The agriculture sector plays a crucial role in the Indian economy. Almost two-thirds of the population directly or indirectly depend upon agriculture for their livelihood. Agriculture employs 41.5 percent of the workforce, generating about 20.2 percent of the nation’s GDP[1]. The country’s exports are also highly dependent on agricultural outputs.
Farmers generally sell their agri-produce/commodities in the available markets to generate income. They use this realized income to take care of their livelihoods and working capital requirement for the upcoming cropping season. Hence, the farmer’s income is crucial and needs to be increased by effective public policy interventions. Agricultural commodities prices must be managed in line with increasing the farmer’s incomes and promoting the sale of production. However, several factors, including production and supplies, demand and procurement, market insights, availability of storage facilities, governmental procurement policies, geopolitical activities, etc., can significantly affect the price of agricultural commodities and the agrarian market operations. As a result, managing the prices of agri-commodities becomes a major concern for farmers (producers), traders, and customers. Government intervention in this area is also notable since Minimum Support Prices (MSP) are set to ensure a higher price realization than the cost of production.
There are numbers of regulated markets available where farmers and traders can conduct their agri-trade activities. Some regulated market spaces in India are Agricultural Produce Market Committee (APMC), Electronic National Agricultural Market (e-NAM), and Agricultural Commodity Derivative Exchange (Fig. 1).
- APMC – State governments in India established the marketing boards to protect farmers from being taken advantage by big retailers and to prevent the farm-to-retail price spread from rising to unreasonably high levels. APMCs are regulated by states by adopting the Agriculture Produce Marketing Regulation (APMR) Act.
- e-NAM – It is an online marketplace managed by the government of India for trading agricultural products. Farmers, traders, and consumers can trade agri-commodities online through e-NAM. This market facilitates efficient commodity marketing and assists in better price discovery. Currently, 1000 APMC mandies and other regional agricultural markets are connected through this e-NAM portal.
- Agricultural Commodity Derivative Exchange – Commodity derivatives trading involves the trading of standardized derivative (futures and options) contracts of agricultural and non-agricultural commodities on the electronic platform of recognized stock exchanges, subject to the approval of the Securities and Exchange Board of India (SEBI) and extant regulations and laws governing the commodity derivatives market, i.e., National Commodity & Derivatives Exchange (NCDEX).
APMCs are the traditional government-regulated markets and are well known to most farmers. These market yards are available in most of the states in the country. A Market Committee manages the market area to facilitate the physical marketing of notified agricultural produce and livestock. Farmers generally sell their produce in their particular regional market only. It gives monopolistic market power to the market committee, buyers (retailers/wholesalers), and traders (intermediaries/middlemen). Therefore, farmers are unable to bid a better price or profit for their produce. Recently, the government introduced e-NAM to address the limitations of APMCs and to provide a better online and transparent trading platform for the farmers to sell their produce. E-NAM aims to establish a nationwide market network of accessible physical mandis rather than a rival marketing structure. Through an online trading mode, e-NAM allows buyers located even outside the mandi/state to participate in the ongoing trading and able to purchase farm produce from a local farmer. When a farmer delivers his/her produce to the mandi for sale, e-NAM helps in better price realization by connecting him/her to the nationwide traders. Unlike APMCs, the farmer can now accept the online (cross boundaries/local) offers. In either scenario, the local mandi will record the transaction and continue to receive the market fee.
There is also a significant gap in the area of storage and warehouse facility for the farm produce. About 15–30% of the farm produce is eaten or spoiled by rats, other pests, or rains annually[5]. Hence, farmers are forced to sell their surplus at low and un-remunerative prices. Without adequate finance facilities for transportation and storage, most Indian farmers are indigent and unable to wait for better commodity price realization. Farmers frequently have to make distressed sales at low prices to unregulated marketplaces, including neighborhood hawkers, retail stores, village markets, and local vendors. Many intermediaries/middlemen exist between the farmer and consumer. They take a substantial portion of the commodities and money, thus lowering the farmers’ returns. Several farm-produce markets (regulated and unregulated) are experiencing massive fraud. Most of them include erroneous weights, lack of product grading, and information asymmetry standards. These issues always work against the interests of illiterate and underprivileged farmers. The dominant pricing for agri-produce in the major markets is not always known to Indian farmers.
Price management
The issues mentioned above (lack of storage facilities, fragmented markets, transportation facilities, intermediaries, and unregulated markets) in the traditional agricultural marketing systems can be resolved via agricultural commodity derivative exchanges. Farmers or groups of farmers can pre-book a contract on a derivative exchange for a specific quantity of an agri-commodity to be delivered on a predetermined future date and price. Farmers engaged in derivatives trading through regulated exchanges would be relatively free from the issues like storage, preventing the loss of surplus items produced, transportation, intermediaries, and unregulated markets. The controlling authorities require a minimum payment from both sides (traders and producers) for the contracts, which will be settled at the time of delivery. There is no scope for intermediaries and fraudulent activities as the market is under the supervision of strong regulator SEBI. Hence, the profits of the farmers will be ensured by managing their profitable prices. The prices of agricultural commodities are also always at risk due to natural calamities, demand and supplies gap, production irregularities, market information, governmental policies on procurement and geopolitical activities, etc. Therefore, prices are extremely erratic, making it challenging for the farming community. However, the three key elements of agri-commodities price management, i.e., price discovery, price volatility, and price forecasting, can be effectively managed by agricultural commodities derivative exchange. NCDEX and MCX are the two common national exchanges through which major derivative trading occurs in India.
