Bright futures

Punjab farmers can get higher wheat prices now

By Vikas Parashar
Published: Tuesday 15 February 2005

in a move that will benefit Punjab farmers tremendously, the Multi Commodity Exchanges of India Ltd (mcx) and the Punjab State Cooperative Supply & Marketing Federation (Markfed) have collaborated to provide them with the option to get into futures contracts for wheat. A futures contract is an exchange-traded contract that requires the delivery of a commodity at a specified price, on a specified future date. Punjab framers sell their wheat in the spot market immediately after harvest in the month of April, at a minimum support price (msp). But now, from the coming rabi marketing season (April 2005), they can sell their wheat on futures contract for July 2005, which will fetch them a price higher than the msp. At the same time, they can get the money from the sale in April itself.

"A farmer, instead of selling his produce in the spot market at msp of say Rs 6,500 per tonne in April, can deposit it in the Markfed warehouse. He will get a receipt for his produce and will immediately get into a futures contract for July. And the July price will be higher, say Rs 7,000," says Birinder Singh, chief manager (food grain), Markfed. But how are the future prices decided? "It's a demand and supply game. Buyers like exporters and flourmill owners want wheat at a certain rate on a particular future date. Under the futures contract, they get surety of the delivery at that time and farmers get a higher price," explains an mcx official.

Regarding how the farmers will be paid, Singh says: "They can take a bank loan against the warehouse receipt issued to them." The amount of loan will be 70 per cent of the value of the futures contract. "So far, State Bank of India, Corporation bank, Union Bank of India, Canara Bank, Bank of India, Bank Of Baroda, Dena Bank and hdfc have agreed to lend at 9-12 per cent interest against the Markfed warehouse receipt," says Jignesh Shah, mcx managing director.

The warehouse charges and bank interest will be nearly Rs 1,000. On the expiry of the contract, the farmer will get the rest of his money after deducing Rs 1,000 from it. In between April and July, if a farmer decides to not sell his wheat on futures contract, he can repay the bank loan and take back the warehouse receipt, submit it to the warehouse and take his wheat back.

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