Future farm markets

A national agricultural market might sound quixotic at first sight. In a sector where substantial commodities are perishable, first stage processing is important and the farmer’s reach is limited in terms of access to demand centres. Most of the action happens within 20 km of the farm and the focus has to be on improving farmers’ access to better sales terms. But markets are also about price discovery and in that sense the national market is a useful instrument. The big movement in the last decade and half in India in search of agricultural markets has been from villages to ‘Census Towns’. There is no agricultural marketing infrastructure there. Agro processing, communication, transport, storage, trade and financial collateral instruments could make a difference.

We can encourage farmers’ groups as producer companies. They can also play a larger role in strategic partnerships with business groups.

The more we encourage organisations of smaller producers to organise their interests and strategise their relations with large companies, the better and more enduring will be the systems we create

The new Companies Act initially was planning to drop the producer company provisions. However, with protest the provision has been retained until a new legislation is enacted.

It would be ideal to retain the producer company concept in the Companies Act, 2013. That would give the institution the priority it deserves. It should be a central part of the legislation and an actor in the national agricultural market.

Market infrastructure is important for efficient price discovery. State agencies at the district level and below are not capable in following up cases of poor collection of data on prices, which leads to non-response at the common market.

There is then the question of futures. Commodity trading restarted recently.Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. With the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks.

Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing a portfolio diversification option. The size of the commodities markets in India is quite significant. Of the country’s GDP of ₹13,20,730 crore (₹13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of ₹1,40,000 crore (₹1,400 billion).

Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The government has essentially made commodities eligible for futures trading, but the nationwide exchanges have earmarked only a select few for starters.

The argument used against futures and price discovery which is the only logical basis for commodity financing against is that markets are thin and allow cartelisation and perverse speculation.

The answer to thin markets is to strengthen them and until then regulate them. It is not to ban price discovery.

The writer is a former union minister

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