study potato men tha
DESCRIPTION
commoditiesTRANSCRIPT
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ADVANTAGES OF
COMMODITY FUTURES TRADING THROUGH
ELECTRONIC TRADING PLATFORM
FOR FARMERS OF UTTAR PRADESH
A Study of Potato and Mentha
The original final report of consulting assignment Submitted to
MULTI COMMODITY EXCHANGE OF INDIA LIMITED,
MUMBAI
FEBRUARY 2007
Consultant
K.G. Sahadevan, Ph.D Professor of Economics Indian Institute of Management
Prabandh Nagar, Off Sitapur Road Lucknow 226 013 E-mail: [email protected]
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Supply Chain and Futures Trading A study of Potato and Mentha
Acknowledgement
Executive Summary
Chapter 1 Introduction and Objectives
.. Introduction
.2. Objectives of the Study
.3. Scope of the Study
.4. Methodology
.4.. Primary Data
.4.2. Selection of Area
.4.3. Selection of Sample
.4.4. Secondary Data
.5. Organization of the Report
Chapter 2 The Market Profile of Mentha and Potato
2.. Introduction
2.2.TheProfileofPotatoMarket
2.2.. World Production of Potato
2.2.2.SignificanceofPotatointheIndianEconomy
2.2.3.SignificanceofPotatointheUPEconomy
2.2.4. Production Forecasts
2.2.5. Demand for Potato
2.3.TheProfileofMenthaOilMarket
2.4. Conclusion
Chapter 3 The Supply Chain and Market Structure
3.. Introduction
3.2.PotatoMarketingPractices
3.2.1.TheRisk-returnProfile
3.2.2. The Supply Chain
3.2.3. Cold Storages
3.2.4.PotatoFuturesMarkets
3.3.MenthaOilMarketingPractices
3.3.1TheRisk-returnProfile
3.3.2. The Supply Chain
3.3.3. Mentha Oil Futures
3.4. Constraints on Growth of Potato and Menth Oil Futures
3.5.SubjectiveInfluencesonDecisiontoTrade
3.6. Conclusion
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2 Supply Chain and Futures Trading A study of Potato and Mentha
Chapter 4 On-line Trading in Mentha Oil and Potato Advantages to Farmers
4.. Introduction
4.2.On-lineTradinganditsAdvantages
4.3.BenefitsofandtheNeedforPotatoandMenthaOilFutures
4.3.. Price Instability
4.3.2. The Problem of Storage
4.3.3.BenefitsofPotatoandMenthaoilFuturestoFarmers
4.4.NecessaryEnvironmentforSounduseofFutures
4.4.1.HowtoInvolveFarmersinFuturesMarkets?
4.4.2.HowtoEnsureCredittoFarmersThroughWarehouseReceipt
System?
4.4.3.EnhancingMarketAccessthroughExchangeTradedWarehouse
Receipts
4.5. Conclusion
Chapter 5 Conclusions and Policy Implications
5.. Potentials of Mentha oil and Potato for Futures Trading
5.2.HowFuturesBenefitFarmersandMarkets?
5.3.HowtoStrengthenFuturesinMenthaoilandPotato?
5.4. Implications for Institutional Capacity Building
References
Appendix1
Appendix2
Appendix3
Appendix4
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3Supply Chain and Futures Trading A study of Potato and Mentha
ACKNOWLEDGEMENT
ThestudyhasbenefitedfromthesupportextendedbymanyofficialsoftheDepartmentof
Horticulture,GovernmentofUttarPradeshwithoutwhichitwouldnothavebeenpossibleto
carryoutthesamplesurvey.Iwishtoacknowledgespecificallyforthetimelyhelpreceived
from Dr. S. P. Singh, Director; Dr. S. P. Joshi, Dy. Director (Statistics) and Mr. K. K. Maurya, PotatoDevelopmentOfficer(PDO)at theDirectorateofHorticulture,Lucknow;Mr.J.K.
Gupta,DistrictHorticultureOfficer(DHO)andMr.H.R.Sahu,DistrictHorticultureInspector
(DHI),Lucknow;Mr.M.K.Khan,DHOandMr.C.P.Awasthi,DHI,Barabanki;Mr.Motilal
Anuragi, PDO andMr.RamNathRajput, DHI, Farrukhabad;Mr. Lakhi Singh,Deputy
Director,DistrictHorticultureOffice,MoradabadandMr.JaikaranSingh,Superintendent,
DistrictHorticultureOffice,Rampur.
Thestudyhasalsobenefited fromaseriesofdiscussions that IhadwithDr.Chiragra
Chakrabarty,HeadTraining,ResearchandDevelopment,MultiCommodityExchange
ofIndia(MCX)Ltd.,Mumbai. IgratefullyacknowledgeMr.JosephMassey,DMD,MCX
Ltd.,Dr.ChiragraChakrabartyandDr.Shanmugham,ChiefEconomist,MCXLtd.,fortheir
highly insightful and valuable comments on earlier versions of this report.
MyspecialthanksareduetoDr.AshokKumarSingh,ProjectAssistant,forhisexcellent
support during the course of this study.
K.G. Sahadevan
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4 Supply Chain and Futures Trading A study of Potato and Mentha
EXECUTIVE SUMMARY
Thepresentstudyhasfour-foldobjectivesthatconcerntheagriculturaleconomyofUttarPradesh
(UP)particularlypotatoandmentha farmingsectors.First, itexamines thephysicalmarketand
supplychainofpotatoandmentha inUP.Secondly, itevaluates thebenefitsof futures in terms
ofmitigating themarket riskofvariousplayers in theentiresupplychainandof improvingprice
realization. Thirdly, it analyses the potentials of potato and mentha as candidates for introducing
futures.Finally,itexaminestheadvantagesofon-linetradingintermsofreach,access,transparency,
and price discovery.
Chapter of the report deals with methodology of the study. The analysis and the conclusions drawn
are mainly based on the data and observations obtained through administering a schedule on a set
ofsamples.Thefieldstudywhichhelpedunderstandthemarketdynamicshastwo-foldobjectives
viz., tounderstand thesupplychainandmarketingpracticesofpotatoandmentha farmersand
secondly tocapture thesubjective influencesandperceptionsabout futuresmarkets.Thestudy
haschosenthreedistrictseachforpotatoandmentha. TheyareFarrukhabad,Moradabadand
LucknowforpotatoandMoradabad,RampurandBarabankiformentha.Thestudyhasalsoutilized
published data of various governmental and private sector agencies.
Chapter2ofthereportprofilestheagriculturaleconomyofUPwithparticularreferencetopotato
and mentha and their supply conditions including cropping season, pattern, area under cultivation
andproductivity,andtheirvariety.Potatoandmenthaareeconomicallysignificantnotonlyfortheir
contribution to the livelihood of thousands of farmers and for their dominance in the agricultural
consumption basket of households but also for their growing linkages to fast growing potato
processingindustryandhighlydiversifiedindustrialuseofmenthaoilforconfectionary,cosmetics
andpharmasectors.Thesecharacteristicsmakethemveryhighpotentialcandidatesforfutures
trading.
Chapter3dealswiththreeimportantissues.First,itseekstoinvestigatethemarketstructure,supply
chainandmarketingpracticesinpotatoandmenthaoil.Secondly,ittriestoevaluatetheutilityof
futures to various constituents in the entire supply chain. Finally, it presents the survey results
on identifying thesubjective influenceson thedecisionof spotmarketplayers to takepositions
in futuresmarkets.Due to lackofan integratedand regulatedsystem formarketingagricultural
produce,farmersaredisadvantagedbyverypoorpricerealization.Theexistingmarketingchannel
isnotcapableenoughtotakecareofsmoothandeconomicaltransferofpotatoandmenthaoilto
thefinalconsumer.Amongtheintermediarieslinkingthefarmertotheconsumer,coldstoragesare
crucial to farmers in the supply chain of potato. The storage capacity is not enough to absorb the
entireproductioninUP.Thepriceriskinstorageposesseriousriskstostorageowneraswelland
thesolvencyofstoragehouses.Inviewofthis,futurescontractsinpotatothroughitsefficientrisk
transfercanbeapotentialavenuetothestoragehousesformitigatingthemarketrisk.
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5Supply Chain and Futures Trading A study of Potato and Mentha
The sample survey conducted on potato and mentha farmers, and cold storages recorded the
awareness about futures, user status, the reason for not using futures and perception about
futures.The farmers responses indicate that certain subjective factors have deeply influenced
their decisions to use futures. The formation of negative attitudes among them and the inadequate
initiativesofthemarketauthoritiesandregulatorstochangemanyoftheunhealthyprejudicesand
negativeperceptionsaboutfuturestradinghavelimitedthepenetrationofthemarkets.Theprevailing
marketenvironmentthereforeposesseriousthreattotheservicesofferedbytheexchangewhile
opportunitiesareaboundduetoenormoussizeofthemarketthatremainunexplored.Thiscallsfor
aproactiveapproachinalleviatingallmisconceptionsandimprovingattitudesoftheexistingand
potential customers.
It is observed that the prevailing imperfections in the supply chain of potato and mentha oil and
consequentpricedisadvantagetotherespectivefarmingcommunitymakefuturesmarketsmore
relevantandbeneficialtothem.Theanalysisofthespotmarketpricetrendsofpotatoandmentha
oil after the launch of futures in them shows that there was substantial improvement in these prices.
Thisadvantageisveryclearlyvisibleinmenthaoilmarketinthreecountsespeciallyafterthelaunch
offuturestrading;(a)thespotmarketpricesofmenthaoilhavestrengthened,(b)theareaunder
menthacultivationanditsproductionhaveshownsubstantialincreaseand(c)theaverageexport
priceofmenthaoilhasrecordedsubstantialincrease.Yetanotherissueexaminedinthepresent
studyisthepotatoandmenthafarmersaccesstofuturesmarkets.Thestudyhasemphasizedon
theroleofcommoditypool investors(aggregators)asafeasibleremedy. Experiencesofmany
countriesshowthatfarmersassociations,marketingagenciesandco-operativescouldbepotential
aggregators in farm sector. This however requires initiative of the government, regulator and
exchangestowardsestablishingpooloperatorsincommodityfuturesmarkets.
Chapter4hasthrownsomelightsonthepotentialrolethatcoldstoragesinpotatomarkets,and
dealersandcommercialdistilleriesinmenthaoilmarketscanplayinthisregard.Thefinalchapter
of the report presents the summary of conclusions of the study and their policy implications. The
government, the regulator and exchanges have a role in transforming futuresmarket tomore
participative and broad based. The most important step in this direction would be the establishment
ofaggregatorswhocanoperateaspooloperatorsinfuturesmarkets.Farmersassociations,co-
operativesandnationalandstatelevelmarketingfederationscanassumetheroleofaggregators.
Moreover,inviewoftheprevailingmisconceptionsandlackofawarenessaboutfuturesmarkets,
there is need for a comprehensive awareness raising and training programmes. There are ways to
improve the supply chain which in turn help farmers realize better prices. Farmers organizations
in addition to improving the supply chain can also ensure indirect participation of small farmers in
futuresmarkets.Moreimportantly,developmentofaformalfinancingsysteminagriculturethrough
cropcollateralwillgoalongwayinensuringafairdealtosmallfarmersinthemarket.Thiscallsfor
building necessary institutional capacity for warehouses, credible collateral management system
and institutional credit flow in agriculture.Commodity exchanges have a crucial role to play in
developingasoundwarehousingandcollateralfinancingsystem.
