Options trade begins for wheat, maize, mustard; allows farmers to set their own price for crops

Options trade begins for wheat, maize, mustard; allows farmers to set their own price for crops

Options trade: Along with the comprehensive agriculture market reforms undertaken via three Ordinances recently to facilitate unfettered market access for farmers, the onset of options trading in three agriculture commodities — wheat, maize and mustard — last month could potentially give another boost to price realisation by farmers. Of course, these are still very early days and the options introduced on the commodity exchange NCDEX is currently drawing minuscule volumes, compared to the total trade in the three commodities. Analysts, however, say the prospects are bright, given that the rules allow the seller (farmer) to set his own price (within a defined band) for selling the crops, with an obligation on the buyer to lift the goods (compulsory delivery).

 

“Option trading can be an alternative to the Minimum Support Price system (that puts a burden on the exchequer and leads to maintenance of food stocks beyond even the buffer levels at a huge cost). It can be replacement of the existing marketing systems if developed properly in the long-run and Farmer Producers Organisations (FPOs) are enabled to aggregate the crops to generate volume,” said Vijay Sardana, a member of SEBI’s commodity derivatives advisory committee.

Under the system, when farmers are ready to sell, traders also must be made to buy on the exchange platform, Sardana said. NCDEX has applied for permission from SEBI to launch options trading in four more commodities — chana, soyabean, refined soya oil and guar gum.

The options contracts have hitherto been premised on futures trading on expiry, whereas the ‘options on goods’ now being rolled out would be settled through physical delivery. In fact, the value of traded contracts on agri-futures has been declining in the country over the last few years, and farmers haven’t benefited much from it, in the absence of ready tools at their disposal to hedge their market risks efficiently.

As per the options contract — now available in wheat, maize and mustard — a seller, who wants to sell his crop on a future date on a predetermined price, can secure that price on present date by paying a small amount of premium. He can also seek a higher rate (up to a limit) from the prevailing rate on the day of trade. After a deal is executed, the buyer has to pay that secured price for the crop on delivery. If the market price is less than the secured price on the date of delivery, the buyer cannot refuse delivery, whereas the seller can quit at any time by foregoing his premium if he finds a higher price in the physical market. The options are modelled on the European system.

“Since the government is spending a lot of amount on buying and selling of crops to ensure farmers get the benefit of MSPs, it may alternatively consider subsidising premium in options trading and also allow direct participation of FPOs in trading without going through brokers of the exchanges,” said an official, requesting anonymity. While options will work as a price insurance for the farmers, the fiscal burden on the exchequer would be lower, he reasoned.

Under a new central law on inter-state trade, farmers now have freedom to sell their produce in any market within the country, without being hamstrung by the APMCs. No state levies will be imposed on trade outside the APMC mandis and payment has to be made to the farmer within three working days. According to the new law, anyone having PAN card can trade, while the Centre reserves the right to lay down any new procedures, including mandatory prior registration.

Via another Ordinance on contract farming, farmers would get share of post-contract price surge, after they sign agreements of contract farming with private players. Also, they will have the cover of minimum guaranteed price if open market/mandi rates fall drastically.

The two ordinances, along with another one in the offing to give effect to the amendments proposed to the Essential Commodities Act to ease stock holding restrictions on commodities till the food processors in the value chain, will together go a long way in unshackling the entire agriculture-to-food-processing-to-retailing value-chain and giving farmers the choice to sell their produce in any market across the country, analysts feel.

Options trade

After deciding to fix the minimum support prices (MSPs) at 150% of the costs (A2+FL) in 2018, the Centre in the same year also launched PM-Aasha, a scheme promised to ensure farmers get to sell their produce at the benchmark rates. However, despite buying a record 5.8 million tonne of oilseeds and pulses in 2018-19 (worth Rs 27,353 crore), the scheme failed to have a major impact on mandi prices, although proponents of the scheme claim that mandi rates would have been even lower without the policy.

As it could not dispose of the previous stocks as well as higher mandi rates than MSP in soyabean, the procurement in 2019-20 dropped to around 4 million tonne.

Options trade

While there is negligible procurement of coarse cereals as the government does not want to take the financial burden, the pressure on the Food Corporation of India, that procures paddy and wheat, has been mounting. The FCI’s indebtedness to the National Small Savings Fund is set to rise to an alarming level of Rs 3.5 lakh crore in FY21 from Rs 2.5 lakh crore at the end of FY20. This will be the steepest annual spike in these loans, which are increasingly being resorted to, by the Centre to keep the food grain procurement operations going, and meet the obligation to provide highly subsidised PDS food supplies under the National Food Security Act.

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