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Farmers need freedom

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Cumulative rainfall during the post-monsoon season up to December 21, 2016, was 43% below the longterm average, the highest deficiency in recent years.

Farmers are clamouring for attention. From loan waivers and suicides, to carrying human skulls, slashing wrists and protests before the PMO, they are using every trick to bring the spotlight on their angst.

Unless we solve the root cause — market failure, and crop failure due to climate change — all succour will remain cosmetic and short-lived. So, what are the policy instruments that will allow the most efficient farmers to cover their costs of production?

The honest search for answers must begin by acknowledging that, unlike manufacturing and services, agricultural markets don’t auto-correct the balance between demand and supply.

While high prices result in higher acreage, low prices don’t correct supply in the short term. As no farm gets mothballed, overall production capacity remains the same. In such periods, we need to generate demand and ensure that farmers have sufficient capital to keep their heads above water.

Right now, both are missing.

The numbers tell the story. Retail food prices rose 1.93% in March, slower than a2.01% annual increase in February. Vegetable prices have fallen for the seventh straight month.

Year-on-year wholesale food inflation measured by the wholesale price index plummeted to 1.54% in November 2016, the lowest since September 2015, due to cheaper rice, pulses, fruit and vegetables (particularly onion), oilseeds and vegetable oils.

Though pulses are India’s primary source of protein, the pent-up demand was too inelastic to mop up supply last summer, giving farmers an income shock. Ditto after the fire sales in onion and potato.

A bumper chickpeas harvest is expected to flood the market shortly In storable crops, such as potato, oilseeds, spices and grains, the overhang of excess supply gets further prolonged. Simultaneously, farmers are grapplingwith crop failure that further affects income.

Although most winter crops, particularly wheat, are largely irrigated, northeast monsoon and winter rains are crucial for rice, maize and pulses in the south. Overall, rainfall patterns have become more irregular over the last decade.

Extreme rainfall events in central India, the core of the monsoon system, are increasing. Small and marginal farmers need to invest in climate-smart growing practices for sustainable agriculture, and buy insurance.

Few have capital or the incentive to invest. The average farm household in Uttar Pradesh earns Rs 4,923 a month and spends Rs 6,230, according to the National Sample Survey Office Situational Assessment Survey, 2013.

Money lenders, not banks, finance it. Bihar and West Bengal families are equally in dire straits. To worsen matters, rural income from infrastructure projects, factories and construction is stagnant.

Eventually, the low prices and lack of savings will reduce the number of commercial farmers as banks curtail lending in the name of credit discipline.

In short, everyday low prices, though great for consumers, are sinking India’s nine crore farming-dependent families further into poverty, malnutrition and illiteracy. We have deliberately ignored this tragedy. Instead, we focus on keeping food inflation low, an indicator keenly watchedby consumers, media and investors.

Even now, stock limits remain on pulses. India’s farm price and income problem is not unique. Other nations use direct payments, revenue insurance, buffer stocking and loan deficiency payments to tide over.

The US diverted excess corn into fuel ethanol. We can start by recognising that, all along, we have coerced the farmer to accept lower profits in the ‘national interest’ when supply is low, and abandoned him when prices are low.

That leaves him with no capital and savings to cope. Companies use profits from the good times to survive times of oversupply. Farming needs the same business freedom.

Consumers can be protected by more targeted actions. Reducing the overall cultivation and marketing costs through better market access will cut losses.

An enhanced push to exports, seed supply and solarpowered drip irrigation, livestock farming and dynamic buffer stocking, will further bulwark incomes. Private sector will do the heavy-lifting. Farmers are belligerent for a reason.

They have been forced to subsidise consumers for too long. Agrarian distress is the direct outcome. It is true that not every cropping season will be profitable.

But it need not end in tears. Agriculture needs a new intellectual paradigm that empowers farmers to cope with the inevitable long periods of demand supply mismatch by freeing them to maximise profits in the good years. Farmers don’t need subsidies, they need capital. For that, price is the best fertiliser.

The writer is chief marketing officer, National Commodities and Derivatives Exchange (NCDEX)

DISCLAIMER : Views expressed above are the author’s own.


