From farm to futures

The majority of Indian farmers have a holding of less than an acre. With no bargaining power, left to the mercy of middlemen, they struggle to make ends meet. While on the one hand input costs are high, on the other, they don’t get the right price for their produce.

The futures market can play an effective role in mitigating such risks.

The Indian commodity derivative exchanges have been in existence for over a decade, but not many farmers know about them. Today, some farmer producer companies are using this platform to help out farmer members. We take a look at how this is done.

Farmer producer organisations received legal status in 2002 when they were allowed to register as companies. Only farmer-producers can be members of this company. They contribute capital, manage the company, appoint staff and share the profits. They receive assistance from NGOs in the initial years (in some cases for a longer time). They train the member farmers on managing the company, and also help them reach out to corporate groups and sell their produce directly. Small Farmers’ Agri-Business Consortium (SFAC) or Nabard provide them financial assistance through loans. By coming together as a company, farmers benefit from lower transaction costs as they aggregate their produce and also get a good bargain on inputs, including seeds and fertilisers.

There are, at present, 750-plus farmer producer organisations (FPOs) in India. While some of these are still co-operatives, others have registered themselves as companies. Some of these companies have taken to the futures market to help their members get better prices. Eight farmer producer companies, covering 18,000-plus farmers, trade on the NCDEX, the agri commodity derivatives exchange.

Two examples are worth mentioning here.

JEEViKA, a World Bank-supported program for poverty alleviation in rural Bihar, started its pilot project in Purnia district in Bihar in 2015 for maize farmers. As most of the farmers in this district were small with an average land holding of less than 1.4 acres, they had limited access to mandis. The manual grading process followed by the agents saw farmers lose out as price was fixed by the ‘look and feel’ of the crop. However, today, the Aranyak Agri Producer Company, a federation of producer companies in Bihar, supported by JEEViKA and TechnoServe India, a global non-profit organisation, sells its produce in the futures platform on NCDEX.

Debranjan Pujahari, Associate Practice Leader, TechnoServe India, says, “After aggregation of the produce of the members, the company stores it in the exchange-accredited warehouse and sells it either directly to institutional buyers or to traders through the futures platform. The Aranyak Agri Producer Company procured about 1,014 tonnes of maize in 2015-16 from about 300 members of the total 1,000 plus members under it. A good portion of this was sold through the futures market. Farmers were able to realise ₹1,060/quintal, compared to ₹951 if they followed their usual ways.

The Samriddhi Mahila Crop Producers Company and its supporting agency — SRIJAN, an NGO — is another case in point. This group of tribal women farmers in Bundi district in Rajasthan have been in operation as a Producer Company since 2011. Currently, the company has 2,310 members producing soyabean. Earlier, these farmers were selling their produce to agents. Then, after SRIJAN came on the scene, it helped the farmers sell their produce directly to Bunge, a global oilseeds processing company. But last year, Bunge closed its plant in Bundi, forcing farmers in the area to look for other options; and find the way to NCDEX.

In September this year, the producer company took a ‘sell’ position in NCDEX futures to deliver 100 quintals of soyabean at ₹3,300/quintal in November; that time the price in a nearby mandi was ₹3,075/quintal. It then, in October, squared off its position as prices dropped to ₹2,995/quintal and made a profit of ₹30,500. Souvik, CEO of Samriddhi Mahila Crop Producers Company, says, “We use the profits to source good quality seeds and fertilisers for farmers and give it to them at a lower than market price.”

SFAC and Nabard provide financial support to FPOs. But larger the producer group, higher the working capital requirement, and these companies are, at most times, in a fund crunch situation.

When they sell their produce through the futures market, they incur a large expense. First, to adhere to the contract specifications, they have to do assaying and grading of the produce, for which they need to invest in some basic machinery and instruments.

Second, they need to put the produce in the warehouse and cough up rent for it.

Further, when the produce has to be sold on the exchange’s platform, the company has to pay the margin money — which may be about 10 per cent of the contract value.

Also, while these producer companies sell and realise money two or three months down the line, they pay the farmers immediately.

The Samriddhi Mahila Crop Producers Company, for instance, gives two options to its member farmers — either put their produce in the warehouse and take 70 per cent loan on it from the bank or give it to them to sell in the futures market.

Farmers who go with the first option, see the company assisting them in open market sale at any time the prices go up in the mandi. Those who take the second option, see the producer company paying them immediately the market value of their produce.

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