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6 Supply Chain and Futures Trading A study of Potato and Mentha
CHAPTER1
INTRODUCTION AND OBJECTIVES
1.1. Introduction
Instability of commodity prices has always been a major concern of the producers, processors,
merchandisersaswellastheconsumersinanagriculture-dominatedcountrylikeIndia.Farmers
directexposuretopricefluctuations,forinstance,makesittooriskyforthemtoinvestinotherwise
profitableactivities.Therearevariouswaystocopewiththisproblem.Apart fromincreasingthe
stabilityofthemarketbydirectgovernmentintervention,variousactorsinthefarmsectorcanbetter
manage theiractivities inanenvironmentofunstableprices throughderivativesmarketsmainly
futuresandoptionsonfutures.Thesemarketsservearisk-shiftingfunction,andcanbeusedto
lock-inpricesinadvanceinsteadofrelyingonuncertainpricedevelopmentsinfuture.Apartfrom
beingavehicleforrisktransferamonghedgersandfromhedgerstospeculators,thesemarkets
also play a major role in price discovery.
Futuresmarketshaveplayedavitalroleinthedevelopmentofagriculturalsectorinmanycountries
intheworld.TheUS,theUK,andevensomeofthedevelopingcountriesinAfricaespeciallyKenya
andZambiaandAsiancountries likePhilippines,Malaysiahavebenefited fromfuturesmarkets.
Most of these countries have utilized agricultural commodity futures for reducing direct government
subsidy to farmers.TheChicagoMercantileExchange(CME);ChicagoBoardofTrade(CBOT);
NewYorkMercantileExchange(NYMEX);InternationalPetroleumExchange(IPE),London;London
MetalExchange(LME);EuronextLondonInternationalFinancialFuturesExchange(LIFFE);Tokyo
CommodityExchange(TOCOM);CentralJapanCommodityExchange(C-COM);SidneyFutures
Exchange;SingaporeExchange (SGX);BursaMalaysiaDerivatives;BolsadeMercadorias&
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7Supply Chain and Futures Trading A study of Potato and Mentha
Futuros (inBrazil), theBuenosAiresGrainExchange,etcaresomeof the leadingcommodity
exchangesintheworldengagedinfuturestrading.
EveninChinaaspartofliberalizationofinternalmarketmanyexchangesweresetupforpromoting
futurestradinginmanycommoditiesandmostofthemlikeShanghaiFuturesExchange;Zhengzhou
Commodity Exchange, Dalian Commodity Exchange, etc. have witnessed tremendous growth
duringthelastfiveyears.
Commodityfuturesmarketsoffercertaineconomicbenefits.First,futurestradingisaveryefficient
means of determining the future price level for a commodity. The price discovery is the best and the
consensusmarketforecastoffuturepricesofcommoditiestradedinthemarketastherearemany
potential buyers and sellers competing freely. There are innumerable small and large numbers of
producersofcommoditiesacrosstheworldcompetinginworldorinnationalmarkets.Thesewidely
dispersedproducersfinditdifficulttoknowwhatpricesareavailable.Moreover,theopportunityfor
farmer,processor,traderandconsumertoascertaintheirlikelycostanddeveloplongrangeplans
is limited. Therefore, the price discovery is of crucial importance to farmers as it helps them predict
their earnings and plan their future investments accordingly. It also enables consumers, traders and
processors to get very highly reliable future price information which help them in quoting a realistic
price and execute their buy and sell contracts. Thus the price discovery essentially provides
all segments in the society with a guide to what various commodities are worth now as well as
todays best estimate for the future. Therefore, the price discovery has the potential to minimize
uncertaintieswithregardtofuturepricesincommoditymarkets.
Secondly,futurescontractsareusedforpriceriskmanagement.Commodityfuturesmarketsoffer
farmers,commoditydealers,processors,andconsumersameansofpassingthepricerisksinherent
intheirbusinessestotraderswhoarewillingtoassumetheserisks.Inotherwords,commercial
usersofthemarketscanhedge,whichistoenterintoanequalandoppositetransactioninorder
toreducetheriskoffinanciallossduetoachangeinpriceand,bydoingso,lowertheircostsof
doingbusiness.Thisresultsinamoreefficientmarketingsystemand,ultimately,lowercostsfor
consumers.
Finally, therearecertain indirectbenefitsof futuresmarkets.Sincefuturesmarketsarenational
on-linemarketsofferingcontinuousauctionofcontractsitautomaticallyensureanintegratedprice
structure throughout the country and also ensure balance in supply and demand position throughout
the year. Moreover, they act as focal point for the collection and dissemination of price statistics and
othervitalmarketinformationwhichprovidevaluablesignalstoallplayersinthemarkets.
Multilateral agencies like World Bank and UNCTAD have been taking initiatives for building
capacitiesinmanycountriestodevelopamarketdrivenpriceandincomesupportsystemthrough
futuresmarkets.Indiabeinganagriculturaldominatedeconomyfuturesmarketshavesignificant
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8 Supply Chain and Futures Trading A study of Potato and Mentha
relevance and can play a supporting role. However, enough attention has not been paid to this
segment.Themarketisinverynascentstage.However,Indiahasnotutilizedthebenefitsoffutures
insignificantscaleyet inmanycommoditysegments.Thegovernment isstill relyingheavilyon
explicit and implicit subsidies to farmsector.Thesubsidyhasbecomeunsustainable in viewof
itswiderfiscal implications.TheMinistryofConsumerAffairs,FoodandPublicDistribution,and
ForwardMarketsCommissionhavebeenenvisaging far reaching reforms in commodity futures
marketsinIndia.
Government has initiated the process of deregulation of domestic trade in commodities in 997
by lifting prohibition of futures trade in a large number of commodities and facilitating setting up of
nationalmulti-commodityexchanges.Subsequently,thegovernmenthasabolishedprohibitionof
forward trading on all the remaining banned commodities in April 2003. These two initiatives have
triggeredmassivegrowthoffuturesmarketsinIndia.Bytheendof2003,threeon-linecorporatised
multi-commodityfuturesexchangesbecameoperational.Currentlythereare24exchangesinIndia
with derivative contracts on more than 20 commodities available for trade. The aggregate turnover
ofalltheexchangeshasshotupfromRs.28419crorein1998-99toRs.129364crorein2003-04
andfurthertoRs.571760crorein2004-05(ForwardMarketsCommission,2005).Thetotalvalue
oftradeduring2005-06hascrossedRs.1000000crore.Simultaneously,bothmarketparticipation
andtradingpracticesunderwentrevolutionarychanges.Thenewgenerationexchangesbroughtin
technology and worlds best trading systems and practices which helped them garner more than
90 per cent of the total volume in less than two years. The traditional and localized commodity
exchanges, in spite of some of them introducing on-line trading, are struggling to retain their
supremacyintheirspecificcommoditydomain.TheinternationalpepperexchangelocatedinKochi
whichhasthereputationofbeingtheonlypepperfuturesexchangeintheworldhasalreadylost
substantialportionoftheirbusinesstothenewmulti-commodityexchanges.Thewritingonthewall
iscleartootherlocalizedexchangesaswell.Indicationsarethatmanyofthemmayeventuallygive
waytotheon-linemulti-commodityexchangesandfaceclosure.
TheNationalAgricultural Policy -2000 has also emphasized the need for promoting futures as
amarketdrivenmechanism forensuring fairpriceand income to farmers.TheMinistryand the
ForwardMarketsCommissionwhichregulatesfuturestradehavecommissionedmanystudiesand
receivedexpertviewsonmeasurestobeinitiatedforrevampingtheageoldmarkets.TheWorld
Bank funded project implemented in 2001 has brought to light through a number of consulting
reports thedirectionof reformstobe initiated forstrengthening the futuresmarkets in India.Yet
anotherjointprojectinitiative,CommodityFuturesMarketDevelopmentProject,oftheMinistryand
theUnitedStatesAgencyforInternationalDevelopment(USAID)hasjustconcluded.
Currently,thereisarenewedinterestinfuturesmarkets.TheGovernmenthasbeeneyingfora
marketdrivenpricingand riskmanagement system inagriculture forensuringstable income to
farmerswhichwouldhelpeasepressureofsubsidyonfiscalsituation.Moreover,thegovernments
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9Supply Chain and Futures Trading A study of Potato and Mentha
commitments under WTO Agreement on Agriculture to phase out direct price and income support
tofarmersrequired,interalia,introductionofamarketdrivenpricestabilizationmechanismthrough
futurestradeinorganizedexchanges.Thisre-orientationofgovernmentpolicytowardsagricultural
productmarketshasbeengiventhrustintheNationalAgriculturalPolicy2000.Inpursuanceofthis
policy, government has removed ban on futures trading for all commodities in 2003.
1.2. Objectives of the Study
The Indian farmers are handicapped by many systemic inadequacies. The price distortions due
to long supply chain in marketing their produce has long been exposing them to lower price
realizationsmakingtheirinvestmentsnonviableandunattractive.TheNationalAgriculturePolicy,
2000 has emphasized on liberalization aiming at augmenting farmers income and on efforts to
ensure that farmers receive prices commensurate with their efforts and investments. In line with its
commitmentforenlargingthecoverageoffuturesmarketstominimizepricefluctuationsasalsofor
hedgingrisks,thegovernmentliftedallrestrictionsandpermittedfuturestradinginallcommodities
in 2003. However, in spite of India being one of the pioneers in commodity futures questions and
concernsarestillbeingraisedbymanyabouttheeconomicbenefitsoffuturesandespeciallyits
utility to the farmers.
ThepresentstudyseekstoexaminethefollowingaspectsofthefarmsectorofUttarPradesh(UP)
with a special focus on two crops viz., potato and mentha.
1. Toevaluatethebenefitsoffuturesintermsofmitigatingthemarketriskofvariousplayersintheentire
supply chain and of improving the price realization of the farmers
2. ToexaminethephysicalmarketandsupplychainofpotatoandmenthainUP
3. To analyse the potentials of potato and mentha as candidates for introducing futures and to
substantiate the rationale for futures in these commodities
4. Toexaminetheadvantagesofon-linetradingintermsofreach,access,transparency,betterprice
discovery and price dissemination.
1.3. Scope of the Study
ThescopeofthestudyislimitedtotheagriculturaleconomyofUPwithfocusonpotatoandmentha
crops.Whileexaminingtheadvantagesofon-linefuturestradingingeneralemphasiswillbeonits
benefitstopotatoandmenthafarmersofUPinparticular.
1.4. Methodology
The study is primarily an empirical one. It has relied on two sources of data.
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0 Supply Chain and Futures Trading A study of Potato and Mentha
1.4.1. Primary Data The analysis and the conclusions drawn are mainly based on the data and observations obtained
throughadministeringascheduleonasetofsamples.Thefieldstudywhichhelpedunderstand
themarketdynamicshastwo-foldobjectivesviz., tounderstandthesupplychainandmarketing
practices of potao andmentha farmers and secondly to capture the subjective influences and
perceptions about futuresmarkets among various stake holders.The decisions of farmers and
various othermarket intermediaries to trade on potato andmentha futures are assumed to be
greatlyinfluencedbytheperceptionsthattheyhaveconceivedabouttheutilityandmodusoperandi
ofthefuturesmarkets.
1.4.2. Selection of area The study has chosen three districts each for potato and metha. Three leading potato producing
pocketsinUParelocatedintheseidentifieddistricts.Thedistrct-wiseareaandproductionofpotato
andmenthaareprovidedinappendix1and2respectively.TheyareFatehgarhinFarrukhabad
district, Sambhal inMoradabad district andBakshi-ka-Talab and surrounding areas in Lucknow
district.Similarly,threemajormenthafarmingcentresareidentifiedwhichareSambhalinMoradabad
district,SadarinRampurdistrictandFatehpurinBarabankidistrict.
