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The change
There were many announcements in the budget that were favourable for the commodity market. The Finance Minister also announced a common e-platform for farmers for 585 wholesale markets. For commodity market participants, the icing on the cake came in the form of the proposal to announce new commodity derivatives by SEBI. The common man will get a reprieve on soaring prices of pulses with the allocation of ₹500 crore for pulses production under National Food Security Mission. The Finance Minister has also indicated that ₹900 crore will be set aside towards a price stabilisation fund to check unwarranted price increases.
Background
The Indian commodity market is currently in shambles. The National Spot Exchange fiasco, the slow developments after the SEBI-FMC merger and the continued distress of farmers due to poor supply chain infrastructure and lack of supportive measures to get the right price for the produce have all added to the problems. The National Agriculture Market (NAM)- a nation-wide online platform for farmers to sell their produce is a move in right direction. Currently, farmers sell all their produce to commission agents authorised by the APMC (Agriculture Produce Market Committee) in their area. A national level market while on one hand will help farmers get a better bargain for their crops by reaching buyers across the country, it will also check inflation by sealing leakages from the system through hoarding. Currently, as markets within each State are fragmented, much of the money in farm commodity trade goes to only the middlemen. The success of Karnataka in establishing a state wide market place is a case in point. The state government of Karnataka with NCDEX Spot Exchange developed a state wide e-platform for its APMCs through Rashtriya E-market and Services in 2014. Today, the platform connects 100 plus APMCs (of the total 157) and benefits farmers of the State by getting them better price and improved transparency in transactions. Setting up of NAM was approved by the Cabinet Committee on Economic Affairs in July last year. With a budget of ₹200 crore, the scheme was to be implemented over the next two years, covering 250, 200 and 135 mandis in the first, second and third year respectively.
Verdict
The clean-up in the commodity market is finally happening. With SEBI being asked to introduce new instruments soon, the market will see liquidity improve. As products such as options where costs are low are introduced, more participants may come to the commodities markets. If liquidity improves, all commodity hedgers can return to the Indian commodity exchanges for hedging price risks. The NAM, in addition to getting farmers a good bargain, will also reduce their cost of selling the produce thus indirectly offering relief to the common man. Currently, APMCs levy multiple fees. For instance, in wheat, the levies as a percentage of MSP go as high as 14.5 per cent (in Punjab; source: economic survey 2014-15) and this increases the end-price of commodities. The other positive in a national level agri market is that it can help give direction to prices for the futures market and control wild price swings. Today without an underlying market, futures prices are driven merely by speculation in most commodities. Once a national level agri market is established, price discovery will happen transparently.
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