Summary
Govt of India could not achieve procurement due to Hedging of Commodities
Analysis
Contract Farming
• Forward Sale/Purchase
• Futures contract
• Options
– best way to manage price risk
– not available in India
USAID/India – Support for Futures
Market
2004 “Roadmap” Report
regulatory reform
capacity of regulator
education and outreach
market infrastructure
USAID Support 2006 to 2008
CFTC and FMI
Are Farmers Benefiting from
Futures Markets?
Price Discovery Benefits
– Crop Choice
– Inputs
– Timing of Harvest
– Price Negotiation
– Storage for future Sale
Why Price Information may not be used
– Access/Understanding
– Bargaining Power
– Storage/Finance
A.C. Nielsen Study
• 2,000 farmers surveyed
– Gujarat, Haryana, Maharashtra, MP, Rajasthan, Punjab
– Traditional Commodity Hubs; wheat, mustard, soy, cumin, guar,
pulses
• Awareness of Futures Prices
– Large 70%, Small 1%
• Pre-Harvest use of Price information
– Before sowing 4%
– After sowing 24% small 45% large
• Post Harvest
– 1/3 small farmers, ½ large farmers store crops after harvest
– Traditional Commodity Hubs
Do Farmers Hedge?
• Farmers Don’t Hedge
• Why don’t farmers hedge?
– Knowledge/Expertise
– Quantity
– Delivery
– Storage
– Liquidity/Finance
– Grades & Standards
– Formality
– Basis Risk
re Farmers Benefiting from
Indirect Hedging?
• Should farmers hedge?
Developed Markets vs. Indian Market
Traders in India will not pass on returns from hedging
• Aggregators
– Banks
– Private companies
– NGOs
• Exchanges can facilitate aggregators
– increase certified delivery centers
– eliminate margins once delivery is made
– increase position limits for hedgers
HAFED
• Apex cooperative for Haryana State
– $700 million sales, $18 million profits
• Major player in wheat, mustard, rice
– Wheat
• 40% of GOI requirements, up to 2.7 million MTs.
• 100,000 MTS commercial
Rice
• 1,000,000 MTs – 80% for GOI, 20% commercial
– Mustard
• 500,000 MTS for GOI
• Major hedger of wheat position
– 65,000 MTs for 2006 commercial purchase
HAFED
Hedging Program at a Crossroad
• GOI ban on wheat and rice futures
– loss to farmers
– very efficient way to raise rural incomes
• Alternatives to NCDEX futures
– Mustard, Paddy -- not suitable
– HAFED takes risk
– auctions for forward sales
– offshore hedge
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
