“LINKING FARMERS WITH COMMODITY

FUTURES MARKET”: Present Status and Future

Strategies - A Case Study in Karnataka
By
Shivanand Balagali
S08PGDM037
shivabalagali@gmail.com

Submitted To
Dr. M. P. Vithal
Professor (Finance and strategy)
 Project Title:
“LINKING FARMERS WITH COMMODITY FUTURES MARKET”:
Present Status and Future Strategies - A Case Study in
Karnataka
 Under the Guidance of:
Dr. K.V. Nagaraju, General Manager
&
Dr. K. U. Vishwanathan
Asst. General Manager, NABARD
 NABARD strategic partnership with NCDEX-
to work synergistically to achieve the objective
of establishing an efficient and transparent
agricultural market in India, in the larger interest
of farming community for better price
realization of their farm produce.
 History of Commodity Markets in India

 The evolution of the organised futures market in India

commenced in 1875 with the setting up of the Bombay
Cotton Trade Association Ltd.
 The first organised futures market appeared in 1921,
when the Cotton Exchange, which dealt in various types
of cotton, was created in Bombay.
India has recently seen 3 National Level Electronic Exchanges
facilitating commodity trading. They are –
 National Commodity and Derivatives Exchange Of India Ltd.

 Multi Commodity Exchange (MCX)

 National Multi Commodity of India (NMCE)

 And also 24 other Regional Commodity Exchanges

Structure of commodity market
 Features of commodity futures

1. Organized
2. Standardized- Quality, Quantity, Delivery date
3. Eliminates Counterparty Risk – Clearing house
4. Facilitates Margin Trading
5. Closing a Position
6. Regulated Markets Environment - FMC
7. Physical Delivery
 Commodities suited for futures market trade
i. The commodity should have a suitable demand and supply
conditions i.e. volume and marketable surplus should be large.
ii. Prices should be volatile to necessitate hedging through futures
trading.
iii. The commodity should be free from substantial control from
Govt. regulations (or other bodies) imposing restrictions on
supply, distribution and prices of the commodity.
iv. The commodity should be homogenous or, alternately it must be
possible to specify a standard grade and to measure deviations
from that grade. (standardized contracts).
v. The commodity should be storable.
Difference between Spot markets and Futures markets
 Current Scenario of Commodity Markets in India

 24 major exchanges are registered with the FMC for

trading in futures.
 NMCE, MCX NCDEX and NBOT.
 Futures trading is now available in 95 commodities
 Major Commodities Available for Trading
 Edible oilseed complexes – Groundnut, Mustard seed,
cottonseed, sunflower, soy oil, etc.
 Food grains - Cereals, Pulses, Maize, etc.
 Fibres - Cotton, Jute, etc
 Spices - Turmeric, Pepper, Cardamom, etc.
 Metals - Gold, Silver, Copper, Zinc, Aluminium etc.
 Energy - Crude Oil, Natural Gas etc.
 Others - Castor seed, Sugar, Jaggery, Rubber, Guar gum etc.

21.29 26.24
11.92 13.17 9.41
7.79 5
1.8 3.9 0.02 0 1.82 0.02 2.310.001 0

2004-05 2005-06 2006-07 2007-08

Bullion and other metals Agriculture Energy Others

 Futures Market and the Farmer
 India is predominantly an agrarian economy
 Farmers face production risk from the weather, pests, diseases
and natural calamities, which affect the yield of crops directly.
 They also face price or market risks, where adverse movements
in market price of commodities produced by them cause’s
unforeseen losses irrespective of the level of yield.
 Causes for poor marketing of agricultural products

 Fluctuations in agriculture prices and supplies (surpluses/scarcities).

 Inconsistency in supply in terms of quality, quantity, specifications
and yield.
 Conflicting interest of farmers, middleman and consumers.
 Under utilisation of resources such as godowns, market yards etc
 Inadequate communication and information network.
 Other factors such as distribution, seasonality, perishability and
enormity of production, storage, lack of processing make the
problem of marketing more complex.
 Why the Farmers Carry the Risk?
 The time lag between production (sowing) and marketing ( six to
eight months).
 “Cobweb” Phenomenon
 How the Risks were Mitigated?

 Minimum Support Price – Farmers

 PDS - Consumers
 Government has so far played a major role in
managing demand, supply, pricing, storage,
domestic and international trade etc.
 Significant financial burden on Government
 Farmers need a price risk management tool.,,,,

 Futures Contracts provide a Market Mechanism

to reduce the farmer’s Risks.
How the Farmers can Benefit from Futures Trading?

 Through Price Discovery

 Through Hedging
 Price Discovery
 Excessive Speculation.
 Futures markets mirror the spot markets. The
imperfections in the spot markets impinge the price
discovery process.
 Dissemination of futures prices and creating
awareness among the farmers to take informed
decisions based on these price signals.
 Project Details
 Location : Dharwad District
 Crops : Soybean and Cotton
 Duration : 8 weeks
 Sample size : 80 Farmers and also Traders,
warehouse, NGO, KVK, RSK, APMC, commodity
exchange brokerage firms.
 Objectives of the study
Primary Objective:
 To analyze the present status of commodity future markets for
cotton and soybean.
 To develop the future strategies to link the farmers to the
commodity future markets and to analyse the scope for
involvement of NGOs, producer associations and others.
 To assess the extent and effectiveness of linkages among different
entities in the supply chain system.
Secondary objectives:
 To study the trends in area under cultivation, production,
productivity and price movement of cotton and soybean.
 To identify different stages in the supply chain- production and
marketing of cotton and soybean crop produce.
 Methodology

