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