Benefits to farmers from commodity futures will be mostly through indirect means and it is not reasonable to expect direct participation in commodity futures, said Joseph Massey, managing director and chief executive officer, MCX.
"The very concept of direct farmer participation is misunderstood. In India, farm holdings are so low and farming is often done on subsistence basis. So, whatever benefits the farmers derive are likely to be indirect," he said.
He was speaking on the occasion of completion of five years of commodity futures trading in India.
Massey said direct participation of farmers in commodity futures is something that does not occur even in developed countries like the US with over 100-year-old commodity futures markets and large farm holdings.
The Union government should make it a priority to pass the amendment to Forward Contracts (Regulation) Act in this winter session of parliament as it will help spur employment and broaden the scope of commodity markets, he said.
"Government should make it a priority to pass economic legislation like the FC(R)A amendment, which boosts livelihood. Forward Markets Commission (FMC) needs to be an autonomous body to better regulate and diversify products available on commodity exchanges," Massey said.
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He cited the example of how US officials defended the Indo-US nuclear deal by indicating that it would lead to creation of 10,000 jobs in the US.
"At the moment, FMC has to approach other regulators through the various ministries, which is a slow process. If FC(R)A is passed, then FMC will be able to interact with other regulators on an equal footing as an autonomous body," he said.
Lack of availability of options and indices have also impacted growth of the market over the last five years.
"Options especially are favoured as they are low-cost product which could have provided the benefits of hedging price risks at very small cost," the MCX head said.
Massey is in favour of active participation of institutional players like banks and mutual funds and said even foreign institutional investors could participate in the local futures market if the FMC was more empowered to regulate them.
“Banks maintain arm's length from the market due to lack of policy support. Banks' integration with commodity market is a must as it could lend and provide hedging advice, to farmers and firms based on their research in commodities,” he said.
This will also make banks feel more secure about their lending to companies.
Massey claims that one of the most tangible benefits of futures trade on the farm sector is that since its launch in late 2003, banks' lending to farmers are rising with very low "haircut".
“Earlier, credit availability for commodities came with a 50 per cent haircut and charged at 2-3 per cent above prime lending rate. Now, the haircut has eased to 15-20 per cent and lending against warehouse receipts is sub-PLR,” the MCX head said.
He agreed that lack of skilled professionals, storage constraints and lack of knowledge about the market continue to be issues that plague commodity markets.
“In five years of its existence, commodity futures have witnessed a boom for three years and an inflationary trend for one, and now the government will have to tackle the problem of a deflationary trend. The government backing off from its policy of opening up the market due to inflation scare also hit the market,” Massey said.
Commodity futures provide the government an alternative input on price from futures contracts, which is often used to help determine duties, and minimum support price.
"Futures market has kick-started economic development in rural areas which were untouched earlier. Although most of this growth is indirect, it is indicative of how important the market is," Massey said.
He explains how choosing a certain place as a delivery centre for a commodity boosts investments in warehousing and infrastructure, and employment.
"Storage and warehousing capacity and facilities are also rising across the country as more people are taking cues and deciding to hold on to commodities for better price realisation," he said.
Massey agreed that most of the trading on commodity exchanges was restricted to a few commodities and there was high level of liquidity in the basket of commodities.