Confident of derivatives trade picking up in agricultural commodities, officials on Tuesday said farmers have begun understanding benefits of the options trading by locking in their price at the cost of sowing of the crop in a big way
Confident of derivatives trade picking up in agricultural commodities, officials on Tuesday said farmers have begun understanding benefits of the options trading by locking in their price at the cost of sowing of the crop in a big way. A special ‘options familiarisation programme for FPOs (Farmer Producer Organisations)’ has also helped farmers learn a technique to take care of the price risk and concentrate their efforts on increasing the yield of their crops, an official said.
“The success of the programme will most likely encourage them to participate in similar contracts in other agricultural commodities as well,” he added. The programme was launched by commodity bourse NCDEX in November 2020 wherein FPOs registered as clients with members of NCDEX were eligible to buy a put option and lock-in a price in two commodities — chana and mustard seed facilitating the farmers/FPOs to manage the price risk.
The premium cost up to Rs 300 per quintal to purchase put options was reimbursed by NCDEX out of regulatory fee foregone by the market regulator Sebi. According to an official, more than 40 FPOs participated in the programme and locked in the price on behalf of farmers for a sale quantity of 1,030 metric tonnes of chana and 1,980 metric tonnes of mustard seed. The premium cost of buying put options of more than Rs 80 lakh was subsidised under the programme.
This helped farmers to have the comfort of the price and concentrate on the production of the crop. Prices of produce worth around Rs 15 crore could be hedged between the sowing and harvesting period. In order to encourage farmers/FPOs to trade on the commodity derivatives exchange, Sebi decided to forego the regulatory fee and allowed exchanges to utilise such forgone money for the benefit of farmers and FPOs by reimbursing mandi tax, charges like assaying, cleaning, drying, and put option premium for incentivizing their participation in the contract of options in goods. A put option gives a right but not an obligation to the holder to sell at a specified price at a specified date.
The farmer or FPO buying a put option is protected from the downward price risk while also retaining the upside benefit. In this case, the premium for buying put options on chana and mustard seed was borne out of the regulatory fee forgone by Sebi, thus making it almost cost-free for farmers or FPOs.
“Since the minimum price was assured at strike price of the put option bought, farmers were able to concentrate more on increasing their yield,” the official said. “Naturally, the minimum price locked-in by FPOs was higher than the cost of production,” he added. “It was also heartening to see that FPOs understood the features of this product as they themselves decided the strike price and expiry date of the put option to be bought and managed their positions, either by squaring off or holding till expiry. This indicated that FPOs have learned about the product and were comfortable using it,” an exchange official said.
Price protection through the put option also enabled FPOs to avail finance at a reasonable cost as lending institutions like banks and financial companies have certainty about the minimum price that would be realized by farmers for their produce.