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Monday, 12 September 2016 04:26
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Buffer stocking for now, a vibrant futures market soon

 

As happens with all agriculture commodities, last year’s shortage of pulses led to prices shooting up which resulted in a 36% increase in acreage under moong in the kharif season and, not surprisingly, a crash in prices this year. As FE reported on Thursday, farm-gate prices are currently at around R4,500 per quintal as compared to the minimum support price (MSP) of Rs 5,225 per quintal that was announced at the start of the season. Since the crash in prices will ensure farmers don’t grow as much pulse next season, the government has done well to announce that there will be a 2 million tonne buffer stock and agencies including FCI and Nafed have been told to start procuring pulses immediately. While that is certain to help, it is not clear by how much, considering this year’s pulses output is expected to be in the region of 20-21 million tonnes—since the procuring agencies will only buy a tenth of the crop, farmgate prices will not rise beyond a point. What is required is a more durable solution, and not just for pulses but for the other crops that are not procured.

This requires the government to completely give up on its current agriculture policy, completely free up exports, remove stocking limits and work on a vibrant futures market. It is only when farmers can freely export produce that they can be assured global prices and when there is a futures market, farmers can lock into a pre-agreed price in the future instead of being forced to accept lower prices when there is a good harvest. Creating a vibrant futures market, of course, requires several pre-conditions—allowing futures in commodities that have very limited production is, for instance, a bad idea—and position limits for traders have to be strictly monitored to ensure no one is cornering the market. Apart from the fact that the Forward Markets Commission which was, till recently, in charge of these markets was not adequately equipped, government policy of banning or suspending futures in times of high inflation has ensured these markets never really took off. It is true that the initial players in futures markets will be traders and corporates and perhaps very large farmers, but as the market matures and gets bigger, even smaller farmers will benefit even if they don’t participate themselves. Piecemeal solutions like increased buffer-stocking are welcome, but they serve little purpose.

 

 

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