India can learn lessons from China to boost farmers' participation in the country's commodities futures market, according to the think-tank ICRIER.
"Given its similarity with India in terms of dominance of small and marginal farmers, it (China) provides some interesting lessons," the Indian Council for Research on International Economic Relations (ICRIER) said in its working paper on 'linking farmers to futures market in India'.
China introduced several innovative schemes, such as 'thousand villages and tens of thousands of farmers', to link farmers to futures since 2005. Another scheme called 'insurance plus futures' was introduced in 2016.
Some of the key takeaways from China's experience in this regard are: state support for futures market is critical, encouraging use of futures by farmers and consistently training and educating farmers for that, easing government protection from the commodity market by reducing the number of commodities covered under MSP-scheme and reducing MSPs for others besides innovative and customised products, the paper added.
Highlighting problems faced in linking farmers to the futures trade in India, the ICRIER paper said, "Despite being over a century old, the agri-futures market lacks depth and liquidity in India. There is limited association of farmers with futures market."
Lack of awareness and trust among farmers belie any understanding in its working. Majority of farmers do not understand its functioning and view it with suspicion. This is also due to prevailing sentiments among local/regional bureaucracy and extension officers who see participating in futures as akin to 'satta' or gambling, it said.
To further add to the problem, majority of farmers in India are small and marginal and do not have the required size of the lot to be traded in the futures exchange.
ICRIER further said acreage-related decisions are based on the last year's prices rather than on future expectation of prices. This leads to a vicious cycle of glut and lower prices followed by scarcity and high prices, it said adding that the role of agri-futures is critical given that it not only aids in price discovery but also mitigates price risk by ensuring a predetermined price.
For futures market to achieve the objectives of price discovery and risk mitigation and have an impact on Indian agriculture, it is necessary that more farmers and farmer-producer organisations (FPOs) participate in it.
Suggesting ways to connect farmers to futures trade, the ICRIER paper said the FPOs need to focus initially on commodities not protected by heavy government intervention since this helps in gaining confidence in its functioning.
FPOs should identify production centres for those crops, build delivery centres around them and first encourage futures trading in these areas.
ICRIER further said resource institutions have to be trained and the state government initiatives, such as that of Bihar and Rajasthan, may help in other regions, trading agencies of the government should be encouraged to directly participate in the futures market and instruments like forwards and options have to be encouraged.
Agri-futures are financial contracts requiring the buyer to purchase an asset or the seller to sell a physical agri-commodity at a predetermined future date and price. Futures contracts give details regarding the quality and quantity of the underlying commodity.
Some futures contracts may call for physical delivery of the asset, while others are settled in cash. Trading in futures market ensures that both buyer and seller are ensured a fixed price at a future date for the commodity.
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