Wednesday, Aug 12, 2020

By Rituparna Ghosh and Sampad Nandy

NEW DELHI – Recent amendments to farm laws will help move agriculture business away from mandis to electronically-traded spot markets, says National Commodity and Derivatives Exchange Managing Director and Chief Executive Officer Vijay Kumar.

"I think these ordinances actually reflect a paradigm shift of how agricultural business will be conducted," Kumar told Cogencis in an interview. "So far, you had to go to the mandi to sell your goods. Definitely, in the COVID times, this method of transaction was not necessarily the most efficient."

The new way of trade will now enable sellers of goods to first keep their produce in storage, get a warehouse receipt, and then conduct the transaction. The goods would not move when the sale occurs, he said.

Kumar said the platform for this has been set up by the exchange with the help of National E-Repository Ltd and National Commodity Clearing Ltd

Recently, the Centre approved ordinances to pave the way for inter-state trade in farm products, scrapping the existing deep-rooted structure of agricultural produce market committees.

It had also amended the Essential Commodities Act that was seen as another deterrent for private investment in farm trade.

The Essential Commodities Act, in its earlier version, had provisions to impose stock limit, which used to keep private investment from flowing into farm trade. Investors used to be sceptical that the arbitrary imposition of stock limits would force them to offload crops at a lower price and lead to losses.

However, even as progress takes place on these issues, Kumar believes the government needs to take a few steps back in the farm sector to create the space for private investments to flow in.

"We have moved from a long history of deficits where the government has stepped in and served as a buyer to encourage food for the nation," he said.

"... But now that we are reasonably in a surplus situation, the markets can play their role and the government may take a lesser role as food security is lesser of an issue. Now. the focus of the government may not be as much required as it was earlier."

He also observed that private investment is now key to development of farm business and the government can enable this by limiting the extent of its activities in the sector.

Explaining this, Kumar said, in farm business, the crop comes over once or twice a year, which means someone has to manage the stock for the remaining 11 months so that it is available for consumption round the year.

"Now, whoever is carrying it has put capital behind it. So as these crops continue to grow, it is important therefore to have private sector also step in rather than only the government being the sole buyer and seller of that commodity," Kumar said.

In terms of volumes on the exchange, he also observed that the procurement interventions of the government during the last few months had prevented the volumes from growing back to pre-COVID levels.

"I think the government this time stepped in and made a lot of purchases of most of the commodities and that is one reason why what would typically have been traded in private markets, and therefore hedged on the exchanges was missing," he said.

This year, the government's paddy and wheat purchases have been sharply higher on year. The government had also stepped up its procurement of other crops leading to a dent in private trade.

Kumar now feels there can be some tools that facilitate both government and private sector trade participation in the farm sector.

"Government buying for public distribution to below poverty-level population is a separate channel as it doesn't mix with the private sector flow of produce which is a free market. So if you have two markets, at least the two markets can be distinct."

When asked about the exchange's plans to launch segment-specific indices, in line with AGRIDEX, Kumar said they have been exploring the subject on requests from various stakeholders on indices in oilseeds, pulses, and grains.

"Once we get some level of data and so on then we will possibly apply for approvals. It definitely depends on the market requirements and if the market wants such products, we will definitely design and provide it."

AGRIDEX is the recently launched tradable index of 10 farm contracts listed on NCDEX.

He was also hopeful of the Securities and Exchange Board of India allowing the re-launch of options in goods in soybean and guar contracts. 

The NCDEX recently launched options in goods for maize, mustard seed and wheat, and withdrew the options contracts on soybean and guar. Options in goods contract is a tool that enables physical settlement of trade in accordance to the underlying futures contracts, unlike the options contracts used to convert into futures after the expiration.

"What we wanted to do is to have one uniform product for options across all commodities so that is why we agreed to launch options in goods, then we might as well switch everything to options in goods," he said.

"We have requested SEBI for approval and as soon as we get it we will definitely launch them."

Moreover, amid the rising volatility in narrow commodities, Kumar said traders or processors should hedge the commodity they hold.

"People who want to hedge, don't mind paying a slightly higher margin because they are protected from real losses. Margin is not a loss but a cost that will be incurred. But if you don't hedge yourself then you could lose 20-40% of your capital," he said, adding that banks also should keep a check whether processors, traders, or farmers taking loans are hedged or not.

Among other factors, Kumar sees rising prospects of custodial services and participation by mutual funds on agricultural commodities in the coming days. 

So far, Orbis Financial Corp Ltd is the only custodial service provider in agricultural commodities.  End

Edited by Ramya J.S. D'Rozario

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