[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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REIMAGINING INDIA<br />
Table I: Volatility Of Spot Prices<br />
Commodity<br />
Pre MCX futures<br />
(Percentage)<br />
Exchange of India Ltd. (MCX), the<br />
country’s No. 1 commodity derivatives<br />
exchange (in <strong>2007</strong>) located in Mumbai.<br />
It was found that there has been a<br />
marked reduction in daily price volatility<br />
in all these three commodities. <strong>The</strong><br />
finding corroborates that the resurrection<br />
of futures trading has indeed contributed<br />
to increased stability in agricultural<br />
markets, which in turn has helped<br />
Indian farmers receive a stable income<br />
besides making efficient sell/store decisions.<br />
Availability of future price signals<br />
also reduced the pre and post harvest<br />
differences in prices avoiding the rush of<br />
arrivals immediately post-harvest.<br />
<strong>The</strong> Drive Behind And <strong>The</strong><br />
Benefits Of Futures Markets<br />
Virtually all agricultural commodities<br />
in India have a long supply chain with a<br />
number of middlemen performing the<br />
roles and functions of the brokers, commission<br />
agents, processors, wholesalers,<br />
retailers, etc., and thus making their<br />
marketing costlier that their production<br />
at times. In almost all the cases, the middlemen-levied<br />
charges do not really mirror<br />
the true value of the economic function<br />
they perform in taking a given<br />
commodity from farm gate to the consumer’s<br />
plate. Thus the existing markets<br />
Post MCX futures<br />
(Percentage)<br />
Wheat 4.80 3.49<br />
Tur 1.47 2.4<br />
Urad 2.58 1.8<br />
Source: Delhi Wholesale Market, CMIE, www.cmie.com/database/services<br />
Note: Daily prices were considered.<br />
Post futures period include inception of specific contracts on MCX platform<br />
till June 2006 and corresponding period before inception of futures contracts<br />
was considered for pre-futures.<br />
had a biased marketing<br />
system offering the producer<br />
the lowest while<br />
charging the consumer<br />
the highest. Obviously,<br />
such an undesirable system<br />
cannot continue for<br />
ever and the stakeholders<br />
would look for a way out<br />
— an efficient market<br />
that enables everybody to<br />
participate in a price discovery mechanism<br />
that is fully transparent and yet is<br />
capable of bringing the cost of the value<br />
chain down to the minimum. Here is<br />
where the birth of futures exchanges<br />
proved out to be the panacea for many<br />
of the above ills faced by the physical<br />
markets. <strong>The</strong>se exchanges performed<br />
the function of advance price discovery,<br />
increasing the efficiency of the markets<br />
by helping them streamline prices to reflect<br />
on the commodity fundamentals<br />
rather than reflecting the profit making<br />
initiatives of the private players in the<br />
value chain. That apart, commodity exchanges<br />
also facilitate private participation<br />
in the market related infrastructure<br />
investments. <strong>The</strong> exchanges’ efforts in<br />
providing effective collateral management,<br />
improved warehousing for<br />
agri-products, widening the network of<br />
quality certification and product standardization<br />
agencies, and providing better<br />
logistics solutions have already<br />
brought in the much needed efficiencies<br />
in the ecosystem.<br />
Commodity Exchanges As Catalysts<br />
Of Agricultural Marketing<br />
Infrastructure Development<br />
MCX took various initiatives to launch<br />
two major infrastructure projects — Na-<br />
tional Spot Exchange Ltd. (NSEL) and<br />
National Bulk Handling Corporation<br />
Ltd. (NBHC). NSEL would provide a<br />
national-level electronic platform for<br />
spot trading in agricultural commodities<br />
by integrating all the physical markets<br />
into a common national market. This<br />
initiative is meant to empower rural India<br />
to usher in the next Green Revolution<br />
by harnessing technology. <strong>The</strong> effective<br />
co-existence of the spot and<br />
futures markets in the ecosystem will<br />
surely help in coming up with fair price<br />
discovery empowering Indian farmers in<br />
several ways, including leading them to<br />
the use of improved technology, thus,<br />
catalyzing rapid growth in agricultural<br />
production. Services that NBHC – the<br />
delivery arm of MCX extend include<br />
warehousing and bulk handling of agricultural<br />
commodities by managing a<br />
chain of accredited warehouses across<br />
the country, grading and assaying, quality<br />
systems for storage and protection,<br />
offloading and disposal services, demating<br />
of warehouse receipts, etc. In a nutshell,<br />
NBHC’s existence is slowly leading<br />
to awareness in the ecosystem regarding<br />
futures trading, collateral management<br />
systems, warehouse receipt financing,<br />
quality and standards, etc., leading to an<br />
overall improvement in the ecosystem.<br />
Thus, commodity exchanges are the seed<br />
sown to provide a new direction to agricultural<br />
productivity and returns to agriproducts<br />
by improving the marketing<br />
systems of the country with participatory<br />
efforts from all the stakeholders in the<br />
system. Exchanges ensured sustained<br />
and increased returns to agricultural<br />
products through transparent and participatory<br />
price discovery process. Besides,<br />
they also create an environment<br />
104<br />
THE <strong>IIPM</strong> THINK TANK