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March 2, 2008

Futures for farmers

Issue 12 - Mar 2008

Karthik Shashidhar

A number of intersecting government policies prevent the farmer from benefiting from futures markets. First, in a large number of states in India, there are government-mandated monopolies in procurement due to the archaic Agricultural Produce Marketing Commission (APMC) Act. In 2003, the central government issued a draft amendment of this act in order to open up the supply chain to competition. However, a number of states are yet to implement this. Due to the monopoly, farmers are prevented from selling their produce to anyone other than the designated buyer, and hence cannot participate in futures markets. Moreover, prices may not reflect the actual demand and supply situation.

Second, futures trading for agricultural commodities is restricted to “durable” commodities – such as cereals, pulses, oils, onion and potatoes. The lack of good cold chain infrastructure has been a major stumbling block to introduction of derivatives trading in perishables, as reliable delivery is a problem. The challenge is in developing a good system of cold storage and cold transportation.

Third, for most commodities, large lot sizes prevent individual farmers from participating directly. The government has prescribed—ostensibly to protect small investors—that the minimum value of a derivative contract in India should be Rs 200,000. In order to get around this barrier, the FMC recommends farmers to form associations and co-operatives, and participate in the derivatives markets through them.
Finally, currently India is not one single market. Various states have octroi and entry taxes, preventing free movement of goods. There is also the draconian Essential Commodities Act which allows the government to place large-scale curbs on the movement of goods. Indeed, the unfortunate—and long neglected truth—is that there is no free trade within India.

Agricultural land is an extremely scarce resource, and it is critical that it is used most efficiently and in a planned manner. Central planning failed. But its shadow continues to haunt the countryside. It is now time to take planning to the lowest levels—to that of the individual farmer—in order to maximise efficiency. All hurdles, infrastructural and otherwise, need to be cleared in order to enable this.

More from Karthik Shashidhar on his blog, Pertinent Observations

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