The proposed exchange-based wheat trading marks major reform of the foodgrain market system
Business Standard / New Delhi Jan 02, 2009, 00:29 IST
The proposed start of exchange-based spot trading in wheat before the beginning of the coming rabi marketing season will, when it happens, mark major reform of the foodgrain marketing system. The transparency that such a system can lend to trading should, in ordinary circumstances, be able to eliminate many of the ills of the present system of grain trading, where middlemen are supreme and dictate terms to both producers and consumers as well as to other end-users. However, in a product where parastatals corner the bulk of the produce with liberal government backing through policy interventions in their favour, the potential benefits of on-line spot trading will not accrue fully to all market players. Curbs such as stock limits and movement restrictions, and some inimical provisions of the laws on state agricultural produce marketing committees (APMC), which apply as much to players on spot bourses as to those who operate in the traditional mandis, could end up playing spoilsport. Doubts about realising the true promise of spot trading in wheat arise also because the major wheat surplus states, notably Punjab and Haryana, have yet to grant permission to the exchanges to operate there. The bulk users of this grain, such as the flour mills, which would eventually be the major buyers on an electronic exchange, cannot obviously meet their full needs by sourcing wheat from states with small surpluses. It must be hoped that these roadblocks will be removed before too long.
A notable feature here is that spot exchanges offer contracts of only single-day duration, with compulsory delivery. This automatically excludes the speculative trading that is often linked with price manipulation. It is this concern that prompted the government to suspend futures trading in wheat, rice and other key agro-commodities when inflation was high. However, the fact is that a countrywide network for spot trading, with facilities for panoramic price dissemination, can introduce something like a virtual national common market for agricultural produce, reducing price volatility and narrowing regional price variations. Knowledge of prices in different areas would improve farmers’ bargaining power and reduce the scope for local traders to exploit unwary growers. Such a system is urgently needed for the additional reason that, as has been highlighted by several studies, nearly half the marketable surplus of agricultural produce is generated by small farmers but gets disposed of by them immediately after the harvest, when prices are at their lowest point.
Once the country’s spot commodity bourses come of age, they can be expected to — and perhaps actually would — augment the content of their on-line market intelligence dissemination to include information on weather, input prices, improved cultivation know-how and other farming tips for the benefit of farmers. However, the most important task before these exchanges would be to enhance farmers’ direct participation in such trading, something that has so far been limited in the commodities that are already being traded on their platforms. Unless this happens the real objective of creating a fair, transparent and hassle-free single national market for agricultural produce would remain unfulfilled.
This system would promote speculation if seller come to the exchange without proof of available goods before trading. Compulsory delivery may be a misleading term allowing for seller defaults and thus make it a one day future providing arbitrage opportunities. Thus, such initiaives may distort markets than benefiting it. Management of such exchanges must exclude parties whose promoters/directors have individual vested interests by shareholding in future exchanges that directly benefits them.
This system would promote speculation if seller come to the exchange without proof of available goods before trading. Compulsory delivery may be a misleading term allowing for seller defaults and thus make it a one day future providing arbitrage opportunities. Thus, such initiaives may distort markets than benefiting it. Management of such exchanges must exclude parties whose promoters/directors have individual vested interests by shareholding in future exchanges that directly benefits them.
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