1.4.3. Selection of Sample The criteria used for selection of sample farmers are the volume of annual production and area under
cultivation. Farmers who prefer to hedge their output and initiate futures position independently on
thetradingplatformofMultiCommodityExchangeofIndiaLtd(MCX)shouldideallyhavecertain
minimum output. Considering the standard trading and delivery unit for potato on MCX platform
being 30 metric tonne (MT) and the average production per acre being 5 MT farm size of 0
acre has been considered as suitable sample for the study. Therefore, each sample potato farmer
chosen for the study has the potential to take 5 units of contracts. This ensures that they are
potentialplayersasgenuinehedgersinpotatofuturesmarkets.
Samples are chosen at random from the population of farmers holding more than 0 acres under
potato cultivation.Ten samples are chosen from each areawith the help of the officials of the
respectiveDistrictHorticultureOffice.ThejudgmentoftheDistrictHorticultureInspector(DHI)with
regard to identifying progressive farmers was duly considered in all these areas while selecting
thesample.SinceDHIsaregovernmentofficialswhostayregularlyintouchwithfarmerstheyare
assumed to have complete and authentic domain information. Cold storages are very important
intermediaryinpotatomarketingchannel.Theyconstituteaverystronglinkbetweenthefarmers
andbigdealersinreadymarketsandprocessorsfromvariouspartsofthecountry.Theyhavea
potentialroletoplayindevelopingpotatofuturesmarketsandcanhelpsmallfarmersasapooled
investor/aggregator. The samples of three cold storages which fulfill two important criteria are
chosen at random from each area. These sample storage houses have not less than 90,000 quintal
capacity and are operating at not less than 80 per cent of their capacity. This ensures that all of them
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Supply Chain and Futures Trading A study of Potato and Mentha
areactiveandpotentialplayeraspooledinvestorinpotatofuturesmarket.
Similar procedure has been followed in collecting samples of mentha farmers in Sambhal in
Moradabaddistrict,SadarinRampurdistrictandFatehpurinBarabankidistrict.Potentialsamples
areidentifiedbasedonvolumeofmenthaoiloutputandareaundermenthacultivation.Considering
thestandardtradinganddeliveryunitformenthaoilonMCXplatformbeing360and720kilogram
(kg) respectivelyand theaverageproductionperacrebeing45kga farmer,holding8acre for
mentha has been considered as suitable sample for the study. Therefore, each sample mentha
farmerchosenforthestudyhasthepotentialtotakeatleast1unitofcontract.Thisensuresthat
theyarepotentialplayersasgenuinehedgersinmenthaoilfuturesmarkets.Samplesarechosen
at random from the population of farmers holding at least 8 acres under mentha cultivation. Ten
samplesarechosenfromeachareawiththehelpoftheofficialsoftherespectiveDistrictHorticulture
Office.Moreover,contractfarmersofpotatoandmenthaareexcludedfromthesampleastheyare
notexposedtomarketriskandhencedonotrequireanyhedgingmechanism.Nevertheless,the
studyunderlinestheimportanceoffuturesmarketstocontractfarmingasfuturespricesserveas
thepotentialbenchmarkforthecontractualprocurement.
Thereareintermediariesoperatinginthehighlyexportdrivenmenthaoilmarket.Thelocaldealers
anddistilleriesarevery importantamong them.Distilleriesareessentiallyexporters.During the
field study effortsweremade to interactwith some of them inMassauli (Barabanki), Sambhal
(Moradabad) and Rampur. They were not willing to share any information relating to their business
for obvious reasons.
Perceptionsofvarioustargetgroupsinbothpotatoandmenthaoilaboutthefuturesmarketsare
important.Theirattitudesdeterminenotonlythepenetrationofthemarketbutalsothesuccessof
futuresinachievingthemostefficientpricediscovery.Theschedulehascapturedcertainsubjective
influencesontheirdecisiontoparticipateinthemarkets.Moreover,basedontheexchangetraded
dataperformanceofpotatoandmenthaoil futurescontractswith respect to risk reductionand
ready-futuresmarketsintegrationareempiricallyevaluated.
1.4.4. Secondary Data The study has utilized published data of various governmental and private sector agencies, and
internationalorganizationslikeFAO,InternationalPotatoCentre,etc.Thereadymarketpricesof
potato(Farrukhabad)aresourcedfromUPAgriculturalProduceMarketingBoard(MandiParishad)
whileformenthathespotpricesinSambhalreleasedbyMCXLtd.,areutilizedfortheanalysis.
Most of the state level data are sourced fromDirectorate ofHorticulture, LucknowandDistrict
HorticultureOfficesoftherespectivesampledistrictsinUP.
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2 Supply Chain and Futures Trading A study of Potato and Mentha
1.5. Organization of the Report
The report is organized into four chapters. Chapter covers objectives, methodology and data of the
study.Chapter2examinestheimportanceofmenthaandpotatointheagriculturaleconomyofUP.
GiventhefactthatUPisthebiggestproducerofthesetwohorticulturalcropstheirphysicalmarkets
havenationallevelrelevanceintermsofdeterminingprices.Thechapterpresentsabriefprofileof
theagriculturaleconomyofUPwithafocusonthesetwocropsandtheirsupplyconditionsincluding
cropping season, pattern, area under cultivation and productivity, and their variety. Chapter 3 has
four-foldobjectives.First,itseekstoinvestigatethemarketstructure,supplychainandmarketing
practices in potato and mentha based on the data and observations obtained through sample
survey. Secondly, it tries to evaluate the utility of futures to various constituents in the entire supply
chain.Thirdly,itpresentsthesurveyresultsonidentifyingthesubjectiveinfluencesonthedecision
ofphysicalmarketplayers to takepositions inpotatoandmenthaoil futuresmarkets.Finally, it
proposesamarketingapproachtotheexchangeinthelightoftheevidenceonprevailingmarket
perceptions among prospective players and the prevailing supply chain in both potato and mentha.
Chapter4examinesthepotentialsofmenthaandpotatoascandidatesforintroducingfuturesand
theadvantagesofonlinefuturestradingwithregardtoitsbenefitstomenthaandpotatofarmers
inUttarPradesh.Thechapter,inadditiontodiscussingtheutilityoffuturestofarmersingeneral
and potato and mentha farmers in particular, has elaborated on the necessity of creating various
infrastructures and institutional capacities including commodity aggregators and warehouse receipt
systems for helping farmers benefiting from futuresmarkets.The final chapter summarises the
findingsofthestudyalongwiththeirimplications.
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3Supply Chain and Futures Trading A study of Potato and Mentha
CHAPTER2
THE MARKET PROFILE OF MENTHA AND POTATO
2.1. Introduction
Thischapterintendstoexaminetheeconomicimportanceofmenthaandpotatointheagricultural
economyofUP.GiventhefactthatUPisthebiggestproducerofthesetwohorticulturalcropstheir
physicalmarketshavenationallevelrelevanceintermsofdeterminingprices.Thechapterpresents
abriefprofileoftheagriculturaleconomyofUPwithafocusonthesetwocropsandtheirsupply
conditions including cropping season, pattern, area under cultivation and productivity, and their
variety.
2.2. The Profile of Potato Market
TheimportanceofpotatohasbeensuccinctlysummarizedbyJohnReaderinManonEarth,1998.
It reads as follows.
In thespaceof just400years, thepotatohasbecomeastaplecropofmanypeoplearound
the world whose antecedents had subsisted perfectly well upon grain crops for anything up to
4000 years. The reason for this somewhat surprising development is that the potato is the best
all-aroundbundleofnutritionknowntomankind.Itsrationofcarbohydratetoproteinissuchthat
anyone eating enough potatoes to satisfy their energy requirements will automatically obtain most
oftheproteintheyrequire.Furthermore,thebiologicalvalueofpotatoprotein(anindexofthe
nitrogen absorbed from a food and retained by the body for growth and maintenance) is 73, second
only to eggs at 96; just ahead of soybeans at 72, but far superior to corn (maize) at 54 and wheat
-
4 Supply Chain and Futures Trading A study of Potato and Mentha
at53.Potatoesalsocontainsignificantamountsofessentialvitamins(theBritish,infact,usedto
derive30%oftheirvitaminCintakefrompotatoes.)Exceptionalproductivityisanothervirtueofthe
potato.Afieldofpotatoesproducesmoreenergyperhectareperdaythanafieldofanyothercrop.
Potatoes grow well from sea level to 4,000 feet on a wider variety of soils, under a wider range of
climatic conditions, than any other staple food. The potato matures faster in 90 to 20 days, and will
providesmallbutedibletubersinjust60days.Allinall,thepotatoisabouttheworldsmostefficient
means of converting plant, land, water and labour into a palatable and nutritious food.
2.2.1. World Production of Potato According to the data released by Food and Agriculture Organization (FAO) (FAOSTAT, September
998), potato production worldwide stands at 293 million tons and covers more that 8 million
hectares.With thebreak-upof theformerSovietUnion,China isnowtheworlds largestpotato
producer.Indiaranksnumberfour.OtherleadingpotatoproducingcountriesareUkraine,Poland,
Germany, Belarus, Netherlands, France, UK, Canada, Turkey and Romania. Although potato
productioninEuropehasfallensincetheearly1960s,thisdeclinehasbeenmorethanoffsetbythe
growthinAsia,AfricaandLatinAmerica,therebyexplainingtheriseinglobalpotatotonnage.
Major Potato Producing Nations
Qua
ntity
( M
T)
The latest available estimate released by Central Potato Research Institute (CPRI) Shimla, the
averageworldproductionduring2001-03 is to the tuneof313.7million tonswithareacovering
morethan19millionhectares.AsperCPRIestimatesIndiaisrankedthreeintermsofproduction
whileoccupyingfourthpositionintermsofareaunderitscultivation.Thecountry-wiseproduction
statistics are provided in table 2..
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5Supply Chain and Futures Trading A study of Potato and Mentha
Table 2.1: Potato statistics of India vis--vis other countries
Area (average of 2001-2003) Production (average of 2001-2003)
Rank Country Ha Rank Country Mt China 4,630,454 China 68,892,594 2 Russia 3,95,433 2 Russia 34,860,837 3 Ukraine ,599,000 3 India 23,9,200 4 India ,255,667 4 USA 20,53,490 5 Poland 92,29 5 Ukraine 7,487,833 6 Belarus 570,33 6 Poland 6,2,420 7 USA 504,890 7 Germany ,073,854 8 Germany 283,267 8 Belarus 7,929,433 9 Romania 280,6 9 Netherlands 6,925,75 0 Peru 259,985 0 UK 6,5,333
World 19,124,181 Total 313,770,638
Source: Potato Statistics, Central Potato Research Institute, Shimla
2.2.2. Significance of Potato in the Indian Economy Potatohassignificantshareintheoverallagriculturalproductioninthecountry.Atcurrentprices,
fruits and vegetables share close to 25 per cent of agricultural production and within the fruit and
vegetablesegment theshareofpotatowasestimated tobearound8percentduring1998-99.
Thedisaggregateddataonvalueofoutputfromagricultureareprovidedintable2.2.At1993-94
prices, the value of potato is estimated to be Rs. 46 crore against total production of fruits and
vegetables amounting to Rs. 57988 crore and value of overall agricultural output amounting to Rs.
2.38lakhcrore(NationalAccountsStatistics,2002,CSO).
