A better future for farmers

The farmer gets a good bargain now as the NCDEX price serves as the benchmark

After falling sharply in the aftermath of the NSEL scam, volumes in the agri-commodity derivatives market have begun moving up again. Jayant Nalawade, Chief of Operations and Compliance, NCDEX, spoke to BusinessLine on the changes the exchange has brought to the country’s commodity markets in the last decade of its operations.

What changes has NCDEX brought to the commodity market?

NCDEX has been in existence for about 10 years now and it has established itself as the primary exchange for agri-commodities through its national online platform. Our significant achievement was bringing in transparency in price discovery and dissemination.

It is a fact that there is no other agency in the country that gives price data for various agricultural commodities in a consistent manner for a specific quality.

There are agencies like agmarknet. The price data they publish is a modal price — essentially an average price for the quantity that was traded. But you don’t know for which (grade) quality those prices pertain to. The spot price the exchange disseminates is collected from many markets and a number of polling participants. The methodology and scientific robustness of the method adopted by the exchange is acknowledged. Second, we have created awareness among farmers about the quality of their produce.

Earlier, the farmer would just take his produce to APMCs and accept whatever price was paid to him — he neither had the price information nor did he know about the quality of his produce. But now he gets to find out the quality of his crop and then relates it to the price of the benchmark in the NCDEX.

How does the polling process work?

We have appointed agencies to collect price data. They call up specified polling participants from major centres for each commodity. These participants are traders, processors, wholesalers and stockists and work on a voluntary basis.

The exchange does not pay them anything for the inputs they give. The entire process of data sifting and arriving at the median prices is automated through statistical methods.

The credibility of this data is high. It is disseminated through the exchange website, its trading terminals and through various media channels.

The exchange also provides this data to the Centre.

Has the futures market helped the farmer in any way?

There is increasing evidence that farmers are now looking at futures prices and taking decisions on which crop to sow in a season. The other benefit is that they know when to sell.

Earlier farmers used to sell 70 per cent of their produce during harvest time and that resulted in a glut in the market. Prices fell and farmers could not get a fair price for their produce. But in the last two-three years, only about 50 per cent of the produce comes to the mandis in the harvest months.

This is clear evidence that the farmer is observing the price trends.

The exchange has created scientific warehousing infrastructure where goods are deposited after they are assayed for quality.

So, when a trader purchases from a farmer, he can deposit the produce in the exchange-approved warehouse and sell them online on the futures platform, where price discovery is based on the demand-supply scenario.

This promotes transparency in the prices of agri-commodities as against the opacity that existed in the physical mandis. There is a close correlation in the futures prices and the mandi prices that directly benefits the farmer.

You launched forward contracts recently. How different is it from futures?

A forward is a bilateral transaction — you do not square off the transaction. There is compulsory delivery. Farmer producer organisations — a small association of farmers in a specific area and registered with the government — can use the exchange-traded forward market to sell and get a better price.

More than 8,000 tonnes have already been traded in forwards since launch. Also, these are ‘compensation guarantee’ contracts.

Suppose, a buyer and a seller agree to execute a trade three months from now; they will pay the required margins to the exchange. If either party defaults, 90 per cent of that margin money goes to the counter party as compensation.

In the physical market, where forwards are taking place, if you enter into an agreement to sell 20 tonnes to someone three months from now and the party backs off because the price has fallen, you will be left with the 20 tonnes and will have to find another buyer while taking the price risk.

Has investor confidence in agri-markets returned?

The NSEL event affected the sentiment of mainly traders. About 40-50 per cent of our business is from physical market participants or hedgers who are processors or exporters of various commodities. With the SEBI-FMC merger now, the commodity markets will have stronger regulation. That will be in the interest of all the participants in the commodity market.

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