- Price Discovery – It is the process of finding a suitable price at which one person agrees to the sale and another agrees to buy that commodity. Price discovery mechanisms can help to achieve the best reasonable price. It lets sellers and purchasers determine a traded asset’s market price. The price discovery procedures define what sellers and purchasers plan to acknowledge and pay.
- Price Volatility – It is measured by the day-to-day percentage difference in the commodity’s price. Price volatility is important because the discovered price is frequently influenced by external factors such as demand and supply, new market information, etc.,
- Price Forecasting – Future price prediction or price forecasting becomes a crucial tool for further price management for producers and traders; so that the subsequent price discovery can be obtained effectively, and they can maintain their profit margin. This is done to address the risk of price variation and for further price realizations.
These three financial tools, price discovery, price volatility, and price forecasting are essential for better and more efficient price management of agricultural commodities. Derivative marketing systems are better than regulated physical markets in efficiently managing commodities prices.
There are various methods employed in determining price discovery, including the two-regime Threshold Vector Autoregression (TVAR), Generalized Information Share (GIS) measure, Component Share (CS) measure, and Univariate Causality (UC) test, etc. However, these models don’t adhere to all the steps of price discovery. For instance, market information outliers, the direction of price trends, and the linearity of price trends trailing and leading between current and future prices. The Vector Error Correction Model (VECM) is among the most recent methods for discovering prices. It is one of the cutting-edge economic techniques. This model satisfies every requirement for better price discovery.
For price volatility, which can be explored by analyzing the inter-linkage between markets, lead-lag between spot and future, spill over or movement detected, and the market information biasness. The Generalized Supremum Augmented Dickey-Fuller (GSADF) test, Extrema Value Theory (EVT), Generalised Autoregressive Conditional Heteroskedasticity (GARCH), and Bivariate Exponential Generalized Autoregressive Conditional Heteroskedasticity (Bi-EGARCH) are some popular econometric models for determining price volatility. But the Bi-EGARCH model is one of the robust techniques which analyzes and follows all the steps for price volatility and gives the idea for minimizing the volatility.
Price forecasting is important for getting an idea about the future prices of agri-commodities. There are several techniques used for price forecasting of commodities; Autoregressive Integrated Moving Average (ARIMA), Genetic Algorithm (GA), Support Vector Mechanism (SVM), Time Delay Neural Network (TDNN), Artificial Neural Networks (ANN), Long Short-Term Memory (LSTM). It is important to incorporate the external factors in the model that may affect the price estimation. The futuristic forecasting model should be flexible enough to accept a new variable easily. The two-step hybrid model (clustering and classifications) is one of the machine learning algorithms which is suitable to serve the purpose of price foretelling.
Way forward
Price management of agri-commodities is essential for helping the farmers for securing better income. Small farmers usually cannot bargain with large traders and buyers but groups of farmers like FPOs or producer collectives, etc. One of the most popular agri-commodity exchanges (NCDEX) is helping the farming community by connecting the FPOs through its largest online trading network. Furthermore, the government emphasizes creating and promoting 10000 new FPOs[6]. National Bank for Agriculture and Rural Development (NABARD) has been entrusted with this responsibility, and they have successfully created 6000 FPOs till now[7]. However, only a small percentage[8] of the created FPOs are successfully connected with the NCDEX portal for better price management and income realization. There is a lacuna exists and needs to be addressed by implementing specific fast-track policies in this segment. Further capacity-building programs need to be strengthened at the FPOs level so that they can quickly adopt the technical and management aspects of the agri-business environment.
Advance price management modeling is required for better pricing realization through the NCDEX platform. The VECM, Bi-EGARCH, and Two-Step Hybrid Models are a few examples of advanced computational econometric techniques. The traders, FPOs, and regulatory agencies will get benefitted from these advanced computing techniques. However, it is a big question how the benefits of these advanced price computational techniques can be extended to the farming communities.
Nevertheless, most farmers are unaware of the concept of the commodity derivative market and its trading mechanism. Therefore, extension and training services can be performed by the government, NGOs, civil societies, academic/ research institutions, and development professionals in different regions of the country.
References
[1] Contribution of Agriculture Sector towards GDP | Mo A&FW | GoI (https://www.pib.gov.in/PressReleasePage.aspx?PRID=1741942)
[2] Annual Report | Department of Agriculture & Farmers Welfare | Mo A&FW | GoI (https://agricoop.nic.in/en/annual-report)
[3] https://enam.gov.in/web/assest/download/eNAM_Directory_20210720.pdf
[4] Annual Reports | NCDEX.com (https://ncdex.com/about/annual-reports)
[5] Post-harvest Management and Farm Outcomes: Storage Facilities Matter | Economic and Political Weekly (https://www.epw.in/journal/2020/16/commentary/post-harvest-management-and-farm-outcomes.html)
[6] Central Sector Scheme “Formation and Promotion of 10,000 new Farmer Producer Organizations (FPOs)” of Rs. 6865 crores (https://pib.gov.in/Pressreleaseshare.aspx?PRID=1696547)
[7] https://www.nabard.org/news-article.aspx?id=25&cid=552&NID=461
[8] Only 405 FPOs are connected to the NCDEX till March 2022 (https://ncdex.com/fpo/fpo-reports)
(Views expressed in the blog are personal and not of any organization/institution)
By Mr. Kripamay Baishnab & Dr. P.K.Singh; ARF group members
(Write to us at kripamayb@kgpian.iitkgp.ac.in for this blog related views and suggestions)