reaching commodity derivatives to farmers may 2006

8/9/2019 Reaching Commodity Derivatives to Farmers May 2006

1/20

Reaching the Benefits of Commodity Derivatives

to Indian Farmers

S Sivakumar, ITC Limited May 2006



2/20

Risk: Farmers Perspective

Need: It will be good if I can be assured of my post-

harvest price when I am making my planting decision

Solution: Sell Futures


,

there is too little rain, or too much rain, or rain at wrongtime, 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



3/20

Execution: Farmers Perspective

Need: My objective is price protection for what I amproducing, I cant manage Exchange margins etc., Iwould simply want to deliver my goods & settle

But: My lot size is too small to take it all the way to one ofthe Exchange delivery centre. Cost is too high for thatlong distance


Also: The variety / quality that I produce is not theExchange grade. In fact my grade fetches me betterprice

Solution: I want to sell & deliver to my regular buyer, if hecan give me an option embedded forward price

Recommendation: Permit Cash Market Contracts where

pricing could be in the nature of OTC Options



4/20

Option Pricing: Farmers Perspective

Need: While I understand the logic of Option premium,

very often the premium is so high, the option doesnt look

worthwhile

Solution: I dont mind giving up some upside to reduce


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 transactionsS Sivakumar, ITC Limited May 2006


5/20

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 weekslater


, ,

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


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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)


o pay ng a en on o ese nee s o armers s aincrease 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


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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 inplace to make the Indian farmers globally competitive

Need Institutional Intermediaries who can bundle (i) cashmarket transactions, (ii) gateway to exchange

transactions, (iii) OTC options (iv) physical reach into

the villages


8/20

ITC eChoupal is one such potential Intermediary



9/20

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


agr cu ture va ue c a n More importantly

Farmers can access information and knowledge freeof cost,

and have a freedom of choice when it comes totransactions

ITC recovers the costs by unlocking value fromstreamlining the supply chain


10/20

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


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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


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)


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Demands of the globalising trade

1. Transition from supply-driven to demand-driven valuechains

Quality as per customer needs (& changing diets)

Traceability to farms & farm practices (SPS, TBT)

2. Competitiveness in Price / Value equation


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


13/20

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


e ver ng rea t me n ormat on to many armersdirectly across geographies

Facilitating informed choices

Provide customized solutions for a farmers specificneed with the help of experts

Increasing farm yields


14/20

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 toovercome weak infrastructure


15/20

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. QualityTesting, Electronic Weighment, Storage, Payments

New made-to-design hubs being built, to overcome


e s or age o space n e ra ona ware ouses

for parking (tractors / trollies) and farmer utilities,

besides many operational problems


16/20


17/20

ITC eChoupal Services 2

Training the Sanchalaks in appropriate productiontechnologies

who in turn disseminate to other farmers Custom built local language web portals contain

weather conditions forecasts together with


frequently asked questions on farming

Web casting of specially prepared video films on bestfarming 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


18/20

The Financial Products Portfolio

Insurance

Life General

Weather


Crop Motor

Health

Credit Credit Rating Services


19/20

All these services are delivered through

Collaborative effort

18 Agri Input Companies (from bothPublic & Private sector)


State Agricultural Universities

Some Krishi Vigyan Kendras

National Research Centers of ICAR

Indian Meteorological Department


20/20

Thank You


reaching commodity derivatives to farmers may 2006

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