The National Commodity and Derivatives Exchange (NCDEX) reported that 329 Farmer Producer Organisations (FPOs) participated in the NCDEX futures platform from January 2016 to February 2021.

About 130 FPOs have utilised the commodity futures platforms to hedge price risks — more than 50,000 tonnes of various commodities were hedged, and nearly 9,530 tonnes of commodities delivered — soyabean and maize (corn) commodities are the most used futures contracts.

The abysmally low participation of farmers has forced policymakers to raise some questions.

* How does principles-based regulation improve and strengthen hedgers, namely farmers and commercial users of the commodities?

* Can hedgers utilise the exchanges as a reference frame for investment, sowing, and marketing decisions?

* What policy actions are necessary to promote hedgers’ participation?

Principles-based regulation

As farmers or commercial users are net hedgers (either short or long) in the commodity derivative market, there needs to be a principle-based regulation in driving the activities and moderating the outcomes. The International Organization of Securities Commissions (IOSCO) proposed 24 principles that include accountability, economic utility, correlation with physical market and information sharing.

The rationale for proposed principles include (1) design and review of physical commodity derivative contracts, (2) data on market transparency, (3) surveillance of commodity derivatives markets, (4) addressing disorderly commodity derivatives markets, (5) enforcement and information sharing, (6) technological developments in commodity derivatives markets, (7) promotion on investor education and awareness. If implemented in letter and spirit, these principles can boost participation in the derivative market.

The lessons

First, the regulator, commodity exchanges, farmer organisations, and market infrastructure institutions need to work in unison and bring the necessary changes to the institutional participation of farmers. This includes margining and collateral practices, member eligibility norms, risk management norms, technology such as co-location facility impacting participation.

Second, a policy push can incentivise farmer participation by providing platform access and equity matching funds for raising farmer organisations’ paid-up capital. Pre-participation grants for capacity building and awareness of farmers is critical to promote smallholders’ participation.

Third, regulators and market agencies must benchmark trading, settlement, and delivery considering the international best practices in the CME Group or Chinese exchanges. While a basket of products has been offered to farmers or FPOs, their willingness to pay would determine the success of product launch, liquidity and market depth, and exchange management.

Participating farmer organisations adopted either hedging (short) or cash-and-carry arbitraging for a lock-in or improved price realisation. Additionally, a few FPOs utilised a mixed strategy — hedging and speculating the price movement and realised the gain on time.

Fourth, intermittent bans on commodity futures or derivative products hurt FPOs’ participation.

Fifth, setting up a decentralised data centre linked to the commodity exchanges and data storage is necessary to streamline FPOs’ collective decision-making in pre- and post-harvest operations with real-time subscription-based crop advisory and market intelligence services.

The writer is faculty of CFAM, IIM Lucknow. Views are personal