Futures ban hurts farm produce firms using exchange platform to hedge risks

Companies say farmers have lost an important and certain source of income because of the suspension

Dnyaneshwar Sakharam Kohale’s farmer producer company (FPC) was getting a price that was at least Rs 100-150 per quintal more than the market rate till 2021.

Kohale found that by hedging the risk of the commodities that his FPC called Parivartan sold through exchanges, his realisation improved.

Parivartan mostly acted as an aggregator of crops such as soybeans and chana for farmers (both members and non-members) in and around Washim district of Maharashtra.

However, the market regulator’s sudden decision to suspend the futures in two of the main commodities that Parivartan hedged its risk in NCDEX dealt a blow to the trade.

“Now we have to scout for a private company to sell the commodities which in itself is a tedious process as first the quality parameters are stringent, also we have to carry the produce to the yards or warehouses and above all payment does not come on time,” said Kohale over phone.

Before the ban, Parivartan sold 600 tonnes of soybeans and 300 tonnes of chana through NCDEX all at good prices and at rates higher than the market.

“An average farmer saved transportation, grading and sorting expenses and also labour if he sold via the FPC either through the exchange or even to government procurement agencies,” Kohale said.

In the past, FPOs have represented the government to lift the ban on futures without much success.

Since 2016 around 506 FPOs were included in the NCDEX exchange platform and of them 169 traded through the exchange platform. The total farmer base reached due to the FPOs was close to 1.07 million.

Around 121,085 tonnes of commodities belonging to the FPOs have been traded in the exchange platform since 2016, of which soybean, maize, and cottonseed grabbed bulk of the volume.

Dilip Bhai Radhanpur, CFO of Banas Farmer Producer Company, a major FPO that traded in the exchange, said that by trading through the exchange platform the 4500-5000 farmers associated with his FPO got a better price for their produce.

“He just needs to sell the produce to us which we aggregate and sell it through the exchange and money is directly transferred into his account,” Radhanpur said.

The three FPOs under his supervision, Banas, Chorad and Samivistar, had a total turnover of around Rs 25 crore in FY23.

“The profit that we get by selling the commodities either through the exchange or directly goes to the account of farmers,” he said.

The FPC aggregates many commodities and it trades cumin seed and castor through the NCDEX platform.

Ban on futures

In December 2022, the Securities and Exchange Board of India (Sebi) extended the suspension on derivatives trading of paddy (non-basmati), wheat, chana, mustard seeds and its derivatives, soybean and its derivatives, crude palm oil and moong for a period of one more year till December 20, 2023.

With state elections round the corner, there is every possibility that the trading suspension might be extended.

The regulator had barred exchanges from launching any new contract on the seven commodities for one and with respect to their running contracts it disallowed any new position and permitted only squaring off.

Data showed that before the ban last year, the aforementioned commodities contributed almost 54 per cent of the total deposits in NCDEX between April 2021 and July 2021 with chana being the highest with 40 per cent of the total deposits.

The suspended commodities contributed around 55 per cent of the total deliveries from the exchange platform, with chana being the highest at 29 per cent.

Because of the suspension, the quarterly average daily volume of NCDEX has fallen from Rs 2310 crore in FY22 to Rs 960 crore in FY23, which is a fall of nearly 58 percent, the exchange said in a report published a few months back.