with industrys inputs to make the implementation


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more effective and efficient. From the authors standpoint, this article would hold its position as

a precursor for a reality check in the ground.

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Table 1: Volume (mill. Tonnes) and Value (Rs. lakh crore) of futures trading

Commodity

2006-07 2007-08 2008-09 2009-10 2010-11

Vol. Val. Vol. Val. Vol. Val. Vol. Val. Val.

Agricultural 502.4 13.17 313.9 9.41 230.9 6.27 291.0 9.02 14.56

Total 612.9 36.77 557.3 40.66 686.3 52.49 764.9 77.26 119.49

Source: Economic Survey of India, Govt. of India


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Table 2: Contract-wise margin requirement

MCX NCDEX

Symbol

Expiry

Date

Initial

Margin

Tender

Margin

Total

Margin Symbol

Expiry

Date

Initial

Margin

Exposure

Margin

Total

MarginALMOND 30-Jun 5 0 5 BADAM 20-Jun 3.5 1.5 5

BARLEY 20-Jun 5 0 5 BARLEYJPR 20-Jun 5.96 3.25 9.21

BARLEY

20-

May 5 0 5 BARLEYJPR

20-

May 6.06 3.25 9.31

GUARSEED 20-Jun 5 0 5 GARSEDJDR 20-Jun 5.41 2.5 7.91

GUARSEED

20-

May 5 0 5 GARSEDJDR

20-

May 5.46 2.5 7.96

MAIZE 20-Jul 5 0 5 MAIZE 20-Jul 3.9 1.5 5.4

MAIZE 20-Jun 5 0 5 MAIZE 20-Jun 3.96 1.5 5.46

MAIZE

20-

May 5 0 5 MAIZE

20-

May 3.99 1.5 5.49

MENTHAOIL 30-Jun 5 0 5 MENTHAOIL 30-Jun 9.78 2.75 12.53

MENTHAOIL 31-May 5.83 0 5.83 MENTHAOIL31-May 9.23 2.75 11.98

POTATO 15-Jul 6.53 0 6.53 POTATO 20-Jul 9.51 1 10.51

POTATO 15-Jun 6.73 0 6.73 POTATO 20-Jun 8.39 1 9.39

POTATO

14-

May 5.11 5 10.11 POTATO

20-

May 7.31 1 8.31

RUBBER 15-Jun 5 0 5 RBRRS4KOC 20-Jun 4.98 1.5 6.48

RUBBER

14-

May 5 3 8 RBRRS4KOC

20-

May 5.08 1.5 6.58

SOYABEAN 20-Jun 5 0 5 SYBEANIDR 20-Jun 2.78 2.25 5.03

SOYABEAN

20-

May 5 0 5 SYBEANIDR

20-

May 2.81 2.25 5.06

SUGARMKOL 20-Jul 5 0 5 SUGARS150 20-Jul 3.5 1.5 5

SUGARMKOL 20-Jun 5 0 5 SUGARS150 20-Jun 3.5 1.5 5

SUGARMKOL

20-

May 5 0 5 SUGARS150

20-

May 3.5 1.5 5

WHEAT

19-

Aug 5 0 5 WHTSMQDELI

19-

Aug 3.57 1.5 5.07

WHEAT 20-Jul 5 0 5 WHTSMQDELI 20-Jul 3.61 1.5 5.11

WHEAT 20-Jun 5 0 5 WHTSMQDELI 20-Jun 3.64 1.5 5.14

WHEAT

20-

May 5 0 5 WHTSMQDELI

20-

May 3.68 1.5 5.18

Source: compiled from the MCX and the NCDEX on 10.05. 2011, data with respect to margin money are expressed

in percentage (%). Bold figures indicate total margin money in %, which shows a sharp contrast in terms of margin

amount being imposed by the two exchanges.


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Table 3: Recent imposition of ban on different commodities

Commodity Date of suspension/ban Date of recommencement of

futures contract

Wheat Feb, 2007 May, 2009

Chana May, 2008 December, 2008

Soy Oil May, 2008 December, 2008

Rubber May, 2008 December, 2008

Potato May, 2008 December, 2008

Sugar May, 2009 October, 2010

Tur Jan, 2007 Not yet

Urad Jan, 2007 Not yet

Source: Annual Report and Abhijit Sen Committee Report, Ministry of Consumers Affairs, Food

and Public Distribution, Govt. of India.

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