Will commodity futures trading be the future of Indian agriculture?

Farmers and futures trading have rarely been synonymous. Well, at least it used to be that way for maize farmers of Purnia who are no longer averse to futures trading.

The maize farmers who count themselves as members of farmer associations and companies earn about 15-20% more by actively participating on futures platform.

The farmer associations and companies in question span states such as Rajasthan, Madhya Pradesh, Maharashtra and Bihar have noticed that farmers are increasingly opting for hedging to derive better returns. A few examples are farm producers’ organisations such as Ram Rahim (Madhya Pradesh) and Jeevika (Bihar). These organisations have introduced hedging on exchange platforms in commodities such as soybean, chana and maize.

Sebi and experts are of the opinion that it is the constant education offered by commodity exchanges on hedging and trading of produce that has led to increased participation of farmers in commodity futures market.

Currently, there are about 35 farmer companies representing about 25,000 and more farmers that are involved on National Commodity and Derivative Exchange (NCDEX). NCDEX predicts the number will go up to 100 by the end of the current financial year. The exchange has about 85 percent share in agri-commodities.

Sebi has also been pushing commodity exchanges to encourage farmer participation in the platform. As market experts believe farmers will benefit immensely from deriving a better price realisation on their produce.

“Farmer associations are now actively hedging on exchange platform. As soon as they procure goods they take a sell position on exchange platform. Later, as month on month spreads get lucrative, they begin rolling over their positions to next month,” said Samir Shah, managing director and chief executive officer of NCDEX.

The number is nominal for now as this a trend that started in early 2015. It is believed that with time, the volume will increase.

“Currently, share of farmers on platform is very less if we consider daily volume of exchange. It is only now that dedicated efforts are being made to bring them on exchange platform. Response is quite encouraging and these associations should give considerable volume in coming days,” said Shah.

Entry barriers and KYC norms, however, act as deterrents to increased farmer participation.

“To encourage farmers’ participation in the regulated markets some entry barriers should be reworked for farmers and FPCs. Some of the things which can be looked at are margins relaxation, relaxation in KYC norms as many farmer associations are unable to complete documentation requirement of KYC. As a result, they are unable to trade,” Shah of NCDEX said.

The companies engaging on behalf of farmers further suggest that there should be an easy mechanism to help farmers.

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