Reaching the Benefits of Commodity Derivatives to Indian Farmers

S Sivakumar, ITC Limited May 2006

Risk: Farmers’ Perspective
Need: It will be good if I can be assured of my postharvest price when I am making my planting decision Solution: Sell Futures Need: God forbid, my crop production suffers because there is too little rain, or too much rain, or rain at wrong time, or some pest / insect attack. Market price goes up, but I get stuck with smaller crop and lower price Solution: Buy Put Option Recommendation: Permit Options
S Sivakumar, ITC Limited May 2006

Execution: Farmers’ Perspective
Need: My objective is price protection for what I am producing, I can’t manage Exchange margins etc., I would simply want to deliver my goods & settle But: My lot size is too small to take it all the way to one of the Exchange delivery centre. Cost is too high for that long distance Also: The variety / quality that I produce is not the Exchange “grade”. In fact my grade fetches me better price Solution: I want to sell & deliver to my regular buyer, if he can give me an option embedded forward price Recommendation: Permit Cash Market Contracts where pricing could be in the nature of OTC Options
S Sivakumar, ITC Limited May 2006

Option Pricing: Farmers’ Perspective
Need: While I understand the logic of Option premium, very often the premium is so high, the option doesn’t look worthwhile Solution: I don’t mind giving up some upside to reduce the premium Possibility: Write options in coupled transactions to reduce the cost by getting some premium Structures: Caps, Barriers, Averages etc Recommendation: Do not restrict writing options, in case of coupled transactions
S Sivakumar, ITC Limited May 2006

Selling: Farmers’ Perspective
Need: I end up selling immediately after harvest, as I do not have storage capacity, or because I need cash, although I know that the price will be higher a few weeks later Solution: Delink Product Delivery, Cash Payment, Pricing transactions Possibility: I can then deliver soon after harvest, take cash when I want, price when I think it is highest Recommendation: Reform APMC Act to facilitate flexibility to delink. Warehouse Receipt negotiability is a precondition too.
S Sivakumar, ITC Limited May 2006

Downside of ignoring these needs
Uncertain Cash flows to farmers shall result in people moving away from farming business resulting in: – lower domestic production leading to higher inflation – higher dependence on imports, leading to trade imbalances for the Country (larger deficits in BoP) Not paying attention to these needs of farmers shall increase disparity between rich and poor in the country resulting in: – Social unrest – Political tensions As 57% of Indian workforce is in agriculture, uncertain cash flows to farmers shall result in lower growth rates for the sector slowing down the economy
S Sivakumar, ITC Limited May 2006

Conclusion
Fragmented Size, Geographic Dispersion, and Heterogeneity in Circumstances are the fundamental characteristics of Indian farmer Market institutions (futures, options, insurance etc) and Regulatory Framework (APMC, WHR etc) need to be in place to make the Indian farmers globally competitive Need Institutional Intermediaries who can bundle (i) cash market transactions, (ii) gateway to exchange transactions, (iii) OTC options (iv) physical reach into the villages
S Sivakumar, ITC Limited May 2006

ITC eChoupal is one such potential Intermediary

S Sivakumar, ITC Limited May 2006

What is eChoupal?
A two-tier infrastructure, specifically designed… – to deliver multiple services for both farming and farm produce marketing in an integrated manner – to suit the unique character of rural India,and – to cater to the evolving needs of demand driven food & agriculture value chain More importantly… – Farmers can access information and knowledge free of cost, – and have a freedom of choice when it comes to transactions – ITC recovers the costs by unlocking value from streamlining the supply chain
S Sivakumar, ITC Limited May 2006

Characteristics of Rural India
Farmers are small – impacting their bargaining power Villages are geographically dispersed – impacting real-time access to information Variation in circumstances (agro-ecology, resources) – impacting costs & scope of customisation The infrastructure is also weak, and still evolving – Physical, Social, Institutional

S Sivakumar, ITC Limited May 2006

And historically, the markets evolved in this context
The traditional middlemen… – made up for the lack of infrastructure – lent money, sold inputs and bought output – but, created an exploitative cycle of dependency The subsequent institutions set up by the Govt… – were more appropriate for the supply driven value chains in an economy of shortages • e.g. mandi (a fair price discovery mechanism, but the sunk cost of transport limits choices) • e.g. agri extension system (delivered great results during Green Revolution days, where the communication needs were more generic)
S Sivakumar, ITC Limited May 2006

Demands of the globalising trade
1. Transition from supply-driven to demand-driven value chains – Quality as per customer needs (& changing diets) – Traceability to farms & farm practices (SPS, TBT) 2. Competitiveness in Price / Value equation – Increased farm yields – Lower transaction costs along the chain Further accentuating the need for… – Customised knowledge – Real-time & relevant information – Access to quality inputs at competitive prices – Effective vertical coordination of the value chain – Efficient Price discovery & risk management
S Sivakumar, ITC Limited May 2006

ITC eChoupal, by leveraging Information Technology, takes on these challenges
By virtually aggregating the small farmers and linking them to various entities in the supply chain • Improving transaction efficiency Delivering real time information to many farmers directly across geographies • Facilitating informed choices Provide customized solutions for a farmer’s specific need with the help of experts • Increasing farm yields
S Sivakumar, ITC Limited May 2006

Reaching IT to the Farmer – Tier 1
eChoupal @ Village Level (Within 5 KM reach of all target farmers) – Sanchalak, a farmer selected from within the village & trained, interfaces between Computer and the Community – Computer with Multimedia & Internet Access – Additional investments in Solar Power & VSATs to overcome weak infrastructure

S Sivakumar, ITC Limited May 2006

Reaching IT to the Farmer – Tier 2
Choupal Saagar @ Cluster level (within 30 KM from all Choupals) – Samyojak, a trader appointed by ITC, provides various services under ITC supervision e.g. Quality Testing, Electronic Weighment, Storage, Payments – New made-to-design hubs being built, to overcome the shortage of space in the traditional warehouses for parking (tractors / trollies) and farmer utilities, besides many operational problems

S Sivakumar, ITC Limited May 2006

ITC eChoupal Services - 1
Direct Marketing – Price discovery in Village Video • Quality assessment by the Sanchalak Video – Produce delivery at Choupal Sagar • Transparent weighment & instant payment • Sanchalak aggregates and organises transport for very small farmers – Links Commodity Futures Exchanges • Currently price dissemination • Gateway for transactions at appropriate time
S Sivakumar, ITC Limited May 2006

ITC eChoupal Services – 2
Training the Sanchalaks in appropriate production technologies – who in turn disseminate to other farmers Custom built local language web portals contain – weather conditions forecasts together with recommended actions & contingent plans – frequently asked questions on farming Web casting of specially prepared video films on best farming practices Video Testing facilities (new as well as access to existing) – Soil, germination, virus etc Supply chain for quality farm inputs Video – Innovative schemes like self reliance in soy seed
S Sivakumar, ITC Limited May 2006

The Financial Products Portfolio
Insurance – Life – General • Weather • Crop • Motor • Health Credit Credit Rating Services

S Sivakumar, ITC Limited May 2006

All these services are delivered through Collaborative effort
18 Agri Input Companies (from both Public & Private sector) State Departments of Agriculture State Agricultural Universities Some Krishi Vigyan Kendras National Research Centers of ICAR Indian Meteorological Department

S Sivakumar, ITC Limited May 2006

Thank You

S Sivakumar, ITC Limited May 2006

Sign up to vote on this title
UsefulNot useful