Financial Daily from THE HINDU group of publications
Sunday, Apr 21, 2002
Agri-Biz & Commodities
Govt mulls pilot scheme for assured price to coffee growers
NEW DELHI, April 20
THE Government is considering a pilot scheme for making proper use of the global coffee futures and options market to ride out the rough time on the price front and to assure a market-related minimum price for growers.
The Ministry of Commerce along with the Ministry of Consumer Affairs, Department of Economic Affairs, will hold a discussion here on April 22, 2002 on a pilot scheme for price assurance for coffee by the Canara Bank with the assistance of the CRMG (Commodity Risk Management Group) of World Bank.
Official sources told Business Line here that instruments that provide simple minimum price, yet allow the producer a higher price if available in the insured period, were preferable to ones which simply lock in to a future price. Though such instruments were costlier than fixed future price instrument, they were less risky in practical terms.
If the buyer offers a fixed future price and the prices rise, the producer would be tempted to sell to another buyer, breaking the contract, the sources said adding that the future contract in such circumstances would produce dire consequences. Hence it would be more pragmatic to go for assured price and allow the producer to benefit from price increase.
Accordingly, the scheme devised by the Canara Bank with Coffee Board and technical help from the CRMG of World Bank would allow the Canara Bank to purchase bulk Put Options through an international price insurer operating in the coffee futures market. This bulk Put Option would be fragmented and sold at the beginning of the season to small coffee growers.
The sources said by collecting a premium upfront from the producers, the Put Option would assure the growers a market-related price at a future date (exercise date). On that day, if the actual coffee price is below the Option Price, the Bank would collect the differential from the international insurer and pass on the benefit to the farmer. In case the coffee price was higher on the exercise day, the farmer would be free to sell his produce and take advantage of the higher price.
A pilot scheme devised by the Canara Bank for discussion notes that the Put Option suggested here would be an independent financial transaction not linked to physical delivery of the commodity covered but linked to Indian market prices. Canara Bank would act as the Local Transmission Mechanism (LTM). A simple price floor instrument is also suggested which would assure farmers a minimum price for 100 per cent of their produce.
Sources contend that while the Canara Bank had a salutary spread of branch network in the coffee-growing areas of South India and the Coffee Board had the expertise of marketing the produce over the last few decades, the "synergy of the two institutions would impart more credibility to the mechanism'' besides ensuring transparency. Canara Bank would take the responsibility of selling the product to the coffee growers through its branches and Coffee Board might bolster the Bank in getting the requisite clearance from the Ministries of Finance and Commerce, RBI and Insurance Regulatory Development Authority.
It is even suggested that the Coffee Board might initially subsidise the premia payable by the growers so as to popularise the scheme. Initially, the size of the project might be limited to the quantity of 5,000 tonnes in one or two districts in Karnataka with growers holding less than 100 acres (40 hectares) being brought under the scheme.
Pointing out that there would not be any physical delivery of coffee, the sources said the premium for the put option would range from 5 per cent to 9 per cent depending upon the size of the bulk insurance on the contracted or assured price which is to be paid upfront to buy the option. Coffee Board might provide subsidy on the ultimate premium payable by the grower so that it would be around 1 to 2 per cent of the target price.
The underlying benefit of implementing the scheme is that the farmers in the country for the first time would be exposed to market-related hedging instrument and their risk would be covered by the global market with minimum cost to the nation.
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