(at current prices, Rs. crore)
Table 2.2: Value of Output from Agriculture
Item 1993-94 1996-97 1998-99 2000-01 Cereals 74523 07499 28505 45824 Pulses 228 7204 959 5758 Oilseeds 24096 34459 36926 25246 Sugars 4627 9474 23076 27647 Fibres 896 4437 369 42 Indigo, dyes 7 4 7 9 Drugs&narcotics 4066 6227 852 70 Condiments&spices 6740 045 485 447 Frutes&vegetables 38420 62275 90025 85732 Potato 33 5528 748 2640 Other crops 5397 9250 9495 9796 By products 4360 966 2343 24745 Kitchen garden 396 838 2659 2405 Value of output from agriculture 204874 302744 370365 369795
Source:NationalAccountsStatistics2002,CSO,GOI.
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6 Supply Chain and Futures Trading A study of Potato and Mentha
Although potatoes are widely grown in India the climatic variations across the country determined
its distribution and cropping patterns. More than 80 per cent of the potato crop is raised in the winter
season (Rabi) under assured irrigation during short winter days from October to March. It is mostly
concentratedalongtheIndo-GangeticPlaintothenortheast,wheremostpotatoesaregrownduring
the short winter days from October to March. Generally one crop is grown in this belt during winter,
plantedfromlateOctobertoearlyNovemberandharvestedinJanuarythroughFebruary.However,
inUPand insomeof theeasternstatesfarmersgofor twocrops insuccession, thefirstduring
SeptembertoNovember-December,andthesecondfromNovembertoMarch.
The Storage PeriodJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Main Harvest
Rabi Storage Early Harvest
Rabi
Theautumncrop,plantedaroundmid-OctoberandharvestedinFebruaryorMarch,isimportant
to the Punjab area to thewest, adjacent to Pakistan (where it is themost important seasonal
potatocrop).Rainyseason(Kharif)potatoproductionistakeninKarnataka,Maharashtra,Himachal
Pradesh,JammuandKashmirandUttaranchal.Potatocultivationinthesouthisgenerallylimited
byanexcessivelyhotclimate.Theoptimaltemperaturerangeforpotatoisfrom15to25C(59
to77F).However,nighttemperatureiscriticallyimportanttotuberdevelopmentandshouldnot
exceed20C(68F).PlateauregionsofSouth-eastern,centralandpeninsular India,constitute
about 6 per cent area where potatoes are grown as a rainfed crop during rainy season (July to
October).However,inasmallareacoveringmainlytheNilgiriandPalanihillsofTamilnadu,thecrop
is grown round the year both as irrigated and rainfed crop.
Areas of high relative concentration of potato cultivation include:
ThestatesofUttarPradesh,WestBengal,andBiharaccountingformorethan75percentof area under cultivation and about 80 percent of total production;
Punjab state to the west, adjacent to Pakistan, where roughly seven percent of area and production occur;
Higheraltitudeareastothenorth,whereasummercropaccountsforaboutfivepercentoftotal production;
Thesouthernpeninsula,whereapproximatelysixpercentofthetotalcropisgrownonrelatively highaltitudeplateaus,suchastheNilgiriandPalinihillsofTamilNadu,underalternatingrain-
fed and irrigated conditions throughout the year.
In India, theCPRIwhichwas set up in 1949 has been instrumental formajor breakthrough in
potatocultivationandproductivity.ALargenumberofvarietiesaremadeavailablewithmanyof
themdevelopedbyCPRI.By2002,CPRIhasreleased35varietiesinadditiontotheexisting32
varieties(seeappendix3forthelist).Acomparativestatisticswhichcoverthegrowthduringthelast
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7Supply Chain and Futures Trading A study of Potato and Mentha
forty years is provided in table 2.3. While productivity increased by 256 per cent total production
increasedphenomenallyby843percentduringtheperiod1963-2003.Withaccesstoirrigation,
chemicalinputssuchasfertilizers,continuedexpansioninpost-harvestinfrastructureintheformof
roadsandcoldstoragefacilities,producerscontinuetofindpotatoesanextremelyattractivecrop
to grow. Strong demand both in the countryside and in rapidly growing urban areas continues to
stimulate increases in area planted.
Table 2.3: India: Potato Production Trends1961-63 2001-03 Comparison
Total Area Cultivated (000 Hectares) 383 ,28 334% Per Capita Area Cultivated (Square Meters) 8.3 2.2 48% Average Yields (Tons per Hectare) 7.3 8.7 256% Total Production (000 Tons) 2,844 23,980 843% Per Capita Production (Kilograms) 6. 22.8 372%
Notes:Dataarethree-yearaverages,comparisonof2001-03to1961-63.
Populationestimatesforpercapitadata:1961-63=46.29crore;2001-03=104.95crore
Source: FAOSTAT.
ThetrendinproductionofpotatohasbeenstableinUP,WestBengal,Bihar,HaryanaandPunjab
states. The all India production of potato has been growing at CAGR of around 3 per cent during
the last ten years. Potato occupies a major share in overall vegetable production in the country.
As shown in table 2.4 in terms of area it shares more than 25 per cent while close to 35 per cent
in overall vegetable production.This signifies the dominant role potato plays in the agricultural
economy of the country.
Table 2.4: Area, production and yield of potato in India
Year Area (000 Hect.)
% Of Veg. Area
Productivity (Mt/hect.)
Production (000 Mt)
% of Total Veg.
Production 1991-92 35. 20.3 6.0 895.0 3. 1992-93 240.0 24.6 4.9 8479.0 29.0 1993-94 047. 2.5 6.6 7392.4 26.4 1994-95 069.4 2.3 6.3 740.3 25.9 1995-96 09.0 20.8 7.0 8843.3 26.3 1996-97 248.8 22.6 9.4 2425.9 32.3 1997-98 208.9 2.6 4.6 7652.3 24.3 1998-99 280.2 2.8 7.6 22494.7 26. 1999-2k 340.9 22.4 8.6 25000. 27.5 2000-01 2.3 9.4 8.4 22242.7 23.7 2001-02 259.5 20.5 9.4 24456. 26. 2002-03 337.2 22.0 7.3 236.4 27.3 2003-04 484.7 25. 8.8 27925.8 32.9 2004-05 542.3 26. 8.9 2988.6 34.4 CAGR % 2.35 2.96 .33
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8 Supply Chain and Futures Trading A study of Potato and Mentha
Source: Directorate of EconomicsandStatistics,MinistryofAgriculture,GOI
IndianHorticultureDatabase2005,NationalHorticultureBoard,GOI
Production Trend of Potatoes
35
30
25
20
15
10
5
0
2004-05
2003-04
2002-03
2001-02
2000-01
1994-95
1990-91
1984-85
1979-80
1974-75
1970-71
1960-61
1950-51
Pro
duct
ion(
Mill
ion
Tonn
es)
2.2.3. Significance of Potato in the UP Economy AgricultureisthebackboneoftheUttarPradesh(UP)economy.Ithascontributed32.4percentof
statedomesticproduct(SDP)during2001-02.UPenjoysaverysignificantplaceintheagricultural
economy of the country. It is a leading producer of pulses, cereals and vegetables. Table 2.5
presents thestatessector-wisecontribution to theoverallagriculturalproduction in thecountry.
While the state shares 2 and 8 per cent respectively of the total cereals and pulses production, its
contributiontototalvegetableproductioninthecountryisestimatedtobe17percentduring2001-
02 (Agricultural Statistics at a Glance, 2003 and 2004, Ministry of Agriculture). Among vegetables
UPleadsintheproductionofpotatoandgreenpeas.
Table 2.5: Area and Production of different crops in Uttar Pradesh & India (2001-02)
Area in thousand hectares Production in thousand MTCrop Uttar Pradesh India
Area Production Area Production CEREALSRice 607 2856 44900 93340 Wheat 9256 25498 26340 72770 Sorghum 323 309 9800 7560 Pearl millet 85 968 9530 8280 Maize 93 57 6580 360 Other cereals 282 6 360 4380 Total Cereals 17714 41759 100760 199490
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9Supply Chain and Futures Trading A study of Potato and Mentha
PULSES
Gram 84 87 6420 5470 Pigeon Pea 394 456 3330 2260 Lentil 625 500 470 970 Other pulses 823 603 0790 4670 Total Pulses 2683 2376 2200 3370 OILSEEDSGroundnut 08 90 6240 7030 Rapeseed&
Mustard
566 574 5070 5080
Soybean 8 6340 5960 Sunflower 0 80 680 Other oilseeds 535 347 380 90 Total Oilseeds 230 030 22640 20660 FRUITSSugarcane 2035 7982 440 29720 Banana .4 33.5 466.2 4209.9 Citrus 0.9 2 68.5 4789. Guava 7.3 36. 54.6 75.5 Litchi 0.2 0.2 58. 355.9 Mango 253 950 575.8 0020.2 Papaya 0.3 6.4 73.7 2590.4 Other fruits 5.2 44.6 643. 576.4 Total Fruits 288.3 2282.8 400. 43000.9 VEGETABLESBrinjal .5 59.6 502.4 8347.7 Cabbage 7 209.4 258. 5678.2 Cauliflower 3.4 50.7 269.9 4890.5 Okra 3.2 54.8 347.2 3324.7 Green Peas 47.4 79.2 303.3 2038.2 Tomato 4 0.3 458. 7462.3 Onion 25.2 278.5 495.8 5252. Potato 389.9 9570 259.5 24456 Sweet Potato 22.6 259.8 3.9 30.3 Other vegetables 73.8 328.6 890.6 9526.2 Total vegetables 777.9 5044.8 655.7 88622. FLOWERS 6.33 5350 06.5 25647 SPICES 42.4 3.4 3224 534.6 Source:AgriculturalStatisticsataGlance2003&2004,DepartmentofAgriculture&Cooperation,MinistryofAgriculture,
Government of India
IndianHoticultureDatabase-2003,NationalHorticultureBoard
UPhasthedistinctionofleadingpotatoproducerinthecountry.Thestatecontributesalmost35per
centoftotalproductioninthecountry.Thestate-wiseproductionstatisticsareprovidedintable2.6.
In terms of productivity the state is way ahead with 22.3 tonne per hectare as against the national
averageof18.8.UPisalsoamajorsuppliertopotatoprocessingindustrymostlylocatedinwestern
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20 Supply Chain and Futures Trading A study of Potato and Mentha
andsouthernpartofthecountry.ManyareasinthestateincludingAgra,Farrukhabad,Kanaujare
knownforhighqualityprocessingvarietypotatoes.Potatoesarealsobeingexportedfromthestate
tomanycountriesincludingSriLanka,SaudiArabia,etc.
Manyvarietiesaregrown inUP inaddition toDesi.Desivariety isgenerallycultivatedbysmall
farmerstomeetthelocalmarketrequirements.Thevarietychosenbythefarmerdependsonthe
markethetargets.Forexample,Rajender1andRajender2aremainlytocatertothemarketsin
BiharwhileprocessingvarietiesKufriChipsona-1andKufriChipsona-2aregrownextensively in
Agra,Farrukhabad,Kannaujandotherleadingproductionareasformeetingtherequirementsof
theprocessingindustry.OtherpopularvarietiescultivatedinUPareKufriAnand,KufriBahar,Kufri
Jyoti,KufriChandramukhi,KufriLalimaandKufriBadsha.Theagrozone-wisevarietiesarelisted
in table 2.7.
