Advantages of Derivative Markets to Farmers | ABM Colleges in Bangalore

Posted by Prof. Archana Gowda On 16/05/2023 07:28:06

Risk is inherent in all marketing transactions. Agricultural commodities marketing is no exception to this risk volatility. As there is a time lag between the production and consumption of farm products. The longer the time lag, the greater the risk. The risk associated with marketing cannot be dispensed with for this risk contributes to profit. Someone has to bear the risk in the marketing process. But most of the risk is taken by market middlemen, for they have the capacity to bear it. Whenever risks are greater and varied, the margin taken by the risk-bearers is higher, and vice versa. One who holds the commodity in the process is the bearer of the risk, because of which he may be better off or worse off. mba colleges in bangalore list

The risk associated with the marketing of agricultural commodities may be classified as :

  1. Physical risk: Loss in the quality and quantity of goods due to fire, flood,earthquake, rodents, pests, insects, excessive moisture or temperature, careless handling and unscientific storage, improper packing, looting or arson.
  2. Price Risk: The prices of agricultural products fluctuate not only from year to year, but during the year from month to month, day to day and even on the same day. The changes in prices may be upward or downward. Price variation cannot be ruled out, for the factors affecting the demand for, and the supply of, agricultural products are continually changing.A price fall may cause a loss to the trader or farmer who stocks the produce. Sometimes, the risks are so great that they may result in a total failure of the business, and the person who owns it may become bankrupt.
  3. Institutional Risks: These risks include the risks arising out of a change in the government's policy, in tariffs and tax laws, in the movement restrictions, statutory price controls, and the imposition of levies.

The risk associated with the variations in the prices may be minimized by the Fixation of minimum and maximum prices of commodities by the government and allowing movements in prices only within the specified range, marketing arrangements for the dissemination of accurate and scientific information about agricultural commodities prices, demand and supply and also by operations of speculation and hedging. The price risk associated with the commodities for which the facility of forward trading is available may be transferred to professional speculators through the operation of hedging.

Derivative markets give price signals and guidance to the farmers and hedging is a tool for minimization of price risk in marketing agricultural commodities. Farmers are now entering into derivative markets or commodity exchanges through FPOs (Farmer Producer organization). FPO are participating at NCDEX for the Last 4  years.273 FPOs are registered (representing 5.30 lacs farmers)and 100 FPOs traded (representing 2.3 lacs farmers). The Securities and Exchange Board of India (SEBI) has focused on FPOs’ Education and Awareness. SEBI reduced the regulatory fee on Agri for setting up an Exchange level Fund for farmer/FPO benefits.
FPOs are getting various benefits from Derivative markets as follows:

  • Price locked in at the time of sowing: hedging tool
  • Remunerative prices.
  • Timely payment
  •  Transparent price discovery.
  • They can make cropping decisions with the information provided about future prices by derivative markets.
  • National Commodity and Derivatives Exchange Limited (NCDEX), from 2016 to February 2021, 320 farmers' producer organisations (FPOs) (8.83 lakh members) from 14 states participated in the futures market at NCDEX.
  • The futures market acts as an indicator and empowers the FPOs and farmers to have better negotiating power in the marketplace. The futures platform brings transparency to prices and helps in informed decision-making.

Therefore, the advantages farmers are getting from future markets are more, So the National Agricultural Cooperative Marketing Federation of India (NAFED) can explore the possibility of participating in the derivatives market so that the farmers can also get the advantage of the global upswing of prices. Due to the complexity of operations of the derivatives market, it would be unrealistic to assume that farmers or even FPOs will have the knowledge and skills to participate and take advantage. For this purpose, Framers should be given knowledge-based training to participate in Derivative markets.

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