The National Commodities and Derivatives Exchange (NCDEX) is in talks with the National Bank for Agriculture and Rural Development (Nabard) and the Centre to finance the participation of farmer producer organisations (FPOs) in “put” options, NCDEX Managing Director and Chief Executive Officer Arun Raste has said.

To take part in “put” options contract, a participant will have to pay an upfront charge, also known as a premium, of 4-5 per cent. “FPOs are a little hesitant as they have to convince their board and not many are aware of put options. Therefore, to encourage them we are trying to get them loans,” he told a select group of journalists near Hyderabad. 

Raste was in Hyderabad to address a Lighthouse Farmer Producer Organisations (FPOs) Conclave organised by agri enterprise Samunnati. 

Weapon to manage risk

Addressing the conclave, he said insurance is a “weapon” to manage market risk. But taking “put” options can be a good precaution. About 500 FPOs have registered with NCDEX to take part in derivatives trade and 170 of them are actively trading. “We helped 41 FPOs to take part in put options trade with the help of SEBI. Of these, three have now come forward to trade on their own,” he said. 

“Put” options can be a good insurance against the minimum support price (MSP) for crops. “We have crop insurance but not price insurance. Option trade has a potential to supplement and complement the MSP regime,” said Raste.

FPOs lose nothing by taking part in “put” options. “In this method of trade, farmers will not have to sell their produce below MSP. Also, large commodities can be covered under the MSP,” the NCDEX chief said.

Aiding MSP mechanism

The Centre could also consider “put” options as one way of ensuring MSP for farmers. “There should be a mechanism to support or provide subsidy for upfront payment of premium for put options, particularly FPOs, so that more farmers could derive benefits of this trading option,” he said.

A put option will help FPOs to cover their risk as farmers will be assured of the produce’s price, say MSP for example in case the price of the produce declines. In the event of the prices increasing, they can sell it in the market and cancel the put option. “Derivatives market is the only solution for FPOs to compete against multinational companies. Farmers will not face any loss by taking part in derivative options,” Raste said.

Referring to some people saying they are unable to understand the concept, the NCDEX chief said a woman from a Bihar village, Kiran Devi, representing Jeevika, a non-governmental organisation, explained the concept to civil servants at the Lal Bahadur Shastri National Academy of Administration. 

AP to subsidise premium

“If a woman, who is not educated much (Kiran Devi), is able to understand the concept, it should be a problem for others,” he said. 

To stress the importance of derivatives, particularly for FPOs, Raste said a FPO from Rajasthan was the first to start trading in groundnut derivatives that was launched by NCDEX last week. 

Soon, Andhra Pradesh will subsidise the premium for FPOs to take part in put options, he said. 

Asked about the continuation of ban on seven agri commodities despite a drop in their prices, Raste said the issue had been taken up with the government. “The ban on crude palm oil (CPO), for example. Their prices have dropped sharply over the last few months, but the ban continues,” he said. 

More derivatives trades

On SEBI-appointed Commodity Development and Advisory Committee recommending derivatives trade in a slew of commodities, including aviation turbine fuel, milk, apple and weather, Raste said the proposal had been sent to the Centre. 

“The Centre will circulate among various ministries seeking their comments. Once it gets the view, it will give the clearance. It will take sometime,” he said.

(The writer was at the conclave on the invitation of Samunnati)

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