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Govt should build on the Budget roadmap

In its Fiscal Policy Strategy Statement, the government has stated that its prime responsibility is “providing a safe and stable environment for the private sector to create wealth”. Agriculture is India’s largest private sector enterprise. But while it recognized the problems, the Budget stopped short of making agriculture an attractive investment for either private companies or farming households.

Even for consumers, there is something fundamentally flawed when the food subsidy bill is 2.5 times the total spend on agriculture and allied sectors. Had the Budget pushed for modern ways to deliver social services, it could have improved its balance sheet in one stroke.

Farming is an input intensive business that requires timely and cost-effective availability of land, seed, fertilizer, irrigation, machinery, credit and labour. If any of these inputs is missing or mispriced, the crop becomes uncompetitive in the market. The current fertilizer subsidy system, besides costing the exchequer Rs 70,000 crore annually, has created a black market where small farmers pay 60% more than the MRP, which incentivizes production inefficiency, and leads to over-use, depleting soil quality and damaging human health. Though urea consumption has risen over the last 15 years, no new factory has come, leading to rising imports. Neem-coating urea prevents leakage into the chemical industry but doesn’t solve the festering sectoral crisis. Similarly, price controls have disenchanted the private seed companies. This has left the field open for counterfeits and black markets.

Foreign companies are free to set up wholly-owned companies in the horticulture, animal husbandry, seeds, plantations, and agricultural services sectors. Yet, between 2000 and 2015, barely $1800 million FDI was received. Start-ups are keen to introduce specialized technologies and communication platforms. The Budget should have offered incentive, or at least assurance, to potential Indian and foreign investors that it would be easy to do business in agriculture.

To move beyond a subsistence existence, farmers largely invest savings in their land. Two consecutive droughts and bad harvests have put paid to that. Banks are not forthcoming with long-term credit. Of the Rs 9 lakh crore credit offered last year, the bulk were short-term seasonal loans. The trend needs to change even though the allocation has increased to Rs 10 lakh crore.

India has close to 2000 Farmer Producer Companies for aggregating harvests and increasing the bargaining power of members. The Budget could have offered incentives for FPCs that invest in improving productivity and connecting to markets. In short, more measures were needed to stimulate private investment in agriculture to produce wealth.

At the same time, government’s own spending, at Rs 56,992 crore, needs to accelerate and become more imaginative. Take irrigation. With half of the arable land under rain-fed agriculture, India practices energy-intensive “DG set-dependent” farming. The number of agriculture connections has increased from 13 million to around 19 million between 2001 and 2015. Over 18% of total electricity consumption and over 5% of total diesel consumption is used for irrigation. By incentivizing a shift to solar-powered micro irrigation, the Budget could have launched a virtuous cycle with far-reaching impact on food, energy, climate change, and water cycles. Maharashtra has already launched the world’s largest solar pump irrigation project.

The Rs 9,000 crore outlay on insurance will cover only 40% of the arable land. In any case, insurance premium is not a substitute for capital formation.

Connecting farmers to market is the right way to ensure that producers get a fair share of the consumer’s rupee. But the Budget stays on the beaten path with solutions such as a new model Contract Farming law and denotifying perishables from the APMC Act. There is no dearth of contract farming laws. They failed because they are tough to enforce. Similarly, if exiting APMC market yards was the solution, fruit farmers in Bihar would have been prosperous by now because the state has repealed the APMC Act. Instead, they are struggling to survive. Given the right market infrastructure, there would be no need for the government to connect farmers to food processing units. It would happen automatically.

The government is banking on the National Agricultural Market (e-NAM) as the platform for bringing together buyers and sellers beyond geographical limitations. Though e-NAM has officially connected 250 mandis, the basic legal frameworks, quality standards, payment clearing systems, and storage infrastructure that define a market are missing. Without these building blocks, e-NAM can’t be the bridge between spot and futures markets.

Exports have traditionally benefitted farmers. Since it has acknowledged the tough external environment, the government should helped promote commodity exports that have fallen 20%.

In contrast to agricultural spending, the food subsidy bill has ballooned to Rs 1,45,339 crore, or almost 1% of the GDP. Food subsidy is paid to the Food Corporation of India for maintaining the buffer stocks of wheat and rice and delivering to ration shops in selected states. The ballooning cost is another example of weak delivery and misallocation of subsidies by the state machinery that is eating into scarce government resources. To prove that it is fiscally prudent, the government should have announced modern market-based tools of procurement and public stocks management that go beyond ration shop automation and have proved successful in other nations.

