The Hindu Business Line : Some hard facts about futures trade

On February 27, at a meeting in Alwar, Rajasthan, the President of the Kisan Co-ordination Committeeannounced that the farmers of Punjab, Haryana and western Uttar Pradesh would sell their wheat in the ensuing season through one of the Futures Exchanges. The next day, making an extempore addition to his prepared Budget speech, the Finance Minister announced the Government's decision to take wheat and paddy out of the futures market.

The Government's decision so closely following upon that of the farmers' organisations could not have been a coincidence. The Government has deliberately thrown the gauntlet at the farmers, who will respond in full measures.

Last year, the competition following the entry of private traders helped the farmers get about Rs 100 above the procurement price per quintal. It was expected that the Government would continue with the openness in the market this year too. The entry of private traders last year has not, in any manner, affected the overall stock position of wheat in the country. For some mysterious reasons in June 2006, traders in Chicago were already talking about the possibility of India importing around 10 lakhs tonnes of wheat, while the Agriculture Minister held that there would be no need for wheat imports that year.

Finally, the Government ended up importing about 30 lakh tonnes of wheat, at a price much higher than the domestic price. The Government justified the dumping operation saying that the imports would be unloaded and used in South India, reducing the cost of transport and putting the imported wheat on par with the north Indian wheat. It would appear that this was an ex-post, de facto reasoning and that the decisions about imports had been made much earlier in the year.

The fall guys

The massive imports had nothing to do with the purchases by private traders. But the Left allies of the UPA mounted a campaign against the Government on this score. By then, inflation had become a hot political issue. The Left and some of the NGOs said the inflation was caused by the futures traders. On the eve of the Budget, the Congress was routed in the Assembly polls in Punjab and Uttarakhand. Thus it was that in a knee-jerk reaction, the Government decided to take wheat and paddy out of the futures market.

Earlier, the Government had sent a message to private companies not to enter the wheat market till the Food Corporation of India (FCI) had completed its quota. Instructions were also given to Railway authorities not to book railway wagons except for FCI. Thus cornered, the private traders found it wiser to refrain from entering the wheat market.

With the ban on both private trade and the futures market, wheat growers had no option but to accept the paltry procurement price offered by the FCI and sell their produce exclusively to it. In all probability, the farmers' organisations will retaliate by boycotting the FCI procurement. The ensuing wheat procurement season threatens to be a hot one.

Futures plan

What was the farmers' plan for selling wheat in the futures market? Some of the futures market platforms offer operations through the Internet. Some of them also provide warehousing facilities.

Any farmer can take his produce to one of these warehouses and store it there after due verification of quality and grade. He can visually ascertain the prevailing spot price as also the futures prices in various languages on the monitor.

The farmer can decide to sell at the current price, in which case he gets the full amount in cash. Or, if he decides to sell at any convenient future date, he gets an advance of about 70-75 per cent of the current price as also a warehousing receipt, which is a negotiable instrument.

On expiry of the contract date, the holder of the warehousing receipt is assured of getting the contracted price. The farmers have no difficulty understanding the scenario and would rather transact through the futures market than face the bureaucratic hassles of the FCI.

Unfortunately, the mindset still persists among many that the futures market is purely speculative and leaves open the field to unscrupulous traders.

Matching the bids

There indeed was a time when the farmer was not a participant in futures trade and the futures market could, therefore, be used for speculations. When the futures market is truly open to farmers, it takes on an entirely different aspect.

The farmer produces crops of different types the existing socio-economic and political framework makes it difficult for him to change the form of his produce through value-addition/processing. It is also difficult for him to make his produce available in another location where the prices may be better.

He knows well that the immediate post-harvest prices are low and that prices will rise in three to four months. However, he cannot afford to wait to take advantage of this.

Concomitantly, there are traders and consumers who need the farmers produce, but at locations other than the point of production or at a specified time in the future. The objective is to avoid costs of transport and storage.

The futures market brings together these two elements and matches the offers to sell with the bids to purchase. For the first time, farmers can choose the price at which to sell their produce. The operations of "hedging" and "options" only facilitate price discovery and risk-cover. They can be misused, but to a very limited extent under the present regime in the Indian futures market, which provides for physical delivery in most cases.

(The author is Founder, Shetkari Sanghatana and Member of Parliament (Rajya Sabha). Feedback can be sent to sharad.mah@nic.in)

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