1. How e-NAM, derivatives markets linkages can benefit farmers

How e-NAM, derivatives markets linkages can benefit farmers

A closer linkage between e-NAM and derivatives markets will benefit farmers by giving them access to competitive market channels.

By: | Published: July 1, 2017 8:12 AM
At a time when policymakers are focussed on cleaning up the government’s balance-sheet, agrarian distress seems to throw the carefully crafted budgetary discipline off-balance.

At a time when policymakers are focussed on cleaning up the government’s balance-sheet, agrarian distress seems to throw the carefully crafted budgetary discipline off-balance. Farmers, in state after state, have demanded relief from indebtedness and prolonged low profitability of farming, ineffective support prices, lack of procurement by para-statal agencies, etc. Competition in labour, input prices that are increasingly marked to market, and the lack of options other than selling in opaque markets dominated by organised traders have added to the current distress. In a nutshell, it is the result of the friction between inefficient markets for agri-output and efficient markets for their inputs. The Agricultural Produce Marketing Committee (APMC) model was supposed to provide an efficient solution, but has instead fuelled the distress, leading to a clamour for amendment of state APMC Acts. Since 1991, with liberalisation, the industrial sector can buy from, and sell to, anyone in the world, but farmers in many states must buy and sell only in the government-designated APMC market-yards.

The electronic National Agriculture Market (e-NAM) initiative could prove a big leap forward if it succeeds in breaking the traders’ nexus. The platform seeks to create a common national market, with the underlying objective of enhancing farmers’ access to buyers. An electronic trading platform will make price discovery and trading transparent. There are a total of 2,477 APMC market-yards in the country and 4,843 APMC-regulated sub-market yards. So far, 417 mandis in 13 states have joined the e-NAM platform against the target of connecting 585 mandis with e-NAM by March 31, 2018.

The initiative can be a panacea for all anomalies including fragmented markets, restrictions on movement of farm commodities, varying state taxes, etc. Transparent and robust electronic physical markets such as e-NAM, backed by greater standardisation and quality awareness will stimulate PPP for standardised infrastructure, assets, warehousing & logistics, etc. Indeed, all stakeholders are set for a complete overhaul as farmers can access buyers from across states and can offer prices after a complete review.

The principle of ‘One Trader One License’ will enable growth of secondary trading among traders, throwing light on the ‘price discovery’ process as it attracts participation. Bulk-buyers like large retailers, processors or exporters, will save on costs of intermediation buying through eNAM if supported by a robust logistics network and a well-developed quality testing mechanism. Robust physical markets are essential for efficient secondary markets and a successful derivative market.

There have been calls for closer linkage between spot markets like e-NAM and derivatives markets to benefit farmers. With wide participation, e-NAM can give an efficient price direction to the futures market, and the transparent futures prices will aid in production/sales decision of the farmers and thereby perfectly sync the signalling and response behaviour of markets and stakeholders. e-NAM authorities can work with derivatives industry stakeholders to introduce exchange-specific quality standards alongside other broad grades to be introduced to encourage the farmers not only to grade and sell their produce, but also to encourage them to produce better quality crop and meeting exchange standards.

The best practices and their demonstrable benefits of the futures market can be taken to e-NAM. As exchanges work to expand their product portfolio and there are common commodities being traded on both the platforms, integration of players of both ecosystems can be considered by permitting traders, aggregators, FPOs, and hedgers to register under a common license. Cost-effective price dissemination, through the e-NAM terminals and to the participants of e-NAM associated APMC market-yards, should be the first step of this integration aspiration. Price disseminated through mobile phones could serve as a reliable reference price for farmers.

Likewise, allowing warehouse receipts generated by the Warehousing Development and Regulatory Authority-regulated repositories to be traded and delivered in both e-NAM and commodity derivative exchanges will go a long way in integrating both the markets, besides contributing to the healthy development of warehousing infrastructure. Financial institutions that may lend against such warehouse receipts should be encouraged to look at e-NAM/exchange platform for receipts-based delivery in case of defaults when allowed. In all, the financial/market institutions and intermediaries, viz. exchanges, warehouses, financial institutions, repositories and APMC market-yards, can cohesively function to promote integration of the two markets.

Indian agriculture needs robust institutions and transparent, price-based signals to the stakeholders. A lot in terms of infrastructure, institutional (markets and finance) connectivity, infrastructure and logistics, quality and standards would have to be looked into if e-NAM were to deliver long-term benefits. Although e-NAM’s implementation has been slow owing to some operational challenges, the farmer needs access to competitive market channels and e-NAM is a major step in this direction.

By V Shunmugam & Ravi Bhushan

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