 The basic data used in the study is primary as well as

secondary data.
 Primary data were collected from the farmers, traders,
warehousemen's with the help of questionnaire, and
discussion were made with producer co-operatives,
RSK, KVK and NGOs.
 Secondary data collected from the JDA and ADA
offices, APMC and from website of NCDEX, FMC.
 Sampling

 A multistage purposive sampling procedure was adopted for the

purpose of selection of representative district, taluks and villages.
and are detailed below:
 4 taluks
 4 villages in each taluk (Total 16)
 5 farmers from each village (Total 80)
 10 traders
 Chapter Scheme of Report

1. Introduction
1.1. Commodity future market status
1.2. Crops, produce, quantity at all India level
2. Study design, objectives and methodology
3. Profile of the study area, crops covered
3.1. Trends in Area, Production and Yield
3.2. Marketing channels
3.3. Market price pattern
4. Comparative study of spot market price and future market price of Soybean and Cotton
5. Present status of soybean and cotton crop producing farmers in commodity future markets
6. Future strategies for soybean and cotton producing farmers in commodity future markets
7. Linking farmers with commodity future markets
7.1. Strategy
7.2. Benefits
7.3. Feasibility
8. Summary, Conclusion and Recommendations
Study Findings
 Trend in Area , Production and Productivity of
Soybean in Dharwad
30000

25000

20000

15000
Area in ha
Production In ton
10000 Productivity Kg/ha

5000

0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Marketing channels for Soybean sale
Price fluctuation in the soybean crop in study
area markets
Trend in Area , Production and Productivity of
Cotton in Dharwad
Area sown 'Hectares Total production in bales Yield bales/Hectare

140000
120000
100000
80000
60000
40000
20000
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Yield bales/Hectare
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Marketing channels for cotton sale
Price fluctuation in the cotton crop in study
area markets
Present status of cotton and soybean crop marketing

70
60
50
40
30
20
10
0
Farmer Processing Farmer Local delivery Farmer Village local Farmer
industry dealer APMC(Commission
agent)

 Present marketing channel of cotton and soybean

 Source of market information
90

80

70

60

50

40

30

20

10

0
Friends Neighbours News paper Mass media Local mandies or Tinna
APMCs procurement
centre

*Samples taken for study includes more no. Of large land holding farmers
 Produce holding capacity of Farmers - avg. 2.4 months

Sl. No. Problems faced by farmers in existing market

1 Price fluctuation (30%)
2 Additional Transportation cost (29%)
3 Traders malpractice in APMC (6%)
4 Non availability of Price information (7%)
5 High commission fee by traders
6 Lack of grading capacity
7 Debtness of farmers
Awareness about commodity futures Market

 Farmers
 Traders
 Warehouse officials
40%
 APMC officials yes
60%
 Other entities no
Model Proposed to Linking farmers with Commodity
Futures Market
 Future strategies for cotton and soybean crop producing
farmers to link to commodity futures markets

 The main challenge for the market players and FMC is to create an awareness at all
level.
 Co-operative bodies, banks and NGOs could act as aggregators of farmers for
participation in the commodity futures.
 The extension agencies should educate the farmers regarding the use of future
markets.
 Special demonstrations and training in respect of appropriate use of future markets
should be organised.
 The structure of co-operatives should be strengthened both organisationally as
well as financially.
 Fixation of price by consideration of the price of inputs and other factors,
guaranteeing of the price.
 Introducing of grading of commodities (ginning percentage, moisture contents,
staple length and fibre quality, soybean oil point measures)
 Policy should aim to reduce the margin money in commodities
where there is less price volatility so as to increase the market
depth.
 Institutional creation of a new service sector with public-private
partnership (PPP) to deal with the standardization and grading of
agricultural produce.
 Policy directives should ensure certain percentage of contract
linked to compulsory physical delivery and off-take to avoid too
much of speculation.
 Shifting the focus of the present system of “Production-
Oriented Extension” to “Market- Oriented Extension” in
agriculture to create awareness on futures and derivatives market
among farmers.
 Enhancing the capacity building of farmers organisations
through NGOs intervention for facilitating active participation in
futures market.
Solutions to resolve the issues related to price discovery

 Interaction with spot market players.

 Online Spot Exchanges.
 Contract Farming.
 Reforms in the APMC Act would help / facilitate
integration of markets and emergence of Private and
Co-op markets.
 Direct marketing by farmers to be popularised.
 Promote Futures marketing.
 Dissemination of the spot and futures
 Prices at Mandis, Post Offices, Rural Bank
Branches, Panchayats, RSKs etc.
 Creating awareness among the farmers.
 Promotion of Aggregators (NGOs, Producer co-operatives)
 Solution to resolve the issues related to Hedging

 Creating awareness.
 Providing facilities for early pay in.
 Promoting Aggregators.
 Appropriate framework for development and
regulation of warehouses.
 Setting Quality Certification Standards
 Conclusion
Direct participation of the farmers in the commodity
futures market is somewhat difficult at this stage as
the large lot size, daily margin, high membership
fees, etc., at exchanges and lack of awareness
among farmers and the members of supply chain
are deterrent for farmers' participation in these
markets. Farmers can directly benefit from futures
market if institutions are allowed to act as
aggregators on behalf of farmers.
Questions & Suggestions,,,,,,,,
T here is nothing so strong as an idea whose time has come.
-Victor Hugo

Thank you….
Shivanand Balagali
Indian Institute of Plantation Management,
Bangalore
Monthly prices of soybean spot & future prices at
Indore market for the period Jan to June (2009)