Table 2.6: State-wise area, Production and Productivity of Potato
States Area (in 000 hectare) Production (in 000 MT) Productivity (in MT/ha) 1991-92 2003-04 2004-05 1991-92 2003-04 2004-05 1991-92 2003-04 2004-05
Uttar Pradesh 323.0 422.1 440.0 6145.6 8825.6 9821.7 19.0 20.9 22.3 West Bengal 206.3 306.0 320.6 4531.8 7591.7 7106.6 22.0 24.8 22.2 Bihar 305.0 318.1 318.1 3250.0 5656.7 5656.7 10.7 17.8 17.8 Punjab 46.6 71.9 72.9 923.1 1439.7 1470.2 19.8 20.0 20.2 Gujarat 16.8 35.8 43.3 412.5 780.0 978.2 24.6 21.8 22.6 Madhya Pradesh 31.7 46.6 52.2 368.0 698.7 782.5 11.6 15.0 15.0 Karnataka 35.4 59.5 60.0 650.0 526.7 603.2 18.4 8.9 10.0 Assam 61.7 78.0 73.1 473.3 543.1 589.1 7.7 7.0 8.1 Uttaranchal NA NA 22.1 NA NA 448.5 NA NA 20.3 Haryana 13.8 17.9 18.4 205.0 440.1 441.7 14.9 24.6 24.0 Others 194.8 128.9 121.7 1235.7 1423.5 1290.2 6.3 11.0 10.6 Total 1235.1 1484.7 1542.3 18195.0 27925.8 29188.6 14.7 18.8 18.8
Source:IndianHorticultureDatabase2005,NationalHorticultureBoard,GOI.
Leading Potato Producing States(2004-05)
Utta
r P
rade
sh
Wes
t Ben
gal
Bih
ar
Pun
jab
Guj
arat
Mad
hya
Pra
desh
Kar
nata
ka
Ass
am
Utta
ranc
hal
Har
yana
10000
7500
5000
2500
0
Pro
duct
ion
in 0
00 M
T
441.7448.5589.1603.2782.5978.21470.2
5656.7
7106.6
9821.7
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2Supply Chain and Futures Trading A study of Potato and Mentha
Table 2.7: Agro Zone-wise Varieties Recommended by NHRDFAgro-ecological Zone Recommended Variety North-WesternPlains Kufri Chandramukhi, Kufri Jawahar, Kufri Kuber, KufriAlankar,
Kufri Badsha, Kufri Dewa, Kufri Pukhraj, Kufri Sheetman, KufriSutlej
NorthEasternPlains KufriAshoka, Kufri Kuber, Kufri Chipsona 1, Kufri Chipsona 2,KufriLalima,KufriPukhar,KufriRed,KufriSutlej
West Central Plains KufriSafed,KufriSindhuri,KufriChandermukhi,Kufri Jawahar,KufriKuber,KufriChamatkar,KufriKisan,KufriSindhuri
Plateau Region Kufri Chamatkar, Kufri Jawahar, Kufri Jyotir, Kufri Kuber, KufriLauvkar,KufriPukhraj
NorthWesternHills Kufri Giriraj, Kufri Jyoti, Kufri Kundan, Kufri Jeevan, Kufri KumarNorthEasternHills Kufri Giriraj, Kufri Jyoti, Kufri Megha, Kufri Khasigaro, Kufri
NaveenNorthBengal,SikkimHills Kufri Jyoti, Kufri Kanchan, Kufri Sherpa, Kufri Giriraj, and Southern Hills KufriMuthu,KufriSwarna,KufriNeela,KufriNeelamani
Source:NationalHorticulturalResearchandDevelopmentFoundation,Nasik
Thedistrict-wisepotatoproductionfiguresaregivenintable2.8.Aspertheproductionestimatesof
theDirectorateofHorticulture,GovernmentofUPcloseto45percentiscontributedbysixdistricts
ofUP in2005-06.TheyareAgra (9.85),Firozabad (8.64),Farrukhabad (8.06),Kannauj (6.77),
Badaun (4.70) and Hathras (4.57). The share of another ten districts adds to 66 per cent of total
productioninthestate.TheyareBarabanki(2.75),Mathura(2.44),Mainpuri(2.44),Aligarh(2.39),
Moradabad(2.36),Etawah(2.31),Ballia(2.22),Shahjahanpur(2.12),Allahabad(2.09)andEtah
(2.02).
Table 2.8: District-wise Potato Production in Uttar Pradesh
(Area in hectare, production in MT and productivity in MT per hectare)District 1995-96 2000-2001 2005-2006(EST.)
Area Prod. Pvty Area Prod. Pvty. Area Prod. Pvty.
Saharanpur 574 13527 23.566 791 16684 21.092 733 16443 22.432
Muzaffarnagar 2942 69331 23.566 2603 54902 21.092 2653 59512 22.432
Meerut 7983 165695 20.756 7353 158950 21.617 6114 99004 16.193
Bagpat - - - 366 7879 21.526 264 4559 17.267
Bulandsahar 5282 124988 23.663 6563 141276 21.526 7350 125156 17.028
Ghaziabad 5176 121978 23.566 4547 97879 21.526 6309 117524 18.628
Gaut. Budh Nagar
- - - 336 7233 21.526 267 4610 17.267
Aligarh 5502 124526 22.633 5531 145737 26.349 10291 239163 23.240
Hathras - - - 12544 370688 29.551 15940 455964 28.605
Mathura 5866 132764 22.633 6137 161704 26.349 8391 244061 29.086
Agra 8747 260941 29.832 18662 569023 30.491 39800 983936 24.722
Firozabad 12502 325552 26.040 18508 435012 23.504 33975 863135 25.405
Mainpuri 10486 243443 23.216 10328 236553 22.904 11760 243996 20.748
Etah 7760 141791 18.272 7058 130121 18.436 10234 202132 19.751
Bareilly 5677 105450 18.575 4664 100140 21.471 6030 117760 19.529
Badaun 15788 293830 18.611 16612 304282 18.317 23119 469662 20.315
Shahjahnpur 5995 111356 18.575 5151 110596 21.471 6423 212171 33.033
Pilibhit 844 15677 18.575 581 12475 21.471 638 14335 22.469
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22 Supply Chain and Futures Trading A study of Potato and Mentha
Bijnor 1040 21155 20.341 958 18924 19.754 888 21576 24.297
Moradabad 10675 263096 24.646 8239 227899 27.661 9179 235294 25.634
Jyoti-phule Nagar - - - 4647 91797 19.754 4303 92261 21.441
Rampur 2700 54920 20.341 2182 43103 19.754 1722 41840 24.297
Farukhabad 54518 1316937 24.156 29221 766876 26.244 31442 804947 25.601
Kannauj - - - 32479 807850 24.873 37507 676401 18.034
Etawah 8754 203968 23.300 5967 135008 22.626 10961 230477 21.027
Auraiya - - - 2857 64642 22.626 3810 91253 23.951
Kanpur N. 824 19657 23.856 10327 251617 24.365 6280 162853 25.932
Kanpur D. 8563 190030 22.192 1467 33192 22.626 2366 93263 39.418
Fatehpur 4237 84587 19.964 5734 81665 14.242 6145 118807 19.334
Allahabad 17029 342964 20.140 12396 253771 20.472 10554 209064 19.809
Kaushambi - - - 3570 50844 14.242 4882 91313 18.704
Pratapgarh 6741 83561 12.396 7200 102544 14.242 4620 87360 18.909
Jhansi 291 5844 20.082 275 5860 21.311 269 6034 22.432
Lalitpur 387 7772 20.083 330 7033 21.311 332 7448 22.432
Jalaun 265 5322 20.083 179 3815 21.311 176 3948 22.432
Banda 394 7913 20.084 97 2067 21.311 304 6819 22.432
Chitrakut - - - 267 5690 21.311 398 8928 22.432
Hamirpur 85 1707 20.082 30 640 21.311 39 875 22.432
Mahoba - - - 90 1918 21.311 234 5249 22.432
Varanasi 5689 102584 18.032 4163 94330 22.659 3347 72481 21.656
Chandauli - - - 966 21889 22.659 1141 24709 21.656
Jaunpur 10242 168624 16.464 11685 250421 21.431 8926 170924 19.149
Gazipur 9686 125376 12.944 9857 224523 22.778 4909 128689 26.215
Mirzapur 2330 41571 17.842 2160 46971 21.746 322 7223 22.432
Sonbhadra 658 11740 17.842 808 17571 21.746 1055 23666 22.432
Ravidash Nagar 2465 43979 17.841 1448 31488 21.746 1286 28847 22.432
Ballia 7175 141549 19.728 7388 137026 18.547 7386 222104 30.071
Azamgarh 5828 84786 14.548 5707 105849 18.547 5571 167526 30.071
Mau 2298 45335 19.728 1796 33311 18.547 1501 45137 30.071
Gorakhpur 4958 52246 10.538 4362 61713 14.148 4222 94708 22.432
Maharajganj 2881 30359 10.538 2886 40831 14.148 1871 41970 22.432
Deoria 2007 21149 10.538 2126 30079 14.148 2043 45829 22.432
Kushi Nagar 2679 28231 10.538 1870 26457 14.148 1394 31270 16.184
Basti 5467 57610 10.538 3684 46532 12.631 703 15770 22.432
Kabir Nagar - - - 1827 23077 12.631 3676 82460 22.432
Sid.nagar 3054 32182 10.538 3076 38853 12.631 2359 52917 22.432
Gonda 5121 88194 17.222 2742 53735 19.597 2942 65995 22.432
Balram Pur - - - 1904 37313 19.597 1545 34658 22.432
Baharaich 3596 61930 17.222 2077 40703 19.597 996 22342 22.432
Shravasti - - - 2000 39194 19.597 484 10857 22.432
Lucknow 6445 125048 19.402 5107 69423 13.594 3515 55312 15.736
Unnao 5611 108867 19.402 5491 74642 13.594 6574 135740 20.648
Raibarily 5271 102270 19.402 5900 80202 13.594 5560 99096 17.823
Sitapur 4468 86690 19.402 3847 52295 13.594 3329 58595 17.601
Hardoi 9497 164830 17.356 11334 155661 13.734 11432 186502 16.314
Lakhimpur Kheeri 1658 32169 19.402 1208 16421 13.594 1589 27969 17.601
Faizabad 4987 70117 14.060 4110 66905 16.279 2866 56128 19.584
Ambedker Nager 4820 67769 14.060 4685 76266 16.279 4482 87775 19.584
Sultanpur 6118 105364 17.222 6684 108806 16.279 7458 146058 19.584
Barabanki 14192 304617 21.464 14338 277827 19.377 14011 274391 19.584
Total Up 356828 7165468 20.081 394083 8398203 21.311 445197 9986781 22.432
Source:DirectorateofHorticulture,Govt.ofUttarPradesh,Lucknow.
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23Supply Chain and Futures Trading A study of Potato and Mentha
2.2.4. Production Forecasts Recent collaborative research involving International Food Policy Research Institute (IFPRI),
Washington and International Potato Center (CIP) has included a detailed analysis of historical
trendsandfutureprojectionsforpotatoesindevelopingcountries.Estimatedgrowthratesinpotato
productionfortheperiod1993-2020are2.02%accordingtothebaselinescenariobasedmore
on past projections, and2.71% for the high demandandproduction scenariobasedmore on
historical trends. As these projections were done as part of a global model for the worlds major food
commodities, they also permit estimates of the future value of production. Similar projections are
carried out by CPRI with regard to production, yield and area in India.
Thesecalculationsshowthatthepotatowillmostlikelymaintain,ifnotincrease,itsrelativeeconomic
importanceinthefoodbasketfordevelopingcountriesinthedecadesahead.Thehighgrowthrate
ofpotatoproductioninIndiaislikelytocontinue,primarilyasamarketedcashcropmorethanasa
ruralstaple.AspertheCPRIprojectionsgivenintable2.9productionofpotatoisexpectedtotouch
30milliontonneby2009-10andtocross40milliontonneby2020.Althoughverylittleofthepotato
cropisprocessedonalargerindustrialscale,homesandsmallbusinesseswhichsellsnackfoods
will sustain the demand for increased production.
