Getting Agri Markets Right

Context: Agriculture Infrastructure Fund (AIF) is a major step towards post-harvest loss management but the policymakers must also realise the potential of future markets and devise stable policies for them

Agriculture Infrastructure Fund

• Building post-harvest storage and processing facilities: largely anchored around Farmer Producer Organisations (FPOs) but can also be availed by individual entrepreneurs.
• Provide loans, at concessional rates, to FPOs and other entrepreneurs through Primary Agriculture Credit Societies (PACs). 
• Steered by National Bank for Agriculture and Rural Development (NABARD): in association with the Ministry of Agriculture and Farmers Welfare.
• Supplement the previous efforts: 
• Amendments in the Essential Commodities Act (ECA).
• To allow farmers to sell their produce outside the Agriculture Produce and Marketing Committee mandis. 
• To encourage farming contracts between farmers, processors, exporters and retailers.

Concerns with AIF

• False presumption of the huge demand for storage facilities: While the better storage facilities will help avoid distress sale, small farmers cannot hold stocks for long due to emergent cash requirements.
• Funding Issues: Large working capital need of FPOs to give an advance to farmers, against their produce as collateral 
• Presently, FPOs get working capital loan from Micro Finance Institutions (MFIs) at high interest rates of 18-22%.
• The decline of the Indigenous Agri-Markets: Agri-futures market is a standard way of hedging risks in a market economy.
• For E.g. The value of traded contracts on agri-futures in the NCDEX is falling from about 44 million in 2012 to 12.5 million in 2019.
• China’s and the US’s agri-futures markets are multiple times the size of those in India. 
• Restrictive policies of the government: A rise in the agri-future prices would often result in banning of agri-futures which hinders price discovery.

Way Forward: To Minimise Agri-market Risk and Ensure Better Price Realisation

• Help the small farmers: by enhancing the value of the storage facilities at the FPO level by a Negotiable Warehouse Receipt (NWR) system.

• Rationalising Interest Rates: NABARD must ensure that FPOs get their working capital at interest rates of 4 to 7 per cent,

• Hedging against the market risks:

• Compulsory training module for FPOs: should be devised by NABARD -

• To use the negotiable warehouse receipt system 
• To navigate the realm of agri-futures to hedge their market risks.

• Increase agri-futures market participation: of government agencies like Food Corporation of India, National Agricultural Cooperative Marketing Federation of India (NAFED) and State Trading Corporation (STC).
• Allowing participation of Banks: that give loans to FPOs and traders in commodity futures as “re-insurers”.
• Ensure more stable and market-friendly government policy: for utilising the potential of Agri-future markets as a tool of price discovery.

Conclusion: India needs to not only spatially integrate its agri-markets but also temporally integrate them with spot and futures markets for realising the best price for producing and hedging market risks.