Two-way trade

| Updated on March 12, 2018 Published on March 25, 2013

Once the season is over, public procurement agencies should keep a window open for sale to purchase through weekly or even daily tenders.

It is unfortunate that the Cotton Corporation of India (CCI) is holding on to stockpiles of cotton in the facile belief hope that open market prices would improve or failing which the Finance Ministry would underwrite the resultant losses in offloading the current inventory. The likes of CCI, Food Corporation of India (FCI) and Nafed are, at the end of the day, hoarders of farm produce, even if their operations might serve a benign purpose: Ensuring that farmers get the official minimum support price (MSP) for their produce. Since harvesting of crops happens over a short time span, there is always the possibility of open market prices falling due to bunching of arrivals. To prevent that, these parastatals are, then, forced to procure kapas (seed-cotton), wheat or mustard during the peak arrival period, which accumulates in their godowns.

The problem comes when such purchases are substantial, as it happened last year in wheat, with over 40 per cent of the crop landing with FCI. It happened in cotton in 2008-09, when CCI bought up a third of the country’s total output, and also this season, where it has, along with Nafed, procured a tenth of the crop. What these end up doing is denuding the market of supplies, particularly in the off-season, leading to price spikes as seen in the current year for both wheat and cotton. It highlights the importance of de-hoarding or returning back to the market the quantities that were mopped up only in order to provide harvest-time price support to farmers. While FCI may be required to maintain a minimum level of stocks for feeding the public distribution system, there is not even this obligation when it comes to CCI. Once the harvesting season is over, the latter should, therefore, be made keep its sale window open for anybody to purchase through weekly or even daily tenders. Here, there should be no discrimination, whether between traders and millers or big and small buyers.

In the long run, though, even these operations need to be replaced with better, less market-distorting ways of supporting farmers. This could entail the latter selling at the going market rate and the Government paying the gap vis-à-vis the MSP for the quantities sold, by way of direct cash transfer to their Aadhaar-enabled bank accounts. All it takes for such a system to work is a robust payments platform that will also record all transactions electronically. Once that is in place, there will be no need for an FCI or CCI to undertake physical purchases and storage operations, with the attendant wastages and inefficiencies. A similar result can be achieved with a vibrant futures and options market enabling farmers to hedge efficiently. Any losses on physical sales in this case can be offset by taking opposite positions – either selling futures or buying put option contracts – in the derivatives market.

Published on March 25, 2013

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