The Economic Survey observes that the “embrace of markets” – even in the basic sense of avoiding intrusive intervention, protecting property rights, selling off unviable public sector assets, exiting from areas of comparative non-advantage and allowing producers and consumers to face market prices – is a “work-in-progress”. This is most true of agriculture. Farmers desperately need agricultural investment to generate wealth and jobs. Unfortunately, due to this intellectual hostility, successive governments have distorted the markets where the private sector operates best. And underinvested in the areas of public good where it should have been more active. The Budget is only one opportunity to set right both. Public policy can pick up where it leaves off.

DISCLAIMER : Views expressed above are the author’s own.


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Five ways Budget 2017 can facilitate farmers

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Agriculture should be the focus of this year’s Budget, according to a Twitter poll conducted by the ministry of finance last week that saw some 66% of more than 21,400 respondents seeking a more agriculture-focused Budget. Not infrastructure. Not the services and manufacturing industries. But agriculture. Clearly, to enhance the ‘feel good’ factor, agriculture has to pick up. Demonetisation compelled farmers to move towards cashless payments and digitalisation. Now they need greater ‘ease of doing business’ to harness that momentum. Here are five steps the Narendra Modi government could take to make that possible.

1. Strengthen tenancy laws: Agriculture needs economies of scale. The average farm in the country is 1.15 hectares in size and will shrink further by 2020-21. According to the 2013 Situation Assessment Survey of Farmers/Agricultural Households, you can’t earn a living from a farm smaller than one hectare. To survive, majority farmers rent land. Farmland tenancy is illegal in most states. But unlike manufacturing, farmers can’t relocate to favourably inclined states. In the absence of a law, landowners don’t sign rent agreements and tenant farmers have no rights. Often, the owner leaves land fallow rather than be ‘grabbed’ by a tenant. Tenants don’t invest in the land due to uncertain tenure. A scarce resource is wasted. Legal tenancy will permit effective consolidation for farming without depriving landowners. Tenant farmers will qualify for bank loans. Digitisation of land records will further strengthen property rights and turn rural land into a bankable asset.

2. Liberalise input markets: Unlike manufacturing, farmers cannot freely import or adopt technology. Of the 140 million hectares of cultivated land, nearly 120 million hectares are degraded. Soil health cards will not lead to precision agriculture unless fertiliser, machinery and seed markets are willing to deliver the right input at the right time and the right price to the farmer.

Erratic Pulse

But the fertiliser companies won’t because the subsidy regime is choking their business. Politics has stymied new oilseed and pulses technology and distorted commercial pricing when sound science should be the deciding principle. Mechanisation gets 3% of farm credit. Until the upstream business models are corrected, farmers will be exploited by rent-seekers and counterfeiters.

3. Don’t mix producer and consumer policies: No sector can survive the kind of political risk that farmers face. Farmers themselves contribute 80% of the capital invested in agriculture. Like other businessmen, they invest in a crop after carefully considering the odds. But often, what starts as a good deal comes a cropper because midway through the marketing year, government coercively ‘corrects’ prices to protect consumers. When capital is used suboptimally or destroyed, growth weakens. Other investors shy away. Consumers should certainly be protected from food inflation. But not through knee-jerk measures that ultimately ruin rural livelihoods.

4. Encourage loans against harvests: Entrepreneurs need capital. The harvest is a tenant farmer’s only renewable asset. Especially for women farmers. Banks, however, are reluctant to lend against small quantities of a crop, with inconsistent quality, stored somewhere far. Moneylenders and middlemen, living close by, step in. Farmers should be taught crop grading and sorting on a war footing so that harvests have standard quality. A regulated electronic repository can digitally maintain records of stored physical crops. Asking financial institutions to lend against these electronic records should be the next logical step.

