reaching commodity derivatives to farmers may 2006
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Reaching the Benefits of Commodity Derivatives
to Indian Farmers
S Sivakumar, ITC Limited May 2006
S Sivakumar, ITC Limited May 2006
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Risk: Farmers Perspective
Need: It will be good if I can be assured of my post-
harvest price when I am making my planting decision
Solution: Sell Futures
S Sivakumar, ITC Limited May 2006
,
there is too little rain, or too much rain, or rain at wrongtime, or some pest / insect attack. Market price goes up,
but I get stuck with smaller crop and lower price
Solution: Buy Put Option
Recommendation: Permit Options
S Sivakumar, ITC Limited May 2006
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Execution: Farmers Perspective
Need: My objective is price protection for what I amproducing, I cant manage Exchange margins etc., Iwould simply want to deliver my goods & settle
But: My lot size is too small to take it all the way to one ofthe Exchange delivery centre. Cost is too high for thatlong distance
S Sivakumar, ITC Limited May 2006
Also: The variety / quality that I produce is not theExchange grade. In fact my grade fetches me betterprice
Solution: I want to sell & deliver to my regular buyer, if hecan give me an option embedded forward price
Recommendation: Permit Cash Market Contracts where
pricing could be in the nature of OTC Options
S Sivakumar, ITC Limited May 2006
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Option Pricing: Farmers Perspective
Need: While I understand the logic of Option premium,
very often the premium is so high, the option doesnt look
worthwhile
Solution: I dont mind giving up some upside to reduce
S Sivakumar, ITC Limited May 2006
Possibility: Write options in coupled transactions to
reduce the cost by getting some premium
Structures: Caps, Barriers, Averages etc
Recommendation: Do not restrict writing options, in case
of coupled transactionsS Sivakumar, ITC Limited May 2006
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Selling: Farmers Perspective
Need: I end up selling immediately after harvest, as I do
not have storage capacity, or because I need cash,
although I know that the price will be higher a few weekslater
S Sivakumar, ITC Limited May 2006
, ,
Pricing transactions
Possibility: I can then deliver soon after harvest, take
cash when I want, price when I think it is highest
Recommendation: Reform APMC Act to facilitate
flexibility to delink. Warehouse Receipt negotiability is a
precondition too.S Sivakumar, ITC Limited May 2006
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Downside of ignoring these needs
Uncertain Cash flows to farmers shall result in people
moving away from farming business resulting in:
lower domestic production leading to higher inflation
higher dependence on imports, leading to trade
imbalances for the Country (larger deficits in BoP)
S Sivakumar, ITC Limited May 2006
o pay ng a en on o ese nee s o armers s aincrease disparity between rich and poor in the country
resulting in:
Social unrest
Political tensions
As 57% of Indian workforce is in agriculture, uncertain
cash flows to farmers shall result in lower growth rates
for the sector slowing down the economy
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Conclusion
Fragmented Size, Geographic Dispersion, and
Heterogeneity in Circumstances are the fundamental
characteristics of Indian farmer
Market institutions (futures, options, insurance etc) and
S Sivakumar, ITC Limited May 2006
Regulatory Framework (APMC, WHR etc) need to be inplace to make the Indian farmers globally competitive
Need Institutional Intermediaries who can bundle (i) cashmarket transactions, (ii) gateway to exchange
transactions, (iii) OTC options (iv) physical reach into
the villages
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ITC eChoupal is one such potential Intermediary
S Sivakumar, ITC Limited May 2006
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What is eChoupal?
A two-tier infrastructure, specifically designed
to deliver multiple services for both farming and farm
produce marketing in an integrated manner to suit the unique character of rural India,and
to cater to the evolving needs of demand driven food
S Sivakumar, ITC Limited May 2006
agr cu ture va ue c a n More importantly
Farmers can access information and knowledge freeof cost,
and have a freedom of choice when it comes totransactions
ITC recovers the costs by unlocking value fromstreamlining the supply chain
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Characteristics of Rural India
Farmers are small
impacting their bargaining power Villages are geographically dispersed
impacting real-time access to information
S Sivakumar, ITC Limited May 2006
Variation in circumstances (agro-ecology, resources) impacting costs & scope of customisation
The infrastructure is also weak, and still evolving Physical, Social, Institutional
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And historically, the markets evolved
in this context
The traditional middlemen
made up for the lack of infrastructure
lent money, sold inputs and bought output
but, created an exploitative cycle of dependency
S Sivakumar, ITC Limited May 2006
were more appropriate for the supply driven value
chains in an economy of shortages
e.g. mandi (a fair price discovery mechanism, but
the sunk cost of transport limits choices)
e.g. agri extension system (delivered great results
during Green Revolution days, where the
communication needs were more generic)
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Demands of the globalising trade
1. Transition from supply-driven to demand-driven valuechains
Quality as per customer needs (& changing diets)
Traceability to farms & farm practices (SPS, TBT)
2. Competitiveness in Price / Value equation
S Sivakumar, ITC Limited May 2006
Lower transaction costs along the chain
Further accentuating the need for
Customised knowledge
Real-time & relevant information Access to quality inputs at competitive prices
Effective vertical coordination of the value chain
Efficient Price discovery & risk management
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ITC eChoupal, by leveraging Information
Technology, takes on these challenges
By virtually aggregating the small farmers and linking
them to various entities in the supply chain Improving transaction efficiency
S Sivakumar, ITC Limited May 2006
e ver ng rea t me n ormat on to many armersdirectly across geographies
Facilitating informed choices
Provide customized solutions for a farmers specificneed with the help of experts
Increasing farm yields
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Reaching IT to the Farmer Tier 1
eChoupal @ Village Level (Within 5 KM reach of all
target farmers)
Sanchalak, a farmer selected from within the
village & trained, interfaces between Computer
and the Community
Computer with Multimedia & Internet Access
S Sivakumar, ITC Limited May 2006
Additional investments in Solar Power & VSATs toovercome weak infrastructure
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Reaching IT to the Farmer Tier 2
Choupal Saagar @ Cluster level (within 30 KM from all
Choupals)
Samyojak, a trader appointed by ITC, provides
various services under ITC supervision e.g. QualityTesting, Electronic Weighment, Storage, Payments
New made-to-design hubs being built, to overcome
S Sivakumar, ITC Limited May 2006
e s or age o space n e ra ona ware ouses
for parking (tractors / trollies) and farmer utilities,
besides many operational problems
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ITC eChoupal Services 2
Training the Sanchalaks in appropriate productiontechnologies
who in turn disseminate to other farmers Custom built local language web portals contain
weather conditions forecasts together with
S Sivakumar, ITC Limited May 2006
frequently asked questions on farming
Web casting of specially prepared video films on bestfarming practices Video
Testing facilities (new as well as access to existing) Soil, germination, virus etc
Supply chain for quality farm inputs Video
Innovative schemes like self reliance in soy seed
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The Financial Products Portfolio
Insurance
Life General
Weather
S Sivakumar, ITC Limited May 2006
Crop Motor
Health
Credit Credit Rating Services
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All these services are delivered through
Collaborative effort
18 Agri Input Companies (from bothPublic & Private sector)
S Sivakumar, ITC Limited May 2006
State Agricultural Universities
Some Krishi Vigyan Kendras
National Research Centers of ICAR
Indian Meteorological Department
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Thank You
S Sivakumar, ITC Limited May 2006