January 6, 2007Economy

Linking Indian farmers to markets

Setting up a commodity futures market is the first attempt to reform agriculture

This is an archived blog post from The Acorn.

Why have reforms not improved the lot of the Indian farmer as much as it has improved, say, the lot of an educated city dweller? One blogger (can’t remember exactly who) made the point very succinctly. Well, because there has been no reform’ in agriculture.

There’s one waiting though. According to PRS Legislative Research, a bill to allow futures trading in commodities, introduced in March 2006, is in parliament. The Acorn has advocated futures markets as a means by which farmers can mitigate some of their risks. Ila Patnaik’s op-ed in the Indian Express suggests that the trading families that have traditionally dominated rural spot markets are attempting to throw a spanner in the works.

In some ways, there is nothing more innocent than futures trading. In a spot market, the buyer and seller agree to do trade at a certain price, and the settlement is done on the spot. In the futures market, the price is agreed upon, but the settlement takes place at a prespecified future date. The classic application involves a farmer who is planting in June and wants certainty about the price at which his goods will be sold at Dussehra. Nobody forces a farmer to use the commodity futures market, but a farmer who chooses to use the futures market in this fashion is happier because of greater certainty.

Normally traders in a region surrounding a town would be the major players in purchase of the product of this region. This trade would typically be dominated by 10 or 20 families. These families would often determine purchase prices. Farmers would have little choice vis a vis the price at which they can sell; indeed farmers might not even know prices elsewhere in the country.

The futures market is a powerful tool for breaking the market power of these families. Futures trading — taking place on a transparent, electronic exchange with nationwide access — brings in a host of new players. Indeed, there are hundreds of people in India who are watching world markets, processing information, and putting trades onto overseas commodity futures markets. Physical proximity to the market becomes a non-issue once an electronic exchange is in operation. Someone in Orissa can be trading guar seed, even though he may have never been to Bikaner which is the traditional trading centre for guar. [IE]There are umpteen parties and politicians who profess to champion the cause of farmers. The passage of this bill will be a test to their claims.

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