5. Provide access to efficient and assured markets: The market is efficient when farmers earn more and consumers pay less. Exchange platforms and other electronic markets are designed to enhance competition by connecting the largest number of buyers and sellers in the most cost-effective, transparent and regulated way. Farmer groups must be assisted to use them. Farmers also need a reliable safety net. Unlike other sectors, agricultural markets don’t self-correct. Low crop prices neither make us buy more nor prompt farmers to significantly cut production. So, farmers face long periods of low prices interspersed with flashes of high prices. Government procurement is dysfunctional as pulse farmers discovered last summer. Food ministry data shows that for wheat and rice, the maximum procurement centres are in Bihar, where purchase is negligible. Instead, market-based tools should be deployed to include more crops and farmers.

Farm is Forked

Agriculture is a unique business that aims to create a food production, processing and distribution system that is, in all stages, economically viable, socially just, and ecologically sound. The current system does not meet thesecriteria and is, thus, unsustainable. India’s small farmers face proportionally the steepest transaction costs if they wish to participate in modern food supply chains. Poor transportation, storage and communication infrastructure, no access to land, information and expertise, political risk and limited access to financing, which is rooted in the lack of collateral, all add to costs. This confines farmers to subsistence livelihoods. The New Year and Budget 2017 give us yet another chance to make things easier for them.

The writer is chief marketing officer, National Commodity and Derivatives Exchange

DISCLAIMER : Views expressed above are the author’s own.


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Another chance to get it right? 6 big trends for farmers

Pericles said the key is not to predict the future, but to be prepared for it. 2016 saw some epic power shifts and new ways of doing business. Here are the six big trends that will shape next year for farmers and consumers and give us another chance to get it right:

1. Domestic food price rise will slow down on the back of normal harvests of grains and pulses.
Weather-wise, 2017 will be another very warm year globally but is unlikely to be a new record due to the absence of additional warming from El Niño, says the UK Met Office. Higher acreage for cash crops will compensate for static crop yields. Farm wages, that have risen 15% since 2014, will correct due to the reverse migration after demonetization. But rising crude oil prices, helped by some OPEC restraint, will offset gains. Irrigation is heavily dependent on diesel gensets. So is transportation.

Farmers will be reluctant to invest capital in farm and machinery because of continued stress from unpaid crop loans and credit sales. Most leased farms are anyway starved of capital. India’s 138 million farms are highly leveraged. Discretionary spends will also falter until a good monsoon. The ripple effect will be felt by FMCG, consumer durables, automobiles, and farm machinery companies. Rural demand contributes almost 40% of their sales.

2. The stronger dollar will turn food imports expensive.
The US dollar, currently at a 14-year high, will rise further if the US Federal Reserve raises interest rates to curb inflation. All imported foods, from pulses and cooking oil, to processed foods, cheese, apples, and almonds, will become expensive. Retail prices of imported foods are typically two to three times higher than FOB export prices after adding tariffs, excise, margins and transportation costs. A stronger dollar typically pushes down global commodity prices. But Indian consumers may not see the benefit. India imported agricultural, fishery, and forestry products worth $25 billion in calendar year 2015.

3. The push towards digital payments will encourage rural financial literacy, tighter supply chains to reduce counterparty risk, and electronic mandis. Digitization will open opportunities for cost-saving automation, accuracy, speed and vastly-improved efficiency in agricultural trade documentation, storage, finance, and risk management. Supported by the right policies and market infrastructure institutions, it can transform Indian agriculture’s financing models, risk mitigation models, and distribution models.

4. Digital agriculture will begin to take root.
A combination of mobile devices (allow real-time data gathering and information dissemination), satellites and drones (provides a spatial and temporal dimension to information), Internet of Things (stitch together diverse sources of information and support delivery of farmer specific information), analytics (turn vast amounts of data into actionable information and knowledge), messaging apps, breeding informatics (accelerates R&D for genetic gain), and cloud computing (enables seamless data storage and real-time reporting across the value chain) will expand delivery of targeted and timely information and direct-to-farmer m-commerce platforms. Venture capitalists have invested $179 million between 2014 and 2015 into Indian agri-tech start-ups.

5. Organic, eco-friendly, socially responsible, and healthy will remain the big food trend.
Patanjali’s success shows consumers are making their food decisions based on where and how their foods are made, grown, raised and by whom. India spends 31% of its budget on food and grocery. Smart brands will broaden their thinking around sustainability and find creative new ways to eliminate any wasted resource. “Going back to your roots” – whether through Ayurvedic diets, traditional grains, or authentic ethnic foods and spices – is another big theme. Look out also for more vegan foods and craft beer.

