by- Jayant Manglik, President of Retail Distribution at Religare Securities Limited
Our commodity exchanges have done commendable work in setting up an entirely new intermediation industry using state-of-the-art technology with a smooth-functioning trading, clearing and settlement system. The operational excellence is now beyond challenge but we have to think ahead – about optimum utilization of this resource and becoming a commodity hub which will attract global traders to India. Commodity market clients are Indian nationals today but we have to look outside – to regional players and international traders who will use our platforms for trade, delivery, procurement and marketing. And to attract this set of participants, we have to bring international trading products like options and indices to our commodity markets.
Our markets have not done too badly in meeting their primary aims of price discovery and risk mitigation. The futures prices have almost always given the correct indication of future prices – and authorities have reacted in different ways to this information, sometimes banning trading in products which showed price increase which is a lot like breaking the thermometer if it indicates you have fever. Before the advent of commodity exchanges in their modern avatar, there was no reliable price discovery mechanism and risk mitigation was always in question. Today the entire supply chain has a choice to buy or sell their listed produce in a freer market with transparent price discovery and free flow of real-time pricing information.
But systemic challenges remain and not all can be addressed by the exchanges alone. One key requirement is to have more accredited warehouses, which the warehousing authority is working on. For one, this prevents distress sale by farmers and the introduction of graded warehouses will bring standard processes and easier facilitation of loans against stored commodities. Today, lack of working capital drives farmers to sell their harvest immediately, at low prices. Likewise, buyers would benefit because they can buy in larger quantities with assured quality from graded warehouses. Widespread use of negotiable warehouse receipt systems can solve many of these problems. Warehousing and assaying can be linked to exchanges but not in a ‘dedicated’ way i.e. today warehousing companies are aligned with one or the other commodity exchange, usually not more than one.
While we have access to reliable statistical information on production of crops and inventories through reasonably good data collection, the information does not quite flow down. To make informed decisions and manage risk, access to information is the first requirement. Perhaps commodity exchanges and intermediaries should take it upon themselves to disseminate standardized information using their wide reach. This should include prices in domestic, regional and world markets. This will ensure fair prices for buyers as well as sellers and give both the choice of place of trade. All this can be done on bedrock of knowledge and information provided to commodity industry personnel. Today this is a gap and a humungous effort is needed to swing this through a mix of mandate and awareness.
Finally, farmer groups will have to step up and solve a simple but important problem – that of small farms whose produce is not enough to sell to a large buyer and also not large enough to pay for transportation cost to the nearest Mandi. Some of this exists but buying centers are still needed.
In sum, systems can only be put in place top-down so regulators have to put structures and practices in place which ensure transparency in trading, something which our modern commodity exchanges readily support. Warehousing infrastructure which assures quality of storage and material is a must have as is smooth running of markets with no threat of intermittent bans on certain commodities trading. Fair and practical rules are a must, like allowing for delayed payment by 2 or 3 days due to shortcoming in banking infrastructure as also benefits for exchange accredited warehouses for the processes and transparency they bring in. Bringing down transaction charges should be a stated aim as it will decrease intermediation cost. Finally exchanges should assure complementary services like inspection, assaying, grading, even packaging and certification with premium prices for superior quality products. Imparting training and awareness is already a huge plus with our regulator and exchanges.
As the ongoing concerns of drought have shown, banks find lending to rain-fed agriculture prospects inherently risky. Add the warehousing quality and quantity risk and you suddenly stare at the basic issues which have to be addressed. The farm-to-market movement of agri-produce should also be swifter which will help lower inflation and prices. Net net, reduced risk equals lower interest rates. And farmers would realize better prices because of grading facility in the warehouses along with the ability to store the produce safely till prices become favourable and which can be sold on national commodity futures exchanges like Ncdex which have transparent price discovery built on a high technology platform. Innovation has also been the hallmark of exchanges like Ncdex which has successfully introduced spread order functionality, mini contracts of 1 MT for retail participation and staggered delivery to reduce volatility in agri contracts nearing expiry.
This is the right time to build on the strong foundation laid over the last decade and institutionalize the industry which will help the maximum number of farmers in the country