21 Jan 2014

Forward Markets: the Future of Agricultural Marketing

In a novel initiative, National Bank for Agriculture and Rural Development (NABARD) organized a One day Awareness programme on Commodity Futures Market and Derivatives for Farmers in Madurai district. Over 50 Farmers club members from Chellampatti and Usilampatti attended the programme.
 One of the participants,  V. R. Muthupeiyandi, President of the Vaigai Vivasaya Nala Sangam, whole heartedly agreed that the programme did dispel several of their misgivings about the commodities market and acknowledged the role of the commodities and futures markets.
Forward Markets
 The forward market is typically an informal financial market in which contracts for future delivery are finalized. It is a market dealing in commodities, currencies and securities for future (forward) delivery at prices agreed-upon on the date of finalizing the contract. In commodity and currency markets, such forward trading is used as a way to hedge against sharp price fluctuations. 
A Short History
The commodity futures market in India dates back to more than a century. The first organized futures market was established in 1875, under the name of the Bombay Cotton Trade Association to trade in cotton derivative contracts. This was followed by institutions for futures trading in oilseeds, food grains etc.
  The futures market in India underwent rapid growth between the period of First and Second World War. As a result, before the outbreak of the Second World War, a large number of commodity exchanges trading futures contracts in several commodities like cotton, groundnut, groundnut oil, raw jute, jute goods, castor seeds, wheat, rice, sugar, precious metals like gold and silver began flourishing throughout the country.
     However, in view of the delicate supply situation of major commodities in the backdrop of war efforts mobilization, futures trading came to be prohibited during the Second World War under the Defence of India Act. After Independence, especially in the second half of the 1950s and first half of 1960s, the commodity futures trading again picked up and there were thriving commodity markets. However, in mid-1960s, commodity futures trading in most of the commodities were banned and futures trading continued in two minor commodities of pepper and turmeric.
Current Scenario
Currently there are five national exchanges which regulate forward trading in 113 commodities. Besides, there are 16 Commodity specific exchanges recognized for regulating trading in various commodities approved by the Forward Markets Commission under the Forward Contracts (Regulation) Act, 1952.
Benefits to Farmers and other Stakeholders
Farmers and growers benefit through the price signals emitted by the futures markets even though they may not directly participate in the futures market. The futures markets lead to reduction in the amplitude of seasonal price variation and help the farmer realize a better price at the time of harvest. This also helps the farmer in planning his cultivation in advance as well as to determine the kind of crop which he would prefer to raise, by taking advantage of the advance information of the future price trends, and probable supply and demand of various commodities in advance.
By providing the manufacturers and the bulk consumers a mechanism for covering price-risks, the futures market induces them to pay higher price to the producers, as the need to pass on the price-risk to farmers is obviated. The manufacturers are able to hedge their requirement of the raw materials and as also their finished products. This results in greater competition in the market and ensures viability of the manufacturing units.
Forward Markets Commission (FMC)
The Forward markets Commission (FMC), headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Finance. It is a statutory body set up in 1953 under the Forward Contracts Regulation act, 1952. 
This Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government. Currently the Commission comprises three members among whom Shri Ramesh Abhishek, IAS is the Chairman. Dr. M. Mathisekaran, IES and Shri Nagendraa Parakh are the Members of the Commission.
Madurai Camp
            Inaugurating the training programme for farmers in Madurai, R. Shankar Narayan, Assistant General Manager, NABARD explained that several dynamic factors come into play in the context of the price discovery of agricultural commodities and it is essential for the farmer producers to be in sync with the scenario. With globalization dissolving the geographical boundaries, futures and derivatives markets across the world have been playing a significant role in the world economy and India was no exception. He further added that if the farmers expect to get the best returns for their toil, they need to organize themselves into producer organizations and equip themselves with cutting edge information. With this end in view, NABARD over the years has propagated the concept of ‘one village one farmers club’ through banks which comprised of progressive farmers from the respective villages. Mr Shankar Narayan also highlighted the need for aggregation of produce and direct marketing to the end consumers preferably as a value added commodity.
 Thavasi Muthu, Secretary, Madurai Marketing Committee called upon the farmers to embrace latest technology and access the market as one unified group to benefit from the economies of scale. They also need to utilise the storage facilities being constructed by the government and stay away from distress sale by availing Produce Pledge loans on soft terms being made available for their produce stored in the Regulated Markets.
S. Senthil Velan, Regional Head, MCX, Chennai provided expert inputs on the workings of Commodity Futures market and guided them through the complex subject. He said that one need not have any inhibitions about the Futures market which operates under the watchful eyes of the Forward Markets Commision (FMC). He said that the farmers who are already into aggregation with the guidance of NABARD should be ready for eventual expansion of the range of agricultural produces in the futures market.
As an interesting culmination of the training programme farmers were also given a first hand idea of the nuances of buying, selling, margin, arbitrage, delivery, call options, put options etc through a live demonstration of on-line trading in the commodities market.

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