‘Providing Access To Finance Is Critical To Farmers’
Samir Shah, CEO of National Commodity and Derivatives Exchange (NCDEX) India, a major player for agriculture supplies trade in the country, speaks to BW Businessworld on the future of agriculture-commodity market in India to prime minister Narendra Modi’s vision of connecting farmers to market. Edited excerpts:
Why there were huge falls in future volume at the end of previous year?
The lack lustre performance of the commodity markets was an outcome of multiple factors. The record production of all major food grains in previous year and increased supplies amidst weak demand have remained the major causes of the price fall.
Food grain production touched record high of 273.38 million tonne; highest post- Independence. A bumper harvest and slowdown in the economy due to demonetisation, contributed to a sharp drop in farm commodity prices in the past few months. Price of different pulses fell by 25-60 per cent during last one year, Soybean was down by 25-30 per cent. Tightening of the flow of money as a result of demonetisation, had also seen reduced stocking by traders and hedgers.
International market was also moving in bearish trend and the factors behind it were ample supply, a slowing global economy and a strong US dollar. This has been coupled with the lack of clarity over the goods and services tax (GST) on processed and packaged goods.
How NCDEX resolves different quality issues?
The Exchange has strict guidelines and processes in place for the Warehouse Service Providers (WSPs) and mandates the WSP to ensure deposits meet the quantity and quality parameters. This along with extensive efforts taken by the Exchange to increase quality consciousness among participants has helped reduce quality related complaints by almost 20 per cent over previous year.
The exchange ensures that independent audit of stocks and other facilities in the warehouses, is carried out by engaging expert agencies, at regular intervals. In the last three months, 54 warehouses have been audited.
Over the years, NCDEX has helped improve quality of production by rewarding better quality and consistency of crop. It has reduced diversity of quality standards in the market and increased purchaser confidence in local quality control/certification. NCDEX contract specifications are aligned to FSSAI standards, which gives confidence to the buyer.
Farmers have been able to recognize the value of meeting NCDEX standards and adopted grading and assaying practices. Having witnessed first-hand advantages of meeting NCDEX quality standards, FPOs are encouraging their farmer members to use proper weighing machines, scientific grading and assaying. FPOs promoted by Jeevika in Bihar have invested in maize driers to ensure conformity to NCDEX quality standards.
What is your ‘early pay in’ facility for Farmer producer Organisations (FPOs)? How do you think it will prepare commodity markets to manage risk in production, processing & marketing of products?
The Exchange permits Farmer Producer Organisations (FPOs) to deposit their produce in Exchange approved warehouses, immediately after taking a sell position on the platform. This facility known as the “Early pay in facility”, reduces the cost of hedging for farmers, who are exempted from all applicable margins, except mark- to-market margins, to the extent of the short open position or the early pay-in position, whichever is less.
It thus encourages participants to use commodity markets to manage commercial risk in the production, processing and marketing of their products. Banas Farmer Producer Company from Radhanpur, Gujarat and Aaranyak Farmer Producer company from Bihar used this facility to deposit Guar seed and Maize respectively and brought down their cost of hedging, thereby seeing increased realisations from the market platform.
Modi is trying to connect farmers with commodity market. What do you think about this vision?
The goal set by Modi, to double farmers’ income by 2022-23, is central to promoting farmers’ welfare. Ensuring farmers get the best value for their produce is extremely important and giving them access to national regulated markets such as futures & forwards, online national agricultural market, providing access to finance and improving post-harvest infrastructure is critical.
Farmer Producer Companies and cooperatives have emerged as viable aggregation vehicles for small and marginal farmers to participate directly on the NCDEX platform to realize better prices and manage risk through informed judgement.
In the last 18 months, NCDEX has reached out to more than 275,000 farmers belonging to 177 farmer collectives. Farmers have received 15-25 per cent higher net price realisation. This is in addition to the three per cent savings in costs from direct market access.
The higher income has become possible through a range of multifaceted developmental activities undertaken by NCDEX to upgrade post-harvest practices, build capacity for marketing, disseminate information, and harness innovative bank credit and trade finance mechanisms.
Going forward, NCDEX has the potential to link small-holder agriculture, commodity supply chains, processing industry, finance and government policies in a reliable and transparent way in order to double farmer incomes.
Any expected rise in figures of agriculture-commodity markets, for current financial year?
The economic survey of FY2017-18 predicts an agricultural growth of 4.1 per cent in the current year as compared to 1.2 per cent in 2015-16. International Monetary Fund (IMF) recently forecast India’s growth to rebound to 7.2 per cent in financial year 2017-18 and 7.7 per cent in 2018-19. Notwithstanding the modest contribution of agriculture to the overall GDP, good monsoon augurs well for India’s macros and this will give enough leg room to the government to support growth in the economy.
What we are seeing is a change in paradigm. After the green revolution and the white revolution of Amul, we feel it’s the right time to call this a marketing revolution for the agri economy. The governments focus on doubling farmers’ incomes, combined with focus on SEBI, WDRA to build strong trusted markets and market infrastructure, e-NAM, the NeML Karnataka Model and emergence of FPOs all bode well for a vibrant ‘marketing led’ growth in the agri economy over the coming years.
On the commodity markets front, the building blocks are in place. In a developmental boost to the commodity markets, SEBI has permitted the introduction of options trading, which will not only offer a comprehensive risk management solution to the participants, but is also expected to improve the depth of the market. In its effort to bring in more liquidity, SEBI has permitted alternative investment funds hedge funds, to participate in the commodity derivatives market. Encouraging farmer participation in regulated markets and the focus on integrating the agricultural spot and derivatives markets will improve efficiencies in market access and ease the flow of credit to small farmers and have a positive impact on rural incomes.
How much pressure has been faced by edible oil trade due to imports?
India's edible oil imports are set to fall for the first time in six years as a surge in local oilseed output cuts into overseas purchases. The lower purchases by the world's biggest importer of vegetable oils come amid a 13 percent run-off in international crude palm oil prices this year that has also pulled down other edible oil benchmarks and kept domestic oilseed crushing in India unprofitable. This underlines the need for hedging their trade risks and futures are an excellent tool available to the industry.
At NCDEX, It has been our constant endeavour to provide a stronger, broad based product offering, which adds economic value to agri businesses. The Oil & Oil seeds basket has been augmented to include Rapeseed Mustard Oilcake, Degummed Soy Oil, Soymeal, offering an exhaustive and wholesome risk management offering to the market.
What is your idea about the large gap between the data of traded commodity and commodity produced?
India is among the top-five producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22 per cent to the gross domestic product (GDP) of the Indian economy. All this indicates that India is a major center for trading of commodity derivatives. However participation on commodity exchanges is very limited. Globally, the Open Interest /Production ratio ranges from 20 to 40 per cent across commodities with that of Soybean being 41 per cent and wheat at 28 per cent. In India, however, it’s is only marginal at 1.8 per cent for soybean and 0.1 per cent for wheat. This also highlights the huge opportunity that exists for the growth of this market.
Any further addition of items for agriculture commodity or energy commodity?
Our product strategy revolves around strengthening the existing product offering, across the commodity value chain, which fulfil an economic purpose and reintroduce contracts, which were discontinued for trading. The last couple of months have seen the relaunch of castor, chana and pepper, which have received an encouraging response from the market participants.
