It could help the Indian farmer manage risks better. If it works
a farmer is often worried about the price a season's produce is likely to get. Prime Minister A B Vajpayee called this the "risk of the market" while inaugurating rice and wheat futures trading on the Ahmedabad-based National Multi-Commodity Exchange (nmce) in December 2003. Futures trading of these commodities brings the promise of reducing that very risk. But whether it actually benefits the poor farmers remains to be seen.
"What is especially heartening for me is its promise of de-risking Indian agriculture in terms of irrational and erratic price fluctuation," said Vajpayee. India is the second largest producer of wheat and rice in the world after China, with a production of 185 million tonnes in 2002. However, there are few market mechanisms to guard against the risks that its large farmer population faces due to price fluctuations.
A 'future' is a standardised contract for buying or selling a specific commodity -- rice or wheat, in this case -- for delivery at a later date. The contract includes the amount of the commodity and the price. It allows an individual to reduce certain risks by transferring them to another person who is more willing -- and able -- to bear them. The mechanism includes: buyers and sellers (farmers, for example, who would want to hedge their risks), the speculator (who is willing to take risks) and intermediaries (who facilitate the transaction). The transactions are carried out by members of a commodity exchange .
Trading in rice and wheat futures can benefit all stakeholders. Farmers and consumers can expect better and more assured prices by accessing the national market and de-risking themselves from price fluctuations. The Indian government, which has to often bear the burden of market failures, could save on costs of procurement, stocking and handling of foodgrain.
But with the opportunity comes danger. Speculators could use the system to manipulate prices. And the lack of adequate storage facilities with the Central Warehousing Corporation (cwc), the principal promoter of nmce, could lead to a large number of farmers getting bypassed.
Sharad Yadav, Union minister of consumer affairs, food and public distribution, also spoke at the inauguration in New Delhi. He said the government would initiate the necessary steps to strengthen the regulatory structure for futures trading in all commodities. But the Union government does have a task on its hands if it has to ensure the success of futures markets in commodities. Similar systems for commodities such as spices, cotton and coffee have been limited in their scope and have faced problems. In a 2002 study of futures trading on six existing commodities exchanges, K G Sahadevan of the Indian Institute of Management, Lucknow, explored the reasons for this failure. They included government price intervention, immature regulations and inadequate infrastructure.
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