How Internet based Electronic Commodity Markets can bring revolution?

How Internet based Electronic Commodity Markets can bring revolution for Farmers' Income?

By:

Vijay Sardana

PGDM (IIM-A), M.Sc. (Food Tech.) (CFTRI), B.Sc. (Dairy Tech.), Justice (Harvard),

PG Dipl. in Int'l Trade Laws & Alternate Dispute Resolution (ADR) (ILI), LL. B (in Progress)

Specialized in Food & Consumers Laws, IPR & Contract Laws Agribusinesses Value Chains,

Commodity Markets & Innovation Management

Member, Commodity Derivatives Advisory Committee (CDAC),

Securities and Exchange Board of India (SEBI)

Disclaimer: Views are personal.

Do not attribute to any organisation directly or indirectly.

Commodity markets are lifeline for farmers. With the advancement in technology the mode of marketing has changes. Today wide range of options are available to all the stakeholders’ including farmers. Global integration of economies has complicated the decision making at local level and uninformed poor decisions will have serious implications on the stakeholders involved in commodity markets, both directly or indirectly.

Conventionally we had spot markets both in unorganised format like haat bazar or village markets and in organised formats like regulated market yards. Agriculture produce market committee (APMC) yards were created to support the farmers by better price discovery. Unfortunately, these markets failed in delivering the expected results and the managers and stakeholders of APMCs started misusing the powers given under APMC act for their own vested interest and became power centres for political funding. This discouraged even the political system to reform the distorted APMC system. The outcome obvious i.e. cartel of licence holder traders in the APMC exploited the system to the fullest at the cost of farmers and consumers. Policy makers extended tacit support to sustain these cartels and never had will power to reform these APMC.

Due to evolution of technology and better connectivity, there was development in markets as well. Alternate form of market emerged. These markets were designed not only to address the concerned of spot market but also the future needs of the stakeholders. These markets were designed to discover better prices and participation of large number of stakeholders were ensured to break the cartel in price discovery.

Today, these markets have many features which are far better than traditional spot markets. It is like a different between age old cabled landline phone and modern smart phones.

Features of todays’ internet based electronic commodity markets:

Today commodity markets based on electronic platform can be accessed by any participant from anywhere in the world. This has dismantled the power of local traders to form the cartels. It means there is better price discovery.

Price discovery: Very often people criticise the price discovery on electronic platforms. This is a clear case that if markets are not fully mature and developed and participation is limited, there are chances that cartelization can happen in these markets as well. The best and easiest way to break cartel is increase the participation in commodity markets. In electronic based market it is very easy to trade from anywhere in the world and by any number of people with any limitation of geographical presence. This is not possible under existing APMC Act, where local presence is important to execute the trade.

Number of Participants: On electronic platforms there is no reason to limit the participation of the interest parties. The technology used can accommodate any number of participants provided they meet the criteria established under the rule and regulations. In case of APMC, the biggest challenge is that there is a role of cartel in permitting the new members. It is universal fact that existing members are not keen to have more participation to avoid competition for their own business interest. Today, the APMCs are classic case of conflict of interests unfortunately supported and promoted by irrelevant and outdated policies and laws.

Transparency in the electronic trading system: There is no chance of human intervention in quoted prices. The prices reflected on the platform is the price quoted by buyers and sellers on the electronic exchange. There is free will of the buyers and sellers to transact or not to transact at given price for the commodity mentioned on the exchanges.

Third Party Guarantee and Assurance: The electronic trading platforms are managed by a legal entity under the close scrutiny and supervisor of the regulators with a strict penalty clause. The role of trading platform is to ensure the quality of participants, the quality of material quoted as per contract specifications on platform and to ensure settlement of the contracted entered on electronic exchanges. Any deviation or non-performance can become part of investigation process and suitable remedial measures can be taken and the offenders can be punished as per the law prescribed by the legislators.

Why Electronics Platforms are not preferred?

With all the merits in place and well established regulatory system in place, the biggest question is why these platforms were not extensively used by the stakeholders.

Transparency and accountability are becoming demerits:

The biggest strengths of the electronic markets have become the biggest challenge. Unfortunately large number of stakeholders are not comfortable with transparency and accountability in the system. In physical spot trade, there is a possibility of discretion and manipulation even at the last movement. Buyers and sellers can simply refuse to accept or prefer to manipulate the contract under one pretext or the other. Due to weak enforcement, it is easy for the influence parties to get away with the crime of breach of contract and the weaker party is left to suffer. In case of agriculture commodities the weaker party is always farmers or consumers.

In case of electronic exchanges, the transactions are transparent and ensured accountability that is why many stakeholders are not keen to participate.