6. Street-food inspired dishes in restaurants, delivery-only restaurants, home-delivery online grocery portals, meals-on-wheels, and food trucks will capture greater consumer attention. Convenience, seamlessness, relevance, value-for-money will remain important, while companies employ algorithms and machine learning to understand our habits and idiosyncrasies.

DISCLAIMER : Views expressed above are the author’s own.


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How Demonetisation Has Affected India’s Agricultural And Food Markets

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A vegetable seller in Kolkata. (Photo by Debajyoti Chakraborty/NurPhoto via Getty Images)

India’s ₹17 lakh-crore agricultural and food markets, from the mandi to the neighbourhood grocer, are at a standstill. Demonetisation has vacuumed liquidity from this virtually cash-only economy that provides livelihood to half the population. Prices have crashed and fresh produce lies rotting. The situation indeed appears dire.

Business is forecast to revive only after people in 7,500-plus mandis and 600,000 villages are re-stocked with new currency. Yet, those with the courage to look beyond this doomsday scenario can spot the proverbial rainbow.

It is a myth that farmers refuse to accept cheque payment

Take farmers first. It is a myth that farmers refuse to accept cheque payment. Small dairy farmers in Andhra Pradesh accept cheques. Sugarcane farmers accept cheques from sugar factories. Moong farmers are accepting cheques from government procurement agencies. Apple farmers accept cheques from large buyers. Potato contract farmers accept cheques from food companies. Maize farmers in Nabrangpur, Odisha’s poorest district, and coconut farmers in Karnataka took cheques from state agencies. The list is growing.

In Karnataka and Andhra Pradesh, which have adopted the Rashtriya eMarketServices-run Unified Markets Platform, produce worth ₹39,000 crore has been sold with cheque payment in the last four years. The 250 mandis in 10 states that have adopted the electronic National Agricultural Market (eNAM) platform for sale of primary produce are designed for cheque payment. So far, 1.60 lakh farmers, 46,000 traders and 26,000 commission agents have been registered on the e-NAM platform.

Food Corporation of India tried but failed to pay Punjab and Haryana farmers by cheque for wheat, only because the powerful commission agents want to first deduct the loan repayment amounts.

AMIT DAVE / REUTERS
A farmer works in his sugarcane field on the outskirts of Ahmedabad, India February 28, 2015. REUTERS/Amit Dave/File photo

Direct benefit transfer for seeds has been a success even among the small and marginal farmers of Uttar Pradesh. Moreover, of the seven crore Kisan Credit Cards issued in India, more than one crore are ATM-enabled debit cards. Farmers accept insurance and disaster relief cheques. So to portray the farmer as a Luddite is both unfair and untrue.

What’s more, marketing practices are changing in several crops, especially oilseeds, maize and certain spices. Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them. So even if the mandis stay shut until the cash shortage recedes, the farmer can still borrow against his commodity.

Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them

It is true that the small and marginal farmers who sell off their produce in the village itself are hurt by the demonetisation. Similarly, value chains with minimal processing and direct consumer sales such as fruits and vegetables are hit. Most fresh produce is sold by small hawkers and vegetable mongers in the streets of India. Since they take payment in cash and buy their wares from the mandi in cash, business is down. These are symptoms of the crying need for reform.

The millers and processors who have raw material in their godown to last two-three weeks are in no panic. In any case, business in the mandis has to pick up within a month. Food is not a discretionary expenditure. The pent-up retail consumer demand will eventually pull up prices sufficiently high to lure traders and re-start the market engines.

AMIT DAVE / REUTERS
A farmer winnows wheat in a field on the outskirts of Ahmedabad, India, March 29, 2016. REUTERS/Amit Dave

Visible difference will come if the government uses demonetisation to persuade two intermediaries in the value chain — the trader and the village shopkeeper — to adopt electronic payments. All the APMC markets are regulated by state governments and used by the larger traders. They should be made cash-free.

The high incidence of indirect taxes have made it lucrative for wholesalers and distributors to stay below the radar and offer the savings as discount to consumers in a low-margin and highly competitive commodity market. Tax avoidance has become their formula for survival. A solution can be found through GST.

