In the latest study by the Indian Council for Research on International Economic Relations (ICRIER), it is recommended that Farmer Producer Organizations (FPOs) be empowered to trade in the commodities futures market. The purpose of FPOs is to collectivize producers, particularly small and marginal farmers, enabling them to form an alliance that can collectively tackle various agricultural challenges like getting improved access to investments, technology, inputs, and markets.
Understanding Farmer Producer Organisations (FPOs)
The idea of FPOs revolves around creating an effective alliance of producers to address farming challenges. An FPO is a legal entity established by primary producers such as farmers, milk producers, fishermen, weavers, rural artisans, and craftsmen. It can take the form of a cooperative society, production company, or any other legal institution that allows sharing of benefits among members.
The role of promoting institutions or resource agencies is to mobilize these FPOs. Small Farmers Agribusiness Consortium (SFAC) extends support for this undertaking while also leveraging assistance from governmental and agencies like NABARD. However, attempts to mass-produce FPOs have not yet yielded the anticipated results.
The Concept of Future Market
Future contracts in agricultural commodities serve as hedging instruments. In simple terms, hedging is a practice that protects farmers against a poor harvest by purchasing futures contracts of the same commodity. The Forward Markets Commission (FMC), which was a regulatory authority for commodity futures market in India, has been merged with Securities and Exchange Board of India (SEBI) since September 28, 2015.
History of Future Trading in India
The first futures trade by an Indian FPO took place in 2014 when the Ram Rahim Pragati Producer Company hedged soybean price risk on the National Commodity and Derivatives Exchange (NCDEX). However, between April 2016 and May 2018, FPOs only held a minuscule 0.004% share of the agri-futures trade at NCDEX.
| Commodity | FPO futures trade(₹ crore) |
|---|---|
| Soybeans | More than half of 50.8 |
| Maize | One third of 50.8 |
Obstacles to Future Trading
Small farmers often hesitate to trade in the futures market due to their limited capacity as individuals, viewing it with suspicion and equating it to gambling. As a result, they depend on traditional marketing channels’ traders who charge high fees but provide easy access to credit and market. However, FPOs can offer the necessary scale of production if adequate information and support are provided.
Role of National Commodities and Derivatives Exchange (NCDEX)
The NCDEX is an online commodities exchange, primarily dealing with agricultural commodities in India. It was established as a public limited company on April 23, 2003. The founders include prominent financial institutions such as ICICI Bank Limited, the National Stock Exchange of India, and the National Bank for Agricultural and Rural Development, among others. Although its head office is in Mumbai, it operates all over the country. As of March 2018, trading is conducted on 27 commodity contracts, including 25 contracts for agricultural products.
Benefits of Future Market to Farmers
Linking farmers with the futures market can lead to several benefits, including efficient price discovery, more market liquidity, removal of middlemen, and ultimately increased income for agricultural families.
The Way Forward
By mirroring China’s approach of assisting small land-holding farmers by providing customised products and reducing price distortions, the Government of India can play a crucial role. The government should not intervene much in prices and procurement of commodities. Instead, the focus needs to be on identifying production centres and constructing warehouses and delivery centres around them to encourage futures trading in these areas.
