To Be Free To Sell, A Farmer Cannot Be Beholden To The Lender

In the middle of September, Samriddhi Mahila Crop Producer Company took a position on the National Commodities & Derivatives Exchange (NCDEX). It was to deliver 100 quintals of soybean at Rs 3,300 a quintal in November. Soybean was quoting at Rs 3,075 in the Kota mandi, the city adjoining the district of Bundi in Rajasthan where the farmers’ producer company is based, around the time it did the futures contract.  The company is headed by Savitri Bai, who is in her 30s and has studied till the IX standard. Its target is to procure about a thousand quintals of soybean this year.

Last year, the company procured 1,321 quintals at Rs 3,300 a quintal, which it sold for an average price of Rs 3,800. This is the first time it is doing a futures contract, at the persuasion of Raghav Raghunathan, a young metallurgical engineer who headed operations for three years till this June at a farmers’ producer company in the tribal area of Bagli in Madhya Pradesh’s Dewas district.

Samriddhi was registered in 2011 with the help of Srijan, an NGO set up by an idealist alumnus of IIT Kanpur and IIM Ahmedabad. The tribal farmers of Bundi district found that they were short changed by commission agents both on price and weight. When the NGO proposed that they form self help groups (SHGs) and collect savings for lending among themselves, the tribal women thought it was just another ploy to grab their hard earned money. But when told they would retain the money and get bank loans, they were convinced, says Savitri Bai. That was in 2009. Currently, the producer company has 2,486 members and a base of 800 self-help groups.

“If you want to free up the output market for farmers you must free up the credit market,” says Raghunathan. When commission agents or traders lend, they have a prior claim on the borrower’s produce.  To be free to sell, a farmer should not be beholden to the lender.

In 2014, the procurement price of wheat was Rs 1,450 a quintal. The Madhya Pradesh government announced a bonus of Rs 100. Raghunathan found that even farmers within reach of the procurement centres were unable to sell to the government because their pavti or land title deeds were with trader-moneylenders. Those documents are required for procurement, as also to obtain subsidised inputs like seeds, fertilisers, bank loans and electricity.

SHGs help break the link because they have that vital ingredient, the lack of which dissuades banks from lending to small holder farmers  – information about who is credit worthy and who is not. By bringing that knowledge to the transaction, SHGs are able to borrow from banks.

Once the SHGs of Bagli broke from the shackles of the trader-moneylenders, they began collecting the produce of their members to sell in the local mandi. The traders tolerated this initially, but when it hurt their business they protested to the local administration. The SHGs did not have a trading licence, they complained. Their trucks were blocked and stocks impounded. At the persuasion of a helpful district administrator, the SGHs set up the Ram Rahim Pragati Farmers Producer Company in 2012 and obtained a trading licence.

But the new entity found itself at a disadvantage. Traders in Madhya Pradesh style themselves as farmers to gain exemption from mandi tax (2 per cent of commodity value), entry tax on oilseeds (1 per cent) and cess. The producer company could not. It had to hold on to stocks so it could sell dear and recoup the taxes. But that put it in risk of losses as prices are volatile. Ram Rahim suffered losses two times its share capital when prices fell eroding the value of the stock of chana it had held for its members in anticipation of prices firming up.

That was in 2013, when Raghunathan was invited to help Ram Rahim find a way out. He decided to seek insurance in the futures market. After a long drawn out process and with the help of a supportive Forwards Market Commission (FMC), it obtained a licence to trade on NCDEX in 2014. That year, soybean prices fell from Rs 4,800 a quintal to Rs 3,300. If Ram Rahim had a naked position it would have suffered a loss of Rs 60 lakh on stocks of 4,000 quintals. But it had locked in at Rs 4,500 a quintal.

Currently, futures are available on the exchange for 12 commodities. Futures, for instance, are not allowed in groundnut, castor, pepper, tea, coffee, coconut, cotton, onions, potatoes, pulses or millets. Even if the range were broader, farmers will have to grow the varieties that are traded and produce them to specified grades. If not, their produce would be unsalable or fetch a lower price. Making that mindset change in Bagli farmers took a lot of effort. Even for traded commodities delivery points may not be available within reach. Ram Rahim was unable to trade in maize futures for this reason. Whimsical regulatory action is another risk. The government thinks futures stoke inflation. The threat of them being banned in a particular commodity is ever present.

Yet, Ram Rahim was able to sell the 2013 stock of soybean for Rs 4,500 a quintal in May 2014 despite prices dropping.  Soybean planted in June- July 2014 it sold at Rs 3,800 a quintal though prices went all the way down to Rs 2,800 a quintal. These positions were taken ahead of the harvest.

But the innovation that producer companies really liked was forward contracts which were introduced in September 2014, when Ramesh Abhishek, currently Secretary, Department of Industry Policy and Promotion, was chairman of the Forward Markets Commission. Ram Rahim argued the case for producer companies to be allowed to do forward deals and negotiated waiver of minimum net worth requirements.

Unlike futures, there are no lot sizes or grades in forward contracts. Commodities which are above fair average quality (FAQ) can get a premium. A farmer producer organisation could enrol on payment of Rs 5,000. (To obtain a futures trading licence, the minimum net worth is Rs 1 crore, and Rs 50 lakh has to be deposited with the exchange). The exchange keeps a percentage of the commodity value as margin money. It enforces the contract so the risk of a party defaulting on its commitments, known as counter-party risk, is taken care of.

Farmer organisations took a shine to the product, says an NCDEX executive. They had access to buyers from across the country. There were no standard specifications. They could for instance, offer to sell maize of 350 grains per 100 grams and a certain moisture content. Buyers could accept the deal after assaying the quality themselves or getting third party inspectors to do it. It was like selling stuff on e-commerce platforms like eBay. The volumes had touched 50,000 tonnes in this segment, the NCDEX executive said, till stock market regulator SEBI (which has subsumed FMC) inexplicably disallowed them this January.

Futures are glacially catching on with farmers’ organisations. Seven of them have done pilot trades on NCDEX. At Samriddhi, farmers have got some grounding in producing for the market. They were earlier selling to Bunge, a global agri-commodities trader. Soybean with moisture content of up to 10 per cent, 2 per cent stained seeds and foreign matter up to 2 per cent get the best price. If farmers can plant with futures prices guiding them, they will be able to break free from rear-view farming, or planting on the basis of last season’s prices, which is responsible for the boom-bust cycle in Indian agriculture, and invariably brings grief to farmers.