Visible difference will come if the government uses demonetisation to persuade two intermediaries in the value chain — the trader and the village shopkeeper — to adopt electronic payments

To convince agri-input and other merchants, the government should make it easier and cheaper for them to adopt card payment and mobile wallets on a trial basis. Shopkeepers should be educated about how they can expand business by moving from “cash only” to “cash and card” because it attracts more customers. Those customers also spend more because they are not hampered by lack of cash. Once village retailers accept digital payments, rural customers will follow. Exactly the way mobile wallets picked up with Ola and Uber. Economists call it the network effect.

It doesn’t end there. Good customer experience is the key to adoption. The biggest argument in favour of cash is its convenience. You don’t need literacy or tech savvy to use cash. Or travel miles to use an ATM. So the push for adoption of digital payments has to begin with easy documentation, quick and hassle-free KYC norms to incentivise utilisation of financial services in rural areas. Usage charges should be low and competitive so that farmers don’t find them prohibitively expensive.

AMIT DAVE / REUTERS
Farmers ride on a motorbike in front of stacked sacks filled with grains at the Agricultural Produce Market Committee (APMC) market yard on the outskirts of Ahmedabad, India, December 1, 2015. REUTERS/Amit Dave

Electronic payment points should be available at walking distance. Users should find apps easy to use and in their local language. They should quickly receive delivery, be assured of complete back-end security and have plenty of choice. The entry of payment banks will hopefully ease some of these pain points.

Once the agricultural value chain adopts electronic payments and cleans up its books to align itself with the financial supply chain, benefits will follow. The biggest will be the inflow of private and banking capital, which is waiting to power agricultural growth, and social impact capital to improve rural lives.

Cash is an inefficient medium of exchange. The World Bank estimates that the Indian government can save 1% of the GDP annually from digitising current cash-based subsidies alone. Farmers, traders, processors and retailers will never again blindly trust cash. That makes it the perfect opportunity to prise open closed minds and introduce new payment habits in this otherwise opaque part of the economy.

 


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Having options is the best option for Indian farmers

monksWhat’s safe for monks is safe for farmers

Though farmers can use futures contracts for protection against price volatility, they face challenges. Hedging, by nature, limits profits when prices rise. The daily demand for margin money affects farm cash flows. Time and effort are needed for initiating the positions, rolling over and liquidation.

Options take away these pain points. Aone-time payment of premium gives the right, but not the obligation, to buy or sell a commodity to another party at a specific price on a specified date. So, for example, a chana farmer should be able to buy a put (right to sell) option in October as insurance against prices going down in March, when the harvest arrives. By paying the relatively small premium, he will insure the minimum price. If the market moves up, the premium he paid for the option will be lost.

But he will be able to capitalise on selling chana physically at higher prices. If chana prices are likely to rise, instead of waiting in expectation, the same farmer can sell in the mandi and simultaneously buy a call (right to buy) option to profit from the rise. Options are the next step after crop insurance. Crop insurance only protects farm income against loss of harvest. Options protect farm income from the harvest that is reaped.

Except in wheat and rice that have partial protection through government procurement, Indian farmers are buffeted by inefficient physical markets. Therefore, farmer producer companies and cooperatives can be encouraged to use options to manage commercial risk in the production, processing and marketing of agricultural products. Banks can extend credit to purchase price insurance.

Food inflation and food subsidy can be stabilised. Through the ability to use options, processors and merchandisers can pay farmers the best prices for their crops and give consumers lower prices for food. Call options — that give the government the right, but not the obligation, to buy, say, pulses when prices rise — will reduce the need for accumulating physical stocks and add transparency by setting clear rules for government intervention. Potential speculators will get a strong signal to desist from hoarding. Formal price risk management is not for the poorest of the poor. The main clients for such insurance will be commercial-oriented farmers. They may have small farms but they are producing a surplus that they market. They get credit and spend money on inputs.

These commercial farmers, too, will need educating. They have to understand that when you pay the premium for an option, you want to lose the money. Exactly like when we want to lose the accident insurance premium instead of wanting to collect it. Another issue is the willingness to pay. Put option premiums can be expensive exactly at the times when price insurance is most needed: that is, for longer dated periods and when price volatility is high. Options won’t reduce price volatility, but they can help manage its fallout.

