1. How to get agriculture to boost GDP a lot more; this approach can even do away with farm loan waivers

How to get agriculture to boost GDP a lot more; this approach can even do away with farm loan waivers

Employing hedging strategies, agriculture can contribute a lot more towards GDP

Published: November 10, 2017 4:17 AM
GDP, Farms profits, agriculture Employing hedging strategies, agriculture can contribute a lot more towards GDP. (Image: IE)

-Ratika Datta

Agriculture is the predominant occupational structure in India (58% of the population); it includes agriculture proper and livestock, forestry and logging, and fishing and related activities. The growth rate of agriculture and allied sectors was 4.1% for 2016-17 (Economic Survey). Among the various reforms in agriculture, liberal contract farming is predominant (it involves agricultural production carried out on the basis of an agreement between the buyer and farm producers). It can also involve the buyer specifying the quality required and the price, with the farmer agreeing to deliver at a future date and direct purchase from farmers by private players for the same. This is a step to double rural income in the next five years. Contract farming has a drawback—that primarily buyers of the produce fix the rate in and around the MSP only. Another system is eNAM (incorporated on April 14, 2016). The National Agriculture Market (NAM) is a pan-India electronic trading portal that networks existing Agricultural Produce Market Committee (APMC) mandis to create a unified national market for agri commodities.

A farmer can auction his produce for an online offer or local offer, and he can get to know where is the maximum price for the produce. For example, in Haryana, which has 54 APMC mandis, by selecting ‘Price’ on the eNAM website or app, a farmer can know the maximum price for a commodity in the respective APMC market auction, the minimum price per quintal for a commodity in an auction in real time, and the last traded price per quintal in an auction. By choosing the option ‘Price’, all commodities and all states on the eNAM are displayed as drop down, and one can get comparative analysis of crops. A farmer understand, by the analysis of prices, as to which crop he can grow the next, based on the highest prices the crop has to offer per quintal, which APMC mandi should he sell his produce to to get the maximum price, or which nearby state he can take the produce to for higher profits.

A farmer has to register with the APMC using Aadhaar and bank passbook. After registration, a sample test is done for his produce in the nearest APMC lab of his district and he gets a certificate. After that, the APMC automatically registers his produce online and conveys to the farmer the maximum price of the bidder for the produce. Also, a farmer has the right to sell it to the highest bidder and must convey the same to the APMC. A farmer, who is selling his produce, does not have to bear any cost of storage or transportation. Subsequently, a message is delivered to the farmer’s registered mobile number and the money is deposited in his registered bank account. Trading can also be done through eNAM. One has to get a licence (global or local) from the APMC and can buy and sell intrastate or interstate. The drawback is the produce is perishable. But intrastate trading can be done on agri produce easily.

The world over, farmers do not directly participate in futures market. They take advantage of the price signals emanating from futures market. Price signals given by long-duration new-season futures contract can help farmers take decisions about cropping patterns and the investment intensity of cultivation. Farmers also benefit by the dissemination of futures prices of exchange-traded products as it improves their bargaining capacity. By taking signals from futures market, a farmer can get to know whether the future price would rise or fall, and he can do trading on the commodity exchange later based on it. There could be also hedging done by a trader on commodity stock exchange. A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In a spot market, commodities are bought and sold for immediate delivery; in a derivatives market, various financial instruments based on commodities are traded.

A trader knows what is the exposure (or the total amount) of his produce which it can be sold at. He has to buy Put option, i.e. the right to sell by paying premium for the same for the total exposure amount. This is done when he has the intuition that prices are going to fall. The price gap per unit on the whole lot would then be the trader’s profit. In case prices rise, the only loss is that of the premium amount. By these simple hedging strategies, agriculture can contribute more towards GDP. The government can eventually do away with the wasteful subsidies expenditure and farm loan waivers if the eNAM is used judiciously.

  1. Ravindra Shevade
    Nov 11, 2017 at 10:23 am
    Options is a viable subs ute for PSS. Options suitable for farmers have not yet been allowed by SEBI as of now. Farmer options should devolve into physical delivery instead of futures.
    Reply

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