Trading agri-commodites on MCX

SUMMARY

India predominantly is an agrarian economy, where agriculture sector is the source of livelihood for more than 50% of the population and occupies more than one third of the country’s total geographical area. The sector continues to be the single largest contributor to the Indian economy even though its contribution to GDP has declined since the country’s independence in 1947. Agriculture is an essential link in the supply chain of the manufacturing sector, and plays an important role in the rural development of the country. The agricultural output in the economy grew by only 2.7 per cent in Q3 of FY19 from 4.6 per cent in the Q2 of FY19. Continued fall in agricultural growth rate is being attributed to adverse weather condition such as prolonged winter, drought and floods. Despite all adversities, India continues to be one of the top producers of cereals (wheat & rice), pulses, fruits, vegetable milk, meat and marine fish. Although there is a deficit of pulses and oilseeds; availability of fruits, vegetables, milk, meat and fish has increased. This is a partnered post.

By CNBCTV18.COMMay 3, 2019 3:51:44 PM IST (Updated)

Prices of agricultural commodities depends on factors like weather, government policies, global duties, domestic and international output, demand etc. As all these factors lies beyond the purview of normal business operations, it imperative for all agriculture market participants to hedge on the commodity derivative exchange in order to ensure also its sustainability and profitability of their business model.

Futures contract of agriculture commodities are just like equity, currency or interest rate futures, one can sell and buy an underling agriculture commodity at present price level. Generally agri-contracts are compulsorily deliverable. The counterparties here are physical market traders, hedgers, and recently SEBI has allowed alternate investment funds category III to participate in commodity derivatives market. Any participant unwilling to take delivery should square off his/her position on the 10th of the contract expiry month as staggered delivery would begin the next day which would automatically mark him/her for taking the delivery.

Looking ahead it appears the Indian commodity markets especially the agri-commodity segment is headed for better days. It would be more efficient in terms of storage, physical trades and warehousing. It is also expected to become more broad-based, vibrant and deep due to the facilitation it has received from the regulators and commodity exchanges.

The Securities and Exchange Board of India in order to facilitate producer participation on the exchange, has decided to levy only a nominal fee of Rs. 1 lakh per exchange instead of charges based on turnover slab rates. The exchanges dealing with agri-commodity derivatives