FPOs turn to NCDEX for price protection

Rutam Vora Ahmedabad | Updated on December 28, 2020

Using ’put options’, farmers can decide which crop to grow, based on the risk-reward returns   -  Kamal Narang

Bourse’s ‘put option’ initiative gets 41 FPOs trading 2,700 tonnes of chana, mustard seed

A latest initiative by the agri-commodity bourse NCDEX is catching the fancy of farmers to ensure price protection for their crop well in advance – even before the sowing.

As many as 41 Farmer Producer Organisation (FPOs) — mostly from Maharashtra, Madhya Pradesh and Rajasthan — have participated in NCDEX’s familiarisation initiative for put options in mustard seed and chana commodities on its platform.

Speaking to BusinessLine, Kapil Dev, Executive Vice-President and Head (Business and Product), NCDEX, informed that the exchange’s put option will give farmers a mechanism to decide which crop will give them good risk-reward returns at what price levels, based on which they can decide which crop to grow.

“So far, we have covered 41 FPOs under this initiative with around 2,700 tonnes of goods including 1,800 tonnes of RM Seed and 900 tonnes of Chana. The farmers have chosen the monthly expiry of April 2021. They pay the premium, which we have supported through SEBI,” said Dev adding that farmers are now capable to lock their price and ensure their profitability.

Risk coverage

Usually, farmers choose their crop based on their past experiences of price and profit and the current market prices.

If the prices fall, there will be a direct impact on the farmers’ income. Amid such uncertainty with no tool to cover the price fall, farmers can use put option tool to cover the risk of a potential loss with price correction of the commodities.

Sharing his experience, Rajendra Kumar Bishnoi, Director, Jambeshwar Digifarm Producer Company from Rajasthan, said, “Locking of harvest price at sowing was like a dream for farmers but with Put Options we have already secured our sale price of chana at ₹5,100 per quintal by paying a premium of just ₹270 on a Put Option. We also locked-in mustard sales at ₹5,000 per quintal with almost the same premium. Now, farmer members of FPOs are safe from fall in prices at harvest and yes we may get higher prices as well.”

Dev said, “There is a huge behavioural change going to come if the farmers know what they are going to get from their crop beforehand. With such a mechanism, a lot of farmers can be protected with minimal cost.”

Helping hand

NCDEX had launched the initiative with support from the market regulator SEBI through a regulatory fee being foregone by it to encourage farmers’ participation in the financial ecosystem. “SEBI is tirelessly trying to get farmers on board the financial ecosystem. As an exchange this is something which we can provide farmers a market-driven tool with which they can decide what to grow, how much to grow, how much to pay and take a well-calculated call,” Dev added.

In January, SEBI had allowed exchanges to offer options in goods under their derivatives segments. After this initial handholding by the market regulator and the exchange, FPOs and farmer bodies would be able to participate in more commodities. NCDEX has options in goods available for mustard seed, chana, wheat, maize, soyabean, guar gum and guarseed.

Published on December 28, 2020

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