Press - Government proposes Integration of spot and derivative commodity markets

Government proposes Integration of spot and derivative commodity markets

An expert committee will be set up, more funds proposed for mandis joining e-NAM

Rajesh Bhayani, Mumbai, Business Standard, February 01, 2017

Finance Minister Arun Jaitley has proposed to integrate spot and derivatives commodity markets. In his budget speech, he said: “The commodities markets require further reforms for the benefits of farmers. An expert committee will be constituted to study and promote the creation of an operational and legal framework to integrate spot market and derivatives market for commodities trading. e-NAM would be an integral part of such framework”.

The move is seen as a radical step to reform commodity trading in the country. Agriculture is a state subject but if the trading platform is one then it has to be dealt with a separate set of regulations which do not exist at present. The derivatives market has established regulations and infrastructure for commodity grading, assaying and storage apart from trading.

E-NAM or electronic integration of all agriculture produce market committees (APMCs) on a single national electronic platform is yet to see the level of success of Karnataka’s electronic platform for farm produce.

Ramesh Chand, member (agriculture), NITI Ayog said: “The move to integrate both markets is good as it will end uncertainty in derivatives markets (remove fears of delisting commodities). The government should also consider state level electronic market wherever established to be allowed to link with national platform. Such interoperability shall help smooth functioning of the e-NAM.”

But how such integration will be achieved? There is no global benchmark available.

Samir Shah, MD & CEO of NCDEX says: “The move will help farmers get the best price for their produce as well as help them hedge their produce on derivatives platform to reduce risk and maximize benefits.”

For this, he suggests, “derivative exchanges’ accredited warehouse can be a hub and spoke for spot mandis or APMCs. Most APMC doesn’t have proper warehousing, grading and assaying facilities. Exchange accredited warehouse can provide all these and goods stored by farmers in such warehouse become fungible for selling on spot platform or even can be hedged in derivatives exchange”.

The coverage of National Agricultural Market (e-NAM) will be expanded from the current 250 markets to 585 APMCs. Assistance up to a ceiling of Rs 75 lakhs will be provided to every e-NAM market for establishment of cleaning, grading and packaging facilities.

Integration of APMCs in Karnataka has shown how a farmer in one town gets the best available price offered for his produce in the entire state.

“E-NAM will make it possible to get the best price across the nation, and spot price derived from electronic platform can be used for the settlement of derivative contracts which at present is obtained by polling spot prices,” said Rajesh Sinha, CEO - NCDEX eMarkets Ltd which is a pioneer in electronic spot trading.

Apart from better price another benefit is better financing against the produce, P K Singhal, President & Whole Time Director, MCX said that such integration will increase the relevance of derivative platform and increase avenue to the banking system for post harvesting finance in better risk management environment.

Electronic negotiable Warehouse receipts issued against warehoused goods, be it for spot market or derivatives, can be used as collateral for such finances which will be cost effective, he added.

But the road of integration will not be smooth. Vijay Sardana, an expert on commodities and a member of sebi advisory committee said that there is a strong lobby of traders in APMCs who don’t want reforms and hence states’ cooperation for this is crucial.

“Government may be giving funds as a carrot but it should use a stick of denotifying commodity whose price falls below MSP to help farmer sell it wherever he gets a better price,” Sardana said.

The FM also said that market reforms will be undertaken and the States would be urged to de-notify perishables from APMC. Another announcement in the budget was that a model law on contract farming would be proposed to integrate farmers who grow fruits and vegetables with agro-processing units for better price realization and reduction of post-harvest losses. A model law on contract farming would, therefore, be prepared and circulated among the States for adoption.