Commodities

Farmers banking on NCDEX’s ‘options in goods’

Suresh P Iyengar Mumbai | Updated on November 18, 2020 Published on November 18, 2020

Farmers can buy options in goods by paying a premium to the contract writer who can be a processor/ exporter/ investor   -  Getty Images/iStockphoto

Exchange to bear premium for put options in rapeseed, chana

Surendra Kumar Gupta, a farmer from Madhya Pradesh, is a relieved man as he has managed to reap a rich harvest even before sowing the first seed.

Gupta, along with a group of farmers under Ekgaon, a Farmers Producers Organisation, has bought options in goods to sell 400 quintals of chana at ₹5,000 a quintal during the start of the harvest in April.

Similarly, Rajendra Dayal, Director of Jambeshwar Digifarm Producer Company from Rajasthan, has bought an ‘options in goods’ contract to sell 100 quintals of mustardseed at ₹5,000 a quintal on the NCDEX.

Farmers who had enrolled themselves with Jambeshwar Digifarm FPO formed in July, are thrilled and cannot still believe that they can lock-in prices for their harvest which will happen next April.

Dayal says the FPO has already registered 445 farmers from Bikaner district and will easily cross the target of 500 as more farmers are showing interest.

Price insurance

In a bid to familiarise options on goods with farmers, NCDEX will foot the entire premium to be borne by the farmers.

Kapil Dev, Head-Agriculture business, NCDEX, said the exchange will be working with the FPOs which are trading in the futures market to spread the awareness about the new options contract which is like buying a price insurance. Gupta had hedged farmers’ price risk last harvest through chana futures contract on NCDEX but was not that successful.

“I think, options in goods is the best tool to hedge farmers’ price risk as it not only covers the loss if prices fall but also allows to reap the benefit of higher prices,” he added.

The entire cost of cultivation for chana farmers works out to ₹2,800-3,000 per acre and the selling price has already been locked in at ₹5,000 a quintal. Farmers can buy options in goods by paying a premium to the contract writer who can be a processor/exporter/investor.

Hedge price risk

Traditionally, farmers decide to grow a particular crop after looking at the then prevailing price. However, they incur huge loss during the harvest as commodity prices crash due to large arrivals at mandis.

Also, farmers are forced to sell their commodity immediately after harvest as they have to pay off short-term liability such as payment for labour, farm implements and loans availed.

Asked whether farmers will be able to deliver the chana matching the quality specification of NCDEX, Gupta said farmers are selling only part of their produce in advance and will definitely be able to meet the quality specification.

For instance, he said the 500 farmers attached with Ekgaon produce about 700-800 quintals of chana per season and what will be sold on NCDEX will be much less. Before moving the produce for delivery, farmers can send a sample for testing to NCDEX-accredited labs to avoid rejection. Farmers are finding it difficult to comprehend the fact that somebody can lock in the price of ₹5,000 a quintal for delivery next April and also are apprehensive whether they will get the assured price.

Exchange’s role

Kapil Dev said the exchange will ensure adequate margin is collected from contract writers and that there is no default at the time of delivery.

Moreover, defaulters have to pay a penalty of three per cent of difference between traded and final settlement price. All the regulation for delivery on futures contract will be applicable for options in goods.

In the unlikely event of prices increasing at the time of harvest, farmers can wind-up their position and sell their produce in the open market at a higher price, he said.

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Published on November 18, 2020
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