(The writer is chief marketing officer, NCDEX)


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Five steps that government can take to reduce food inflation

Food Inflation

India could wipe out $49 billion from its GDP if global food prices double, says new research by the United Nations Environment Programme (UNEP) and the Global Footprint Network. China could lose $161billion in GDP. The two countries will be the worst affected among 110 countries in terms of absolute loss of GDP.

The next global food shock will be created by the lethal combination of rising consumer demand and fluctuating supply, thanks to climate change, water scarcity and environmental degradation. And it will likely result in India’s GDP dropping 2.4%, the consumer price index (CPI) rising 13.8% and the sovereign credit rating plummeting by three notches, the report says.

Runaway food inflation will force households to spend even more on food from the present 44% of their income. Imported food staples will become expensive, distorting the trade balance.

Government subsidies to make food affordable will widen the budget deficit. Together, these will emerge as material risks to our creditworthiness.

The UNEP study underlines two facts. One, food inflation has the potential to sink the entire economy. Second, India and China are enormous players within the global food system, accounting for more than a third of the world cereal, cooking oil, soya bean, sugar and meat consumption. This means that the biggest threat could be brewing at home and not overseas.

India’s average food inflation during 2006-13 was one of the highest among emerging market economies, and nearly double the inflation we saw during the previous decade. Indeed, food inflation beat non-food inflation by about 3.5 percentage points on average during 2006-13. Higher incomes have increased consumer demand.

But inflation is also the result of inefficiencies in the food supply chain: agriculture, the food processing industry and the food wholesale and retail distribution sectors.

Can we prevent the crisis forecast by the UNEP report? Here are five steps that the government can take to reduce food inflation:

Take tech seriously: GoI should accelerate technology dissemination, especially relating to environmental sustainability, climate change, crop yields and mechanisation. This will reduce dependence on costly inputs, labour and chemicals, and stimulate food supply.

The Indian Council of Agricultural Research estimates that each of its Krishi Vigyan Kendras transfer on an average 7.5 technologies annually. Government extension workers have been able to reach only 7% of farm households. The private sector is, therefore, important. Around 120 million hectares is suffering from soil, wind and water erosion, and chemical and physical degradation.

Info supply chain: The government should invest in a market information system for accurate and timely data of crop production, trade and prices. This will send right price signals from consumers to the supply chain, improve bargaining power and reduce business risk and response time. Research shows that information raises net income per hectare by more than 12%.

Real competition: GoI should end rent-seeking in the food supply chain by encouraging competition through efficient markets. Removing barriers such as mandi licences and state taxation laws will puncture marketing margins. Consumers rarely benefit from any crop price fall because of the marketing margin commanded by the biggest players.

A rise in crop prices, however, is quickly passed through to protect profits. The case of onions shows how both farmers and consumers are exploited by powerful cartels. The more intense the competition, the lower price levels are likely to be. ]

Calm volatility: GoI should encourage strengthening of the supply pipeline by the private sector to reduce price volatility. There is an inverse relationship between stocks in the pipeline and prices. Smaller the stocks lying in godowns, higher the prices shoot.

Since there is virtually no chana left over from last season, price of the new crop harvested in March 2016 is spiking. Instead of treating stockists as criminals under the Essential Commodities Act (ESA), a transparent online mechanism to track commodities lying in warehouses should be introduced.

Don’t keep poking: The government should stop market interventions in its zeal to balance consumer and farmer interests. Last year, import duty was raised and an export
was announced to raise sugar prices so that mills could pay sugarcane farmers. Now, GoI is hurrying to protect consumers by removing the subsidy, imposing stock limits and lowering import duty.

Ultimately, both farmers and consumers were left dissatisfied while business risk has heightened. Rising food prices are the outcome of farm costs, business risk premium and market concentration. We can lower all three through a smarter mix of technology, institutions and policies.

The consumer is more prosperous and demanding. But the hand that feeds her is shaky. Unless we act urgently, our economy is in double jeopardy.

The writer is chief marketing officer, NCDEX

DISCLAIMER : Views expressed above are the author’s own.