The National Commodity & Derivatives Exchange (NCDEX) will provide underwriting support for 5,000 tonnes of chana and mustard, to kickstart options trading for farmer-producer organisations (FPOs) in these two commodities.
The exchange on Monday announced a familiarisation programme for FPOs, through which they will be able to buy ‘put’ options in chana and mustard-rapeseed — the sowing of which is currently on in several parts, largely in Rajasthan and Madhya Pradesh.
In the case of rapeseed-mustard, the premium comes to Rs 200-250 per quintal, depending on the strike price/agreed price of the ‘put’ option. The support, which will be in the form of premium payment for a ‘put’ option, will enable farmers to actively participate in the newly launched options trading through the FPOs, NCDEX Managing Director and Chief Executive Office Vijay Kumar told reporters.
Options trading on spot prices was launched by the NCDEX some months ago for wheat, maize (feed and industrial grade), and mustard-rapeseed.
Thereafter, four more commodities — Chana (desi unprocessed whole raw chana; not for direct human consumption), Soybean, Guar Gum Refined Splits, and Guar Seed — were added in the exchange’s portfolio under the options segment.
The contract of options in goods is settled only through compulsory delivery on the day of expiry.
The quality specifications, delivery centres, final settlement price methodology, and trading hours, etc in the option contracts is similar to the corresponding futures contracts.
NCDEX is the first exchange to launch options based on spot agriculture goods, after the Securities and Exchange Board of India allowed bourses to launch ‘Options in Goods’, in the commodity derivatives segment.
“This underwriting support for FPOs is part of our options familiarisation programme that we are jointly holding with Sebi, and will be focused initially on FPOs that have already participated in out futures platform. There are 50-80 of them, each having 500-1,000 members,” said Vijay Kumar.
He said the underwriting of premium would ensure that farmer groups could lock in the price of the produce, much before harvest, through an options contract. They don’t even have to pay a premium for that, as it will be taken care of by the NCDEX.
The exchange added that options in goods give an opportunity to FPOs and farmers to lock in the selling price for their crop at the time of sowing, simultaneously protecting their right to participate in case of a rally.
As the premium is known in advance, FPOs can factor it in their cost of cultivation.
“This will certainly help FPOs and farmers in calculating returns and to take an informed decision while selecting new crops for sowing,” the exchange said in a statement.
Vijay Kumar said the exchange is discussing with a lot of banks, processors, and financial institutions to act as underwriters of the premium in a ‘put’ option so that more farmers and others can hedge their risks at a low value.