Betting on farm futures is not equivalent to gambling

Restoring futures trade only can give a level playing field to farmers to hedge their price risks as sowing begins.

The Indian agricultural sector is going through a challenging period leading to an unprecedented contradiction on the policy front, thanks to delayed monsoons and potential kharif crop losses. One can blame cyclone Biparjoy or El Nino for delayed monsoon, but the fact remains that farmers would be hit in some way or other. They may suffer due to lower produce or lower incomes, or both. The emerging situation could propel anger among farmers and consumers due to inflation and jeopardise the fortunes of the ruling party.

This is reflected in the recent risk management steps taken by the government to protect itself from a political backlash in a series of polls that will climax with the General Elections in May 2024. Imposition of stock limits on tur (pigeon pea), urad (black matpe) and wheat, cut in import duty on edible oils when there was a necessity to do the opposite to protect mustard and soybean farmers, and massive procurement of chana (desi chickpea) are some of the steps taken by the Centre.

Farmers Pay A Price

However, what about farmers? What about their risks? A price slump could be a major risk emanating from risk management steps taken by the government as a counterparty. But there is no mechanism for farmers to manage their price risks. Because futures trade, a mechanism to manage price risks, has been banned since 2021 in three stages taking soybean, soyoil, chana, mustard, and five other commodities’ contracts off this platform. Consider, for instance, the ban on soybean. Farmers have paid a heavy price as they could not hedge soybean during sowing months when prices were around Rs 6,300-6,400 a quintal. At harvest, as the oilseed slumped below Rs 5,000 and traded around that level for some time, farmers sold their produce at that level in panic. The same was the fate of mustard and chana producers.

Restoring futures trade only can give a level playing field to farmers to hedge their price risks as sowing begins. The lean season of Kharif crops, which is a period of ‘relatively’ high prices, can be the best time for farmers to sell to-be harvested kharif crops on futures platforms and protect themselves from the imminent drop in prices at harvest. For example, tur currently trades at Rs 10,000 a quintal, 43 percent above the minimum support price. Having futures in tur at this point could have helped growers to lock in this price instead of waiting for six months and fetching barely the MSP or even less.

The latest ban as well as over a dozen such bans since the launch of the futures trade in 2003 were imposed on the perception that ‘speculation in futures could have caused the inflation’. Despite a Parliamentary panel and several others concluding that ‘futures trade has no role in inflation’, the government seems unconvinced. Anti-futures brigade, which consists of industry experts and trade bodies, continues to criticise futures trade labelling it as ‘speculative’ though, in reality, they fear losing pricing power to producers. This contradictory behaviour raises only confusion among policymakers and to address the same, there is a need to decode or interpret the word ‘speculation’ in a contextual manner and learn the dynamics of price movement in a complete cycle of a futures contract. Here policymakers, parliamentarians and industry bodies seem to have failed completely. I have come across even high court judges and prominent lawyers representing top consulting firms informally confessing that they hardly understood the concept and operational aspects of futures trading. That is it is necessary to understand the meaning of “speculation” in the context of futures trade.

Speculation vs Gambling

Speculation is a way of life. For example, buying gold or land without the intent of farming or investing in a second home are also examples of ‘speculation’ and the ultimate intention of these deals is to earn profit. In fact, these deals are more dangerous for farmers due to escalation in the cost of production (land as a factor of production) and for the common man, whose shelter becomes costlier. Similarly, the government buying of 30-40 percent of the country’s 300-million-tonne grain basket or imposing stock limits and rejigging duties is also done on a ‘speculation’ that inflation may go out of control in the near future. But these ‘speculative transactions’ have constitutional protection.

In the context of futures trade, however, ‘speculation’ is viewed negatively though futures trade as a concept itself is based on the above speculative nature of humans. Speculators carefully analyse market trends, economic indicators and other relevant information to make informed investment decisions. They provide the necessary volume to act as counterparties to enable producers or hedgers (farmers in this case) to sell their produce at a remunerative price. Hence ‘speculation’ is welcome.

But there is a major catch at this juncture. Regulators and critics of futures markets having vested interests, mix up gambling with speculation to justify frequent bans. Gambling can be associated with ‘excessive speculation’ but not speculation for sure. Casino games, lotteries or betting on events are perfect cases of gambling where bets are taken to try out sheer luck or manipulation and are still allowed by the government. Conversely, futures trade is a place for price discovery and hedging, and commodity exchanges provide a neutral platform for farmers and other stakeholders to hedge their respective price risks. It has a positive impact on the economic interests of farmers, consumers and even the government coffers, yet is banned frequently. Isn't it a contradiction taking a heavy toll on the farm sector and farm incomes?

The Centre should restore farm futures as the recessionary trend in global farm prices and the likely setback to kharif output of rice, pulses and soybean may hurt millions of small farmers in India if they are not assured of respectable prices through derivatives trade.

Shrikant Kuwalekar is an Agri Journalist, Price Risk Management & Agri Value-Chain strategist. Views are personal, and do not represent the stand of this publication.