Checking farm volatility

Gone are the days when a post-harvest dip in prices, followed by an off-season spurt, was seen as something you had to live with in agro-commodities.

The profile of stakeholders in the commodities sector has been transformed, with corporate houses like Bharti and Videocon showing an active interest in taking up the processing, retailing and export of agro-goods.

But for this, they need predictable, if not stable, prices and assured year-round supplies. Unfortunately, while most countries have re-tailored their policies for commodity marketing with this end in view, India remains a laggard.

A major objective in lifting the ban on futures trading in commodities was to let these exchanges serve as instruments of price stability and price discovery, but that aim does not appear to have been achieved.

The situation has remained as it was. Cotton prices had dwindled following a good harvest in the last kharif, prompting the government to order the Cotton Corporation of India (CCI) and other agencies to intervene in the market in all cotton-growing tracts.

Several months down the line, the government is still struggling to muster the funds needed to pay for the procured stocks. In Maharashtra alone, the arrears are reported to be above Rs 3,000 crore.

More recently, it is rapeseed-mustard which has witnessed a price crash in the wake of a good rabi harvest. The government, as usual, has asked Nafed to lend marketing support.

Nafed fears that it may have to buy around 2 million tonnes (out of a total production of merely 7.6 million tonnes) for this purpose. As should have been expected, it has run out of storage space to keep the procured inventory and is thinking of moving stocks all the way from the western state of Rajasthan to West Bengal.

On the other hand, the prices of commodities like guarseed, guargum and zira have spurted abnormally for no obvious reason. What is noteworthy is that all these crops are actively traded on the commodity futures exchanges.

The exchanges cannot automatically be blamed for this dismal scenario. The real reason is the policy makers' failure to take a series of other measures that are essential for the success of futures trading and price discovery.

As a result, the country does not yet possess an elaborate network of godowns and cold stores to stock commodities. Nor does it have in place a legally valid and tradable warehouse receipt system.

Contract farming, which allows production and direct marketing of produce of the desired quality, is unable to flourish for want of legal sanctity for these contracts.

The private sector is still barred from setting up integrated markets that provide all the necessary facilities and services for ensuring price stability.

On top of all this, the government's penchant for market intervention to influence prices and availability has not yet diminished a wee bit. Thus, it is time for the policy planners to take a holistic view of the whole commodities scenario and create a statutory and policy environment conducive to rapid growth.