Adverse Impact of Agri Derivatives Suspension on Farm Ecosystem

An agrarian economy, India is ranked the world’s third largest producer of agricultural crops and other farm products covering milk, rice, wheat, pulses, oilseeds, sugar, cotton, spices and so on. Importantly, farming provides livelihood to about 130 million families. The value chain participants include a large number of processing units spread across the country, distributive trade as well as providers of logistics, finance and other services. Several millions are employed in the country’s agri ecosystem.

A large number of SMEs and MSMEs (Micro, Small and Medium Enterprises) are engaged in processing of various agricultural commodities. Many trading houses are engaged in export or import agricultural goods.

By their very nature, agricultural commodity markets are subject to price volatility as the interplay of several factors – weather, production, quality, demand, export/import trade, currency – impacts market prices. It is critical for market participants to manage their price risk.

One scientific and time-tested method of price risk management is hedging with the use of derivatives contract. Hedging is akin to insurance policy that helps prevent losses that may arise from adverse price movement. It protects and helps to lock-in the built-in margins.

For sustained and sustainable growth of our country’s agriculture, we need policies that adopt an ecosystem approach. Such an approach covers production, processing, distribution, consumption, foreign trade and related activities. The value chain participants need stable, predictable, long-term policies that would provide an environment conducive to flow of investment and sustained growth.

In other words, switch-on – switch-off policies are most likely to work against the interest of value chain participants including growers, processors and others. Our policymakers have to be conscious of this imperative. But from time to time we find our agri sector policies are not stable or predictable. This disturbs the market sentiment. Market participants turn unsure about the future of their business. This policy uncertainty or policy risk is counter-productive.

Derivative contracts of several agricultural commodities including pulses and oilseeds have remained suspended for almost one year now for reasons not publicly available. The suspension has hurt value chain participants including farmers, processors and exporters as they are unable to have any forward guidance about prices of key agricultural crops.

Stakeholders are unable to take any ‘informed’ decision about cultivation and disposal of crops. The suspension of derivatives contracts has vitiated the atmosphere for value chain participants who have now turned apprehensive about the stability of government policies relating to agriculture.

It is likely there is an undisclosed but baseless assumption among policymakers that derivatives trade leads to price rise and that suspension will contain price rise. Nothing can be farther from the truth.

Take the Chana / gram / desi chickpea market for example. In the physical market, chana prices are still ruling below the Minimum Support Price announced by the government. The low price is despite suspension of the derivatives contract. Low farm gate prices hurt growers. There is risk growers may be forced to compromise on planting chana in the ongoing Rabi season. Very clearly and indeed tragically, suspension of the chana Futures contract has hardly helped growers.

It is time for the government to win back the trust and confidence of the millions of value chain participants in the nation’s agri ecosystem. It is time to lift the suspension and relaunch the contracts with a new vigour.

The physical market and derivatives market are two sides of the same coin. The latter simply reflects the supply-demand fundamentals of the former. By suspending agri derivatives the physical market gets distorted and value chain players suffer. Private investment to improve the physical market efficiency may also take a hit.

(G. Chandrashekhar is a senior editor, policy commentator and agribusiness specialist. Views are personal. He can be reached at: gchandrashekhar@gmail.com)

Moneycontrol journalists were not involved in the creation of the article.