Poor awareness was used to malign the efficient system:

Vested interested parties were fully aware about the merits and strength of the transparent and accountable electronic system. They started facing the heat of the new system. This create panic among them. It was in their interest to stop the evolution of this electronic system to protect their own vested interest. Careless attitude and poor management of the electronic exchanges in initial days helped these vested interest to capitalise on the bad experiences.

Cartels and vested interests spread all negative information about the electronic platforms and created a public opinion that these are electronic commodity exchanges are actually culprit for food inflation. Food inflation is also a favourite topic for political system and media because this influences the vote bank dominated by lower section and middle class of the society. Moreover, impose of ban on sensitive agricultural commodities have further weakened the confidence of stakeholders and farmers in the futures markets which are widely perceived as “Satta Bazaar” (gambling market) in the farming community and ignorant middle class including policy makers.

Due to sheer ignorance about the commodity markets among masses and policy makers, the planted bad ideology succeeded over good concepts. This damaged the development of transparent, accountable and vibrant commodity markets in India. Once again evil survived over good due to ignorance and immaturity of policy makers.

No effort were made to educate farmers:

The participation of farmers in commodity futures markets is extremely limited. According to market estimates, not even few thousand out of millions farmers in India are directly or through their cooperative or producer companies are participating in the futures markets. Farmers can benefit directly from electronic commodity markets and their futures market by entering into futures contracts to sell their produce at a pre-decided price at a future date.

Farmers can also decide the crop they want to grow by planning directly based on the expected future price disseminated through the electronic exchange. However, both these benefits have not been passed on to Indian farmers till date. Lack of education, awareness and trust are among the most prominent reasons.

What is the way forward?

Awareness programs must be taken as targeted activity:

The SEBI, the regulator, and commodity futures exchanges with the support of their members should undertake new policy initiatives to increase the participation of farmers and commercial hedgers in the Indian commodity futures markets. There is enough fund available for consumer education. In fact, SEBI should create a separate body to undertake education programs for the stakeholders in a systematic manner. This can be funded by exchanged based on their predefined contribution to this activity which can be linked to the turnover of the exchanges. All exchanges must contribute their share to this corpus committed for education and awareness so that there is no discretion with the management of exchanges, which is definitely not their priority. This must be treated as public interest activity and suitable tax incentives can be extended for the contribution.

Develop reach to the farmers by following time bound activities:

1. Place price ticker boards, develop a universal SMS services, apps and website for all prices in regional languages to display futures and spot prices on a real-time basis. These should be installed at all major junctions where farmers gather including bus stands, local mandis, post offices, bank branches and public community places. This awareness will force the farmers to take the note of prices on electronic exchanges. The dissemination of prices would immensely benefit farmers to take appropriate decisions before selling their crops in spot market in APMC mandies. This will also help in deciding next crops during pre-sowing and post-harvest period.

2. The policy makers should appreciate the ground reality of Indian agriculture and discourage copying of western concepts blindly. For small farmers group, it is must to launch micro and mini contracts (with small trading lots and tick size) across all agricultural commodities to encourage the direct participation of farmers and their associations or cooperatives.

3. The use of speculative trading concepts like alog trading should be barred in agriculture segments. Concepts like options with mandatory deliver or threat of delivery must be introduced to improve confidence and utility of the exchanges for the buyers and sellers.

4. Farmers are too small entity to trade due to lack of resources and understanding. The government should allow farmer cooperatives and agricultural marketing federations (such as Cooperative, FPO,  IFFCO, NAFED, etc.) to act as aggregators and hedge positions in futures exchanges on the behalf of their member farmers.

5. The governments (both at centre and state) should work on war footing for policy reforms to remove bottlenecks such as fragmented spot markets, lack of road connectivity, insufficient number of accredited warehouses, grading facility, and other infrastructure bottlenecks.

6. Policy makers should develop strict classification criteria and reporting system to segregate market players into two major categories – commercial hedgers and non-commercial traders – across all commodity futures exchanges. There should be mandatory data reporting of participation by market players, based on categories and their market positions. In the developed markets, regulators release weekly report on trader positions with a breakdown of aggregate positions held by commercial traders (hedgers), non-commercial traders (large speculators) and non-reportable (small speculators). This will help in understanding the changing structure of the market and suitable policy and regulatory steps can be initiated to prevent distortion of markets in early stages itself.

The growth of commodity futures markets in India mainly in agriculture sector will help the farmers in dismantling powerful trading cartels. It has also helped farmers take sensible and more broad-based decision on production, storage and marketing of farm produce, the study noted. This will minimize the policy risk for the farmers and consumers as well because market forces will try to correct the policy risk well in advance.

Timely and advance indication about market prices will help the farmers in better risk management and better price realization. This will help them in improving their living standard. 

Will policy makers and exchanges work hard in timely manner to win the comfort and expectations of the stakeholders’ or not, only time will tell.

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