Table 2.9: Potato Projection up to 2020
Area (000 ha) Production (million t) Yield (q/ha) Based on 2003-04
2009-10 1554.0 29.255 188.25 2014-15 1730.1 34.544 199.67 2019-20 1926.2 40.791 211.76
Based on average of 2000-01 to 2002-03 2009-10 1465.4 29.317 200.06 2014-15 1631.4 34.619 212.20 2019-20 1816.3 40.878 225.06
Source: Potato Statistics, Central Potato Research Institute, Shimla
2.2.5. Demand for Potato AccordingtoFAOSTAT(1998)potatoconsumptionindevelopingcountrieshasincreasedsignificantly
overaperiodoftimefrom9kg/capitain1961-63to14kg/capitain1995-97.Theseaveragesare
stillbutafractionofpercapitaconsumptionlevelsof86kg/yearinEuropeor63kg/yearinNorth
America,suggestingthatampleroomexistsforcontinuedconsumptionincreases.Recentstatistics
suggest that this trend is already underway in parts of the developing world. Potato is a rich source
ofstarchanditisconsumedmainlyforitscalorificvalue.Potatoalsocontainssignificantamounts
ofvitaminsandminerals.InAsia,percapitapotatoconsumptionjumpedfrom12kg/capitain1991-
92 to 14 kg/capita in 1994-96 (InternationalPotatoCenter, Lima,Peru).Theannual per capita
consumptioninIndiaisestimatedtobeabout23.5kgin2003.Thecurrenttrendisbeingdriven
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24 Supply Chain and Futures Trading A study of Potato and Mentha
in part by a shift in food habits, as demand for potatoes increases with greater absolute numbers
of people with relatively high incomes. The potato in India is not primarily a rural staple, but as in
muchofAsia,acashcropwhichprovidessignificantincometoruralfarmers.Indiaspopulation
is approximately 28percent urban, a proportionwhichhas remained fairly stableover thepast
decade, but urban Indians with higher incomes are providing much of the growing demand for
potatoes (FAOSTAT, 998). The potato processing industry is still undeveloped, but has strong
potentialtogrowinresponsetodomesticandinternationalmarkets.
It is estimated that about 25 % of the potatoes, which are spoiled due to several reasons, may be saved by processing and preservation of various types of processed products.
Potatoes can be processed for preservation and value addition in the form of wafers/ chips, powder,flakes,granules,cannedslices
Apotatocrispisathinsliceofpotato,flatorwavy,friedinvegetableoilandsaltedorseasoned to taste.
Potatogranulesareusedforthepreparationofvariousrecipes,toaddtovegetableandnon- vegetable recipes and to enhance the quantity as well as to enrich the food value
Thereisahugepotentialforprocessedpotatoproductssuchaspotatoflakes,potatopowder, frozen potatoes, frozen french fries
Potatochips/wafersareoneofthemostpopularsnackitemsconsumedthroughoutworld.Itis byfarthelargestproductcategorywithinsnacks,with85%ofthetotalmarketrevenue
IndiaisoneofthelargestsnackmarketsintheAsia-Pacificregioncontributingthreepercentto thetotalAsia-Pacificsnackmarketrevenue.
There is an increased opportunity for the players in Potato chips to act as contract manufacturers fortheleadingglobalbrandsenteringtheIndianmarket
The range of potato chip production includes high technology lines having a production capacity from80upto2,000kg/hoffinishedproduct.
The range of French Fry production includes high technology lines having a production capacity from300upto6,000kg/hoffinishedproduct.
2.3. The Profile of Mentha Oil Market
Mentha(mint) isaseasonalcashcropgrowninentiretaraiandwesterndistrictsofU.P.mainly
Nanital, Rampur, Moradabad, Badaun, Bareilly and recently extended to eastern districts viz.
Barabanki,Lucknowandsitapurdistricts.UPistheleadingproducerofmenthainIndiawith80per
cent share and the rest 20 per cent is grown in Punjab and Haryana. It is usually sown in February
andharvestedfrommid-Mayonwards.Itisawater-intensivecropandrequiresabout20irrigations
during the crop cycle. Mentha oil is obtained by steam distillation of mentha arvensis leaves. The oil
is a natural source of menthol which is one of the most actively traded commodities in the chemical
marketsinIndia.
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25Supply Chain and Futures Trading A study of Potato and Mentha
In India there are four main species of mentha. They are mentha arvensis also called mentha
ShivalikwhichisthesourceofJapanesemintoil;menthaperperitawhichprovidespeppermintoil;
menthaspicataasrawmaterialforspearmintoilandmenthacitrateforextractingbergamontoil.
Menthaoilyieldsanaverageof40-50%mentholand50-60%dementholisedoilwhichareusedin
confectionery, cosmetics and medicines.
India is the largest producer and exporter ofmentha oil in theworld followed byChina, Brazil
andtheUS.Indiahasanapproximateshareof70-75%oftheglobalmintoilproduction.Withthe
growingdemandinthedomesticaswellasinternationalmarkets,theproductionofmenthaoilhas
increased manifold. The area under mentha cultivation has touched as much as 70,000 hectare
andproductionofoiltotheextentof14,000MTduring2004.IndiaexportsmenthaoiltoArgentina,
Brazil,EuropeanUnion,JapanandtheUS.Theexportfigurehascrossed3000MTworthmore
than Rs. 00 crore.
Table 2.10: Area under Mentha Cultivation and Mentha Oil Production in India
Year Area Hectare Production of Mentha Oil (in MT) 965 65-70 2 970 600-650 46 975 4000-4500 260 980 8000 500 98 0000 800 985 8000 400 988 25000 2200 990 35000 5000 992 38000 5400 995 45000 7000 996 35000 5500 997 55000 000 999 62000 2000 200 65000 3000 2003 72000 5000 2004 70000 4000
Source:FICCI,NewDelhi.
Table 2.11: Indias Export of Metha Oil
Year Quantity (MT) Value (Rs. Crore) 1992-93 50 26.06 1993-94 40 30.6 1994-95 583 43.57 1995-96 352 47.50 1996-97 237 34.50 1997-98 306 95.94 1998-99 2825 70.54 1999-2K 2734 96.73
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26 Supply Chain and Futures Trading A study of Potato and Mentha
2000-01 2725 93.75 2001-02 2945 96.97 2002-03 Data not available 2003-04 5.32 2004-05 .22 2005-06 3.60 Source:IndianAgriculture-2003,IndianEconomicDataResearchCentre,Delhi.
Director-GeneralofForeignTrade,MinistryCommerce,GoI
Table 2.12: District-wise Production of Mentha Oil in Uttar Pradesh
(area in hectare, production in MT)
Districts 2000-01 2004-2005 2006-2007(PROJ.) Area Prod.(Oil) Pvty. Area Prod.(Oil) Pvty. Area Pvty.
Barabanki 18250 1825 0.100 29500 2950 0.100 29595 2959 0.100
Moradabad 16150 1615 0.100 19000 1900 0.100 19061 1906 0.100
Rampur 8250 825 0.100 12000 1200 0.100 12039 1204 0.100
Badaun 4632 463 0.100 6000 600 0.100 6019 602 0.100
Sitapur 2400 240 0.100 3000 300 0.100 3010 301 0.100
Bareilly 1810 181 0.100 2500 250 0.100 2508 251 0.100
Faizabad 2210 221 0.100 3000 300 0.100 3010 301 0.100
Pilibhit 230 23 0.100 500 50 0.100 502 50 0.100
Other Distts. 508 51 0.100 2200 220 0.100 2206 221 0.100
Total 54440 5444 0.100 77700 7770 0.100 77950 7795 0.100
Source:DirectorateofHorticulture,GovernmentofUP,Lucknow.
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27Supply Chain and Futures Trading A study of Potato and Mentha
District-wise Share in Mentha Oil Production in UP
100%
80%
60%
40%
20%
0%2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Year
Sha
re (
%) Rest of UP
Sitapur
Badaun
Rampur
Moradabad
Barabanki
TheleadingproductioncentresinIndiaareFatehpur(Barabanki),Sambhal(Moradabad),Sadar
(Rampur),Chandausi(Moradabad),Badaun,Bareilly inUP.Almost80%ofannualproduction in
IndiaoriginatesfromUPalone.
Barabanki is the leadingmenthaoilproductioncentre inUP.Fatehpur,RamnagarandMassauli
areas in the district have high concentration of mentha farms. As per the data received from District
HorticultureOffice,Barabankithetotalproductionofmenthaoilfromthedistrictistothetuneof
34.20lakhlitreswithanareaof40,236hectareundermenthacultivationinthedistrictin2005-06
(table 2.3).
Table 2.13: Production of Mentha oil and Area under Mentha Cultivation in Barabanki
Year Area (in hectare) Production(inlakhlitre)2001-02 27,495 29.7 2002-03 28,000 29.8 2003-04 30,500 3.6 2004-05 3,000 33.7 2005-06 40,236 34.20
Source:DistrictHorticultureOffice,VikasBhawan,Barabanki
2.4. Conclusion
PotatoandmenthaplayaverysignificantroleintheagriculturaleconomyofUttarPradesh.They
areeconomicallysignificantnotonlyfortheircontributiontothelivelihoodofthousandsoffarmers
and for theirdominance in theagricultural consumptionbasketofhouseholdsbutalso for their
growing linkages to fastgrowingpotatoprocessing industryandhighlydiversified industrialuse
ofmenthaoilforconfectionary,cosmeticsandpharmasectors.Thesecharacteristicsmakethem
very high potential candidates for futures trading. The relevance of introducing futures in these
commoditiesinthelightoftheirsupplychainwillbedealtindetailinthenextchapter.Menthaoil
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28 Supply Chain and Futures Trading A study of Potato and Mentha
andpotatofulfillthefollowingconditionswhichmakethemsuitableforintroducingfuturestrade.
The supply and demand for these commodities are large enough to attract many potential futuresmarketsplayers.
As India is a leading producer of both the commodities they have the potential to attract internationaltradinginterestsinthefuturesmarkets.
These commodities are well standardized and storable. While mentha oil is high value and low volume commodity which is storable without any special and expensive infrastructure
requirements,a largechainof coldstoragesnetwork inUP is takingcareof thestorageof
potatoes.
Privateandfreemarketsforcesoperateinbothcommoditieswithoutmonopolisticorgovernment control.
The most important among other conditions is their seasonal supply and large price variation betweencropseasonandoffseasoncreating largepriceriskstoproducersandconsumers
alike.
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29Supply Chain and Futures Trading A study of Potato and Mentha
CHAPTER3
THE SUPPLY CHAIN AND MARKET STRUCTURE
3.1. Introduction
Thepresent chapterhas four-foldobjectives.First, it seeks to investigate themarket structure,
supplychainandmarketingpracticesinpotatoandmenthabasedonthedataandobservations
obtained through sample survey. Secondly, it tries to evaluate the utility of futures to various
constituentsintheentiresupplychain.Thelongsupplychaininbothpotatoandmenthamarkets
inUPisidentifiedasthepotentialsourceofexploitationoffarmers.Thirdly,itpresentsthesurvey
resultsonidentifyingthesubjectiveinfluencesonthedecisionofphysicalmarketplayerstotake
positions inpotatoandmenthaoil futuresmarkets.Finally, itproposesamarketingapproachto
theexchangeinthelightoftheprevailingmarketperceptionsamongprospectiveplayersandthe
structure of supply chain in both potato and mentha.
