The Hindu Business Line : MCX ties up with Markfed for wheat futures

WAREHOUSE receipts-based farm lending, mediated through commodity futures exchanges, may finally take off from the ensuing rabi marketing season, beginning April.

The Multi Commodity Exchange of India Ltd (MCX) has tied up with the Punjab State Cooperative Marketing Federation (Markfed) to hook farmers in the State to its futures trading platform in wheat.

Currently, farmers sell their entire wheat on the spot market, offloading bulk of their crop to State agencies immediately after it is harvested from mid-April. The entire crop is sold at one go mainly because of the perceived requirement for ready cash for repaying loans and meeting other large expenses on marriages, house repairs, consumer durable purchases, etc.

Since most farmers have small landholdings, not many can hold on their crop so as to realise higher prices in the off-season.

What MCX and Markfed plan to do now is to provide farmers the option to buy into wheat futures contracts traded on the former's exchange. The farmer, instead of selling 10 tonnes of wheat at the minimum support price of Rs 6,400 per tonne in the spot market on April 15, will deposit the same quantity in a warehouse operated by Markfed, which will issue him a warehouse receipt (WR). The farmer will simultaneously sell into a futures contract for July, which would be trading at a higher price, say Rs 7,000 per tonne.

The WR can then be used as a collateral by the farmer to obtain bank finance, covering about 70 per cent of the value of the futures contract, which, for 10 tonnes of wheat at Rs 7,000 per tonne, work out to about Rs 49,000.

"So far, SBI, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, Dena Bank and HDFC have agreed to lend at 9-12 per cent interest against WRs issued by Markfed," said Mr Jignesh Shah, Managing Director, MCX. The banks will have a lien on the stored wheat to protect their security interest in the event of the farmer defaulting.

While 70 per cent of the value of the futures contract would be paid upfront to the farmer, the balance 30 per cent (`haircut') would be given when the contract is due to expire (July 15). That is when the MCX declares payout and forwards the money put by the purchaser to the bank.

The purchaser of the contract could be an exporter, a large processor, a flour miller, a broker representing them or even a plain speculator.

While giving the balance amount, the bank will deduct the interest and also the various warehouse charges owed to Markfed, including expenses on loading and unloading, fumigation, insurance, etc for the stored period. Assuming all these deductions to add up to around Rs 1,000, the farmer would still end up getting about Rs 69,000, of which Rs 49,000 would have been obtained in the first instalment itself. The aggregate amount also works out to higher than the Rs 64,000 that he would have received by selling on the spot market.

"We will operationalise the project from the coming rabi season. Once the farmer familiarises himself with the new system, it would change the way crops are marketed in the State", said Mr S.S. Channy, Managing Director of Markfed, which annually procures around two million tonnes of wheat for the Central pool.

Apart from being a certified warehouse operator, Markfed is also a trading member with MCX, giving it the leeway to enter into futures contract on behalf of farmers.

"We will leverage our network of 3,302 primary societies connecting over a million farmers for this purpose. Our plan is to install terminals across the State, through which farmers can access latest price information," he added.

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