Commodities Exchanges

That the farmers in the developing countries face serious deficiencies in availability of storage and marketing facilities is common knowledge. The storage and marketing infrastructure developed by Government agencies is severely deficient or even absent, in many villages.

In this context, one of the more interesting developments in global financial markets in the recent years, has been the emergence of a vibrant commodities trading market. A number of commodities exchanges have appeared as facilitating platforms for trade in commodities. These exchanges have led to the development of a network of storage and marketing logistics and the attendant infrastructure around them. In fact, it makes great economic sense to link up the existing logistics and infrastructure, both private and Government owned, to these exchanges.

A transaction in a commodities exchange works something like this. Mr. Farmer, growing green gram can sell a futures contract on his yet to be harvested (or even sowed) crop, and be guaranteed the price he will be paid when he delivers the produce; a Reliance Fresh retailer can buy the futures contract in green gram, and thereby protect himself from any possibility of a price rise, when the crop is delivered. This simultaneously hedges the producer, Mr Farmer, from price drops and the buyer, Relaince Fresh, from price rises.

The opportunities for forward linkages are numerous and some of them are potentially very profitable for farmers. The recent emergence of retail fruits, vegetable and grocery chains across the country has the potential for radically altering the commodities procurement landscape.

But unfortunately these developments and its advantages have benefited only a very few large farmers, as they trade mainly in commercial crops like coffee and tea. Foodgrains like paddy, wheat, millets, and pulses and even oil seeds are either not traded or form a very small proportion of the commodities traded. The small farmers, who stand to benefit the most by such interventions have therefore not benefitted to the desired extent, and most of them have been bypassed by these developments.

A typical commodities exchange could have all the interested farmers of the village enrolled as its members, through a subscription. The members can then put up their produce for trade, and let the exchange market identify the right kind of buyer and price. The exchange could be linked up to other exchanges, which will help the farmer access real time price and other information, and also a larger pool of buyers. The farmer will then be able to make informed decisions and also get the best price for his produce.

Further, with the vast potential of Information Technology and Communications, it is possible to obtain real time information about commodities from markets across the globe. Such seamlessly integrated exchanges, which includes among its members a large proportion of small farmers can, wash away arbitrage opportunities and bring greater returns to them.

In fact, instead of focussing solely on Minimum Support Price (MSP) and other direct market intervention support to farmers, the Food Corporation of India (FCI), the agency responsible for these interventions, should be paying more attention to commodities trading and exchanges. In fact, the FCI could emerge as a sort of regulator of all the private and public commodities exchanges across the country.

The Government should catalyse and initially support the setting up of commodities exchanges, which bring together the local sellers and local and outside buyers into a single transparent trading platform. Given the massive profit opportunities available in commodities trading - both retail and wholesale - the Government should actively seek to leverage private sector resources to set up storage and marketing facilties.

To start with, these exchanges can have very rigorous margin requirements and daily or atleast two day settlements. This will help avoid some of the common problems and pitfalls associated with financial markets. Quality and other commodity specific parameters have to be standardized with appropriate regulation, duly taking into account local requirements.

It is a win-win model for all stakeholders. The farmers have access to the latest market information, larger choice of buyers, and adequate storage facilities, all of which help get much better returns on their produce. The wholesale traders and retailers have an institutionalized arrangement which brings together the entire market into a single trading platform. This lowers their substantial transaction costs, helps source better quality commodities, and also ensures assured and regular supply of goods. By eliminating substantial transaction costs, hitherto captured by rent-seeking and parasitic middlemen, these exchanges could also contribute towards lowering the prices of agricultural produce for all of us.