Asexplainedinchapter1,samplesarechosenfromthreemajorpotatomarketsoneeachfrom
Farrukhabad,Moradabad and Lucknow districts of UP.Cold storage houses aremajormarket
intermediarieswhichprovideintegratedpre-harvestandpost-harvestsupporttoespecially large
scalefarmersinUP.Theyareoperatingaswhole-salemarketplacesinalltheproductionareas.
Inordertounderstandthemarketingpracticesandsupplychainasmallsampleofcoldstorages
fromeachoftheseareasarechosenbasedonthecriteriaexplainedearlier.Thesethreesample
locationsareFatehgarh,SambhalandBakshi-ta-Talab.Similarly,threemajorlocationsofmentha
farmingviz.,SambhalinMoradabad,SadarinRampurandFatehpurinBarabankiarechosenfor
collection of samples.
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30 Supply Chain and Futures Trading A study of Potato and Mentha
3.2. Potato Marketing Practices
In UP, potato is a rabi crop which is planted during October-November and harvested during
January-February.Freshpotatoarrivaltomarketsstartsfromend-February.Itisaseasonalmarket
with wild fluctuations in prices. Bymid-January 2006, prices plummeted to as low asRs. 280
perquintaland increased toRs.375byend-Marchand toRs.675asatend-September2006.
Thereisnogovernmentinterventioninpotatomarkets.Marketingofpotatoisessentiallyaprivate
activityinalmostallstateswiththeexceptionthatcoldstorageratesfortheseasonarefixedby
thegovernment.LargenumberofAPMCmarketshoweveraresetupinUPtopromoteorganized
marketing.
3.2.1. The Risk-Return Profile Potatofarmingisaprofitableactivitytofarmers.However,majorityoffarmersarenotabletorealize
benefits that themarket offers due to lack of properly organizedmarketing activities.The cost
estimates collected from a progressive large scale potato farmer are provided in table 3.. The
estimates indicate that the storage has ensured a phenomenal margin of more than 00 per cent
during2006.Theprofitmarginisstillhigherforthosewhohaveownland,seedandotherrequisite
infrastructure including own funds.
Table 3.1: Estimated Average Expenses Per Acre PotatoParticulars Expenses(Rs.)Seed(boughtfrommarket) 2,000.00 Fertilizers 4,000.00 Irrigation([email protected]/-foreach) 9,000.00 Insecticides and pesticides ,800.00 Labour,tillinganddiggingcharges 3,000.00 Leasecharges(@1500/bigah;1acre=6.4bigah) 9,600.00 Otherincidentalexpenses(approximate) 7,000.00 Total 46,400.00 Production (tonne) .50 Storagecost(@90/-perquintal) 3,500.00 Value(atthebestprice@650/-perquintal 97,500.00 during October 2006)
Source: Field visits
However, this shows only the brighter side of the picture. In reality, the marginal, small and medium
scale farmers who constitute the majority do not have the wherewithal to wait for good prices. They
often resort to distress sale immediately after the harvest. Some of them store part of their produce
in cold storages and sell the remaining at a rather low price tomeet their immediate financial
commitments. The only way to protect them from price disadvantage is to ensure them access to
warehouses and collateral credit from formal sources. Commodity futures have an active role in
promotingwarehousereceiptfinancingsystem.Thisissueisdiscussedinchapter4.
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3Supply Chain and Futures Trading A study of Potato and Mentha
3.2.2. The Supply Chain TherearemanycriticalissueswithregardtosupplyanddemandforpotatoandmenthainUP.On
the supply side, fragmentation of land and the resulting diseconomies are nevertheless a general
issue in Indian agriculture. Indian agriculture sector is predominantly occupied by marginal (less
than1hectare),small(1to2hectare)andmedium(2to10hectare) farmers.Lackofsufficient
institutionalcreditflowintofarmsectorhasbeenamajorthreattoitsgrowth.TheRuralFinancial
AccessSurvey(2003)conductedjointlybyWorldBankandNationalCouncilforAppliedEconomic
Research inAndhraPradesh andUP revealed that 44 per cent rural households had informal
borrowing at interest rates as high as 48 per cent per annum. Only 2 per cent of rural households
have access to formal credit. The most critical issue is the price distortions due to long supply chain
inagriculturalmarkets.Theintermediariesoperatinginthesupplychainextractthepricebenefits
whichotherwisewouldhavemadefarmingprofitabletofarmers.
Duetolackofanintegratedandregulatedsystemformarketingagriculturalproduce,farmersare
disadvantagedbyverypoorpricerealization.Theexistingmarketingchannelisnotperfectenough
totakecareofsmoothandeconomicaltransferofpotatotothefinalconsumerthroughouttheyear.
Microlevelstudiesindicatethatsmallfarmerscontributeabout54percentofmarketablesurplus
anddistresssalebythesefarmersaccountforabout50percentofthemarketablesurplus.They
oftensell theirproduce tosquareoffdebtssoonafterharvesting.Largepricespreadsand low
pricerealizationduetoimperfectionandweaklinkagesinsupplychainhavedisadvantagedsmall
farmers(ReportoftheWorkingGrouponWarehouseReceiptsandCommodityFutures,Reserve
BankofIndia,2005).TheseimperfectionsareclearlyvisibleinpotatomarketsinUP.
Thesupplychainconsistsoffarmers,storagehouses,whole-saledealers/exportersandprocessors.
Thecoldstoragesformvitallinkinthesupplychainbynotonlyofferingstorageservicesbutalso
facilitating sale of potatoes.
FARMERSCOLDSTORAGES
DEALERS/EXPORTERS
PROCESSORS/CONSUMERS
Figure 3.1: The Potato Supply Chain
3.2.3. Cold Storages Amongtheintermediarieslinkingthefarmertotheconsumer,coldstoragesarecrucialtofarmersin
the supply chain of potato. They ensure continuous supply of potato during the entire year staring
fromApril to October-November.At the end of crop season in March storages complete their
procurementfortheoff-seasoni.e.,April-November.However,thestoragecapacityisnotenough
toabsorbtheentireproductioninUP.Aspertheofficialestimatesprovidedintable3.2,45to60per
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32 Supply Chain and Futures Trading A study of Potato and Mentha
cent of production goes to storages while they have the capacity to store around 84 per cent of total
potatoproductioninUPby2005-06(DirectorateofHorticulture,Govt.ofUP,Lucknow).Therefore,
40to55percentoftheproductionarrivesatthespotmarketsjustaftertheharvestduringFebruary-
March.Thiscreatesamajorpricecrashinthemarket.
The Storage Season for Potato in UP
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Main Harvest
Rabi Storage Early Harvest
Rabi
Thepricerisk fromstorage ishighwhichservesasadisincentive forprivatesector to invest in
storages.Futurescontractsinpotatothroughitsefficientrisktransfercanbeapotentialavenue
tothestoragehousesformitigatingthemarketrisk.Theabsenceofsufficientinter-yearstorage
facilitiesmakesthepriceshighlyvolatilebetweentheseasons.Sinceaccurateforecastoffuture
prices are not available there is always storage premiumor discount.The rise inmarket price
betweenseasonsi.e.,thestoragepricemargin,isthegrossbenefitearnedbyfarmersoneachunit
ofpotatostored.Inorderforstoragetobeprofitable,thestoragepricemarginmustbesufficiently
high to compensate farmers for all of the costs incurred for storage, including labour and materials,
interest on foregone income from delaying the sale immediately after the harvest and the storage
losses. If the storage margin is lower than the cost of storage, then farmers suffer a net loss and
havelittleincentivetostore.Ifthestoragemarginisabovethecostofstoragethennetbenefits
from storage are positive.
The sample survey reveals that majority of big farmers (holding more than 0 hectare) resort to
storage houses. The summary results are presented in table 3.8 through 3.0. The sample survey
of storage houses in three districts reveals that none of them operates in full capacity. There are two
mainreasonsforthedistressandimmediatepost-harvestsalebysmallandmediumfarmers.First,
duetotheirurgencytogetmoneytopaybackdebttheyarecompelledtosellwithoutwaitingfor
better price later and secondly and more importantly, storage houses compete for bringing medium
andbigfarmerstotheirfoldtofilltheirstoragecapacity.
Services of storages houses are not standardized in all respects. Although storage charges are
governed by the rules of state government, small and medium farmers are often discriminated
in many other counts. Storage services are tailor made services depending on the personal
relationshipbetween theownerand theclient.Themostpreferredclientasexplainedearlier is
largefarmers.Theyareofferedpre-harvestandpost-harvestinfrastructureandfinancialsupport
services.Theseincludefinancewhichcoversmajorportionofthemarketvalueofstoredpotatoat
lowerinterestrate,freetransportservicetopickuppotatofromthefield,bagsforstoringpotatoes
instorage,etc.Itisrevealedfromdiscussionswithofficials/ownersofstoragehousesthatsmaller
farmerclientsareofferedloansequivalenttocertainportionofthemarketvalueofstoredpotatoat
arelativelyhigherrates.Aswarehousereceiptsystemisnotdevelopedsmallfarmersdonotfind
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33Supply Chain and Futures Trading A study of Potato and Mentha
significantadvantageingoingforstorage.Itseemsthattheirbenefitsfromhigherpricerealization
with considerable time lag even out the interest and storage costs.
Storagehousesarepractically theorganizedwhole-salemarkets forpotato.Theyprovideend-
to-endmarketing services to farmers.They attract dealerswho stuck deals in the presence of
farmers, release potato and receive payments from dealers. After deducting all pending dues
includingstoragecharges,interestandprincipalandloading/unloadingexpensestherestispaid
tofarmer.However,thereispriceriskinstoragewhenthestoragemargin(discussedinchapter4)
is negative which has made many farmers not turning up for claiming the crop stored. This in turn
posesseriousriskstostorageowneraswellandthesolvencyofstoragehouses.
Table 3.2: The Profile of Cold Storages in UP
Year No.ofColdStorages
Storage Capacity (inLakhtonne)
Potato Production (inlakhtonne)
Total Storage (inlakhtonne)
1999-2000 948 59.73 0.09 50.34 2000-01 005 60.3 83.98 36.9 2001-02 0 6.66 95.7 45.22 2002-03 040 65.5 02.2 62.48 2003-04 085 72.73 88.25 50.69 2004-05 55 78.89 98.2 58.43 2005-06 205 83.65 00.86 60.65
Source:DirectorateofHorticulture,Govt.ofUP,Lucknow
Table 3.3: District-wise Cold Storage CapacityDistrict UPTODec.2005 District UPTODec.2005
Sl.No. Number Capacity (tonne)
Sl.No. Number Capacity (tonne)
Saharanpur 8 8468 36 Banda 0 0
2 Muzaffarnagar 30 48203 37 Chitrakoot 0 0
3 Meerut 44 8424 38 Hamirpur 0 0
4 Bagpat 5 6089 39 Mahoba 0 0
5 Bulandsahar 39 37565 40 Varanasi 3 52768
6 Ghaziabad 23 47679 4 Chandauli 24
7 Gautambuddhnagar 450 42 Jaunpur 2 0237
8 Aligarh 26 284425 43 Ghazipur 23 2850
9 Hathras 4 34783 44 Mirzapur 8 8899
0 Mathura 27 82794 45 Sonebhadra 0 0
Agra 43 397 46 SantRavidasNagar 3 0386
2 Firozabad 63 637825 47 Balia 4 77850
3 Mainpuri 26 80945 48 Azamgarh 0 22954
4 Ettah 22 46932 49 Mau 2 2578
5 Bareilly 7 94800 50 Gorakhpur 7 360
6 Badayun 67 287042 5 Maharajganj 6 624
7 Shahjahanpur 20 92484 52 Deoria 2 23
8 Pilibhit 3 2990 53 Kushinagar 3 5602
9 Bijnore 0 33238 54 Basti 4 2848
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34 Supply Chain and Futures Trading A study of Potato and Mentha
20 Moradabad 36 255069 55 SantKabirNagar 4 2978
2 Jyotibafulenagar 22 07399 56 SiddharthNagar 0 0
22 Rampur 4 22859 57 Gonda 7 20532
23 Farrukhabad 60 526005 58 Balrampur 3872
24 Kannauj 73 732683 59 Behraich 9 4087
25 Etawah 28 283580 60 Shrawasti 0 0
26 Auraiya 3 2325 6 Lucknow 20 7288
27 Kanpurnagar 4 350779 62 Unnao 82779
28 Kanpurdehat 2 700 63 Raibereli 2 42208
29 Fathepur 7 62355 64 Sitapur 9 34275
30 Allahabad 39 2584 65 Hardoi 8 80506
3 Kaushambi 2 759 66 Lakhimpurkhiri 8598
32 Pratapgarh 6 36447 67 Faizabad 3 59683
33 Jhansi 4000 68 Ambedkarnagar 3 48334
34 Lalitpur 0 0 69 Sultanpur 2 846
35 Jalaun 80 70 Barabanki 9 78685
TOTAL 205 8365690
Source:DirectorateofHorticulture,Govt.ofUP,Lucknow.
3.2.4. Potato Futures Markets Potatohedgecontractswereearliertradedintworegionalexchangesviz.,ChamberofCommerce,
HapurandBhatindaOmandOilExchangeLtd.,Bhatinda.Theyinitiatedtradinginanopen-outcry
systemwithlittlesuccess.TheavailablestatisticsindicatethatevenHapurexchangewhichhas
theadvantageofbeinglocatedinaleadingpototoproducingbeltinUPhasfailedtoattractenough
tradinginterest.Theturnoverduring2000-01wasaslowasRs.13.56crorewithvolumeoflessthan
onelakhtones.Therelevantdataareprovidedintable3.4.WhileBhatindaexchangeremainedas
non-starterinpotatocontractsHapurexchangesreportedlyterminatedthecontractsin2002dueto
lackofenoughtradinginterestsinit.
Table 3.4: Potato Futures Trade in Chamber of Commerce, Hapur
(VolumeinLakhtonne,valueinRs.crore)July Contract Oct. Contract March. Contract Total
Volume Value Volume Value Volume Value Volume
1996-97 0.37 4.40 0.8 7.33 0.22 6.64 0.77 1997-98 .06 28.63 0.23 5.73 0.90 35.75 2.9 1998-99 0.09 5.95 0.00 0.8 0.00 0.00 0.09 1999-2K 0. 3.03 0.03 0.68 0.2 2.62 0.26 2000-01 0.35 8.07 0. 2.35 0. 3.4 0.57
Source:TheChamberofCommerce,Hapur,UP.
Tradinginpotatofuturesstartedinon-lineplatformoftwonational-levelmulticommodityexchanges
viz.,MultiCommodityExchange of India (MCX) Ltd., andNationalCommodity andDerivatives
Exchange (NCDEX) in2006.Themarket haswitnessedamajor recoverywith the introduction
of online trading. As per the data made available by MCX it has generated volume to the tune of
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35Supply Chain and Futures Trading A study of Potato and Mentha
.98 million tones (MnT) (including both sides of the contract) with an equivalent value of Rs.
7314.34croreduringMarch-October,2006.Thetotalpotatoproductionhoweveristothetuneof
29.19milliontonesduring2004-05andhascrossed30MnTduring2005-06.Internationally,futures
marketsgeneratesturnover2-3timesthesizeoftheunderlyingphysicalmarket.Thisshowsthat
potatofuturesmarketsinIndiaarestilltogoalongway.Ithashoweverthepotentialtotakecareof
hedging requirements. The volume generated within a few months of the launch of futures trading
isanindicationofitssignificance.
3.3. Mentha Oil Marketing Practices
The consumption pattern of mentha in India has made it an important crop. Mentha in India has
reached out to all most all the households and has made a major impact because of the qualities
present in it. In fact, India is the leading consumer of mentha and mentha oil. Sauces are made from
mentha leaves. Increasing rate of production of mentha oil has made India the largest producer
andexporterintheworld.ThemajortradingcentersinIndiaarelocatedinUPwhichareSambhal,
Barabanki,Rampur,Chandausi,BareillyandBadaun.
Marketingofmenthaoilisaprivateactivity.Mostofthementhafarmershavetheirowndistillation
facilities installed in their field. Oil extraction takes place during May-June. The market is
characterizedbywildfluctuationsinpricesduetostrongseasonalnatureofitsdemand.Itsdemand
in pharma sector goes up at the beginning of winter season in view of high demand for cough syrup,
allergyandcoldrelatedmedicinalpreparationswhichcontainmenthol.Itsreadymarketpricevaried
fromRs.350duringJune-JulytoalmostRs.650perkilogramduringOctober2006.
Thereisnogovernmentinterventioninmenthaoilmarket.Thereisdemandfromvariousquarters
for introducing minimum support price (MSP) for mentha oil. It is learnt that farmers organizations
likeBharatiyaKisanUnionunderMahendraSinghTikayathasbeenorganizingfarmersinFatehpur,
Ramnagar,MassauliareasinBarabankidistrictforpressurizinggovernmentforMSP.
3.3.1. The Risk-Return Profile Production of mentha oil is a high value adding activity for mentha farmers. They are able to realize
a fairlyhighmargin for theoil.However,majorityof farmersarenotable to realizebenefits the
marketoffersduetolackofproperlyorganizedmarketingactivities.Thecostestimatesformentha
cultivationcollectedfromsomeoftheprogressivefarmersandtheprevailingreadymarketprice
mentha oil are provided in table 3.5. The estimates indicate that a productive farmer with value
addition is able to realize a fairly high margin during 2006.
Table 3.5: Estimated Average Expenses Per Acre Mentha
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36 Supply Chain and Futures Trading A study of Potato and Mentha
Particulars Expenses (Rs.) Seed(boughtfrommarket) ,000.00
Fertilizers 700.00
Irrigation([email protected]/-foreach) 6720.00
Insecticides and pesticides 500.00
CostofLabour,tillingandsowing 3,000.00
Particulars Expenses
Labourforweeding 500.00
Distillation(@Rs.35/-perkgoil 575.00
(assumingrecoveryof45kgoilperacre)
Miscellaneousexpenses 000.00
Total 5,995.00
Productionofmenthaoil(kg) 45
Storage cost 0.00
Value(atthebestprice@675/-perkgduring 30,375.00
end-October2006)
Source: Field Visits
However, therearemanybottleneckswhichprevent the farmers from realizing themargin that
themarketoffers.First,asagainsttheorganizedsaleofpotatoesundercoldstorages,menthaoil
marketisdevoidofanyorganizedmarkets.Itisprimarilyalocalmiddlemensmarket.Largenumber
of localdealersandcommissionagentsoperates inmarkets likeSambhal,Rampur,Barabanki,
MassauliandRamnagarareaswhointerfacebetweenfarmersandcommercialdistilleries/exporters.
Secondly,farmerstendtosellmenthaoilimmediatelyaftercroppinganddistillationwhenthemarket
rateislow.Thisisduetolackofformalcreditflowintheformofcollateralfinancingavailableto
farmers.Finally,themarketisdominatedbybigplayerswhereassmallfarmersaredisadvantaged
bytheirinsignificantsmallsize.Thesesmallfarmersselltheiroutputtolocaldealerswhointurn
dealwithlargescaledistilleriesandexporters.
3.3.2. The Supply Chain MenthaoilmarketinUPisahighlyexploitativemarketforlackofaformallyorganizedmarketing
channel.Duetolackofanintegratedandregulatedsystemformarketingfarmersaredisadvantaged
byverypoorpricerealization.Theexistingmarketingchannelisnotperfectenoughtoensurefair
price to farmers. Farmers often resorts to distress sale of oil to local dealers due to compulsions
tosquareoffdebtssoonafteroil isextracted.Largepricespreadsandlowpricerealizationdue
to imperfectionandweaklinkagesinsupplychainhavedisadvantagedsmall farmers ingeneral
(ReportoftheWorkingGrouponWarehouseReceiptsandCommodityFutures,ReserveBankof
India, 2005).
Thesupplychainconsistsoffarmers,localdealers,bigcommercialoildistilleriesandexporters.
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37Supply Chain and Futures Trading A study of Potato and Mentha
FARMERSLOCAL DEALERS
OIL DISTILLERIESEXPORTERS
PHARMA,COSMETICS,CONFECTIONERY PRODUCERS
Figure 3.2: The Mentha Oil Supply Chain
Distilleriesarethevitallinkbetweenthefarmersandtheenduserofmenthaoilanditsderivatives.
These distilleries are not only meeting the domestic industry requirements but also cater to the
growingexportmarketsinvariouspartsoftheworld(alistofleadingmenthaoil/mentholdistilleries/
exporters isgiven inAppendix-4).Astheydeal inbulk(normally theirminimumdealsize isone
tonne)farmersdonothavedirectaccesstothem.Thisgivesanopportunitytolocalmarketdealers
to interface between the distilleries and farmers.
Thelocaldealersmakelargepoolofoilpurchasefromfarmersandsellittodistilleries.Someof
them,overaperiodoftime,havebecomeleadingexportersinsomepocketsandmanyofthem
establishedlinkageswithpharma,cosmeticsandconfectionarycompanieslocatedindifferentparts
ofthecountry.Theyareabletorealizehugeprofitmargin.Effortsweremadeduringthesurveyto
locate some of them especially in Rampur, Sambhal, Ramnagar and Massauli areas. Many of them
aredisguisedtraderswhodonotwanttobeidentifiedasmenthaoildealersortheyarereluctantto
divulge any information about the transactions they carry out. Some of them even disappeared from
their shops as soon as the research team arrived. It is learnt that they didnt want to be trapped
bysalestaxauthorities.
Someofthefarmerssharedtheviewthattheyarenotabletorealizetheprevailinghighermarket
price due to unethical practices resorted to by the local dealers. The dealers buy oil from farmers
athugediscounttotheprevailingmarketprice.Asthereisnostandardizedqualitycheckfarmers
are often misguided by dealers and forced to sell at a huge discount. During the current season the
markethasbeenridingveryhighwitharecordpriceofmenthaoilhoveringaroundRs.675perkg
inOctober2006asagainstRs.350-400prevailedduringMay-June2006.Similarly,theaverage
exportpriceofmenthaoilhasgoneupfromRs.382in2003-04toRs.418in2004-05andtouched
ashighapriceasRs.532in2005-06(DGCIS,MinistryofCommerce,GoI).Thoughthedealers
arenotpassingthefullbenefitofhigherpricestofarmers,indicationsarethatfarmerswereableto
get better prices during the last two seasons. A substantial increase in area under cultivation and
productionduring2005-06asseenintable2.12and2.13inchapter2isanindicationofincreases
prices of mentha oil.
3.3.3. Mentha Oil Futures Currently,threenationalmulticommodityexchangesofferfuturesinmenthaoil.WhileMCXand
NCDEXoffer futures inmenthaoil,NationalMultiCommodityExchangeof IndiaLtd (NMCEIL)
trades in menthol futures. The MCX trading platform has recorded huge volume in mentha oil
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38 Supply Chain and Futures Trading A study of Potato and