Linking Indian farmers to markets

Setting up a commodity futures market is the first attempt to reform agriculture

Why have reforms not improved the lot of the Indian farmer as much as it has improved, say, the lot of an educated city dweller? One blogger (can’t remember exactly who) made the point very succinctly. Well, because there has been no ‘reform’ in agriculture.

There’s one waiting though. According to PRS Legislative Research, a bill to allow futures trading in commodities, introduced in March 2006, is in parliament. The Acorn has advocated futures markets as a means by which farmers can mitigate some of their risks. Ila Patnaik’s op-ed in the Indian Express suggests that the trading families that have traditionally dominated rural spot markets are attempting to throw a spanner in the works.

In some ways, there is nothing more innocent than futures trading. In a spot market, the buyer and seller agree to do trade at a certain price, and the settlement is done on the spot. In the futures market, the price is agreed upon, but the settlement takes place at a prespecified future date. The classic application involves a farmer who is planting in June and wants certainty about the price at which his goods will be sold at Dussehra. Nobody forces a farmer to use the commodity futures market, but a farmer who chooses to use the futures market in this fashion is happier because of greater certainty.

Normally traders in a region surrounding a town would be the major players in purchase of the product of this region. This trade would typically be dominated by 10 or 20 families. These families would often determine purchase prices. Farmers would have little choice vis a vis the price at which they can sell; indeed farmers might not even know prices elsewhere in the country.

The futures market is a powerful tool for breaking the market power of these families. Futures trading — taking place on a transparent, electronic exchange with nationwide access — brings in a host of new players. Indeed, there are hundreds of people in India who are watching world markets, processing information, and putting trades onto overseas commodity futures markets. Physical proximity to the market becomes a non-issue once an electronic exchange is in operation. Someone in Orissa can be trading guar seed, even though he may have never been to Bikaner which is the traditional trading centre for guar. [IE]

There are umpteen parties and politicians who profess to champion the cause of farmers. The passage of this bill will be a test to their claims.

4 thoughts on “Linking Indian farmers to markets”

  1. all this is fine, but are farmers able to take advantage of it? usually trading requires scale which the middle men have, and they take advantage of the commodities market. the small and marginal farmer who probably needs most assistance is in allprobablity left out of the entire system.

    which is why im a huge fan of ITCs e choupal

  2. A long while ago when i was small child, i remember my grandfather putting me on his shoulders & showing me a vast expense of land and saying “What you see before you all owned by us”. But in my recent trip (by train) from Chennai to Delhi, i could see farming land so divided, the demarcation between farming land could add up to huge amount of land in itself.

    The point i am trying to make is that, In general, the amount of farming land owned / available by a small time farmer is so little, the effort to output ratio may as well be in the negative.

    While i am a strong believer in the power of futures markets in general & commodity futures in particular, i believe, unless something dramatic happens to the efficiency of production, i see little that commodity futures could do for a small time farmer.

    The core idea in a futures market is that, the producer & consumer (not including the key players, the speculators) are directly related in a win-win situation. If this doesn’t happen, then the outcome of a commodity futures market might end up hurting a large set of people instead of helping them.

    My 2 cents.

  3. i agree with some of the scepticism that has found its way in the above two comments. of course, everyone agrees that the problems of indian agriculture cannot be rectified by the commodity futures market. although the eleventh five year plan says that it concentrates on agriculture, there are serious doubts over what it says, and there is no talk of land reforms, something that is fundaqmental to reforming agriculture in india.
    my second problem is with the commodity futures market. often, these markets have led to useless and unhealthy speculation, with short selling, and manipulations. what will be the plight of the already distressed farmers in case these markets crash due to manipulations? as such, the benefits that futures markets will bring willl only be felt by the richer farmers.
    technology is important, but it can never replace fundamental reforms.

  4. There is a lot of evidence that the government does not intend the futures market to be viable. At present even the players on the spot exchanges have strict limits placed on the amount of material they can stock.

    The government does not allow the rates for food items to decrease, because it would hurt the farmer lobby. At the same time it does not want the rates to increase as it would cause inflation and would be politically disastrous. It expects the rates to be in a limbo and will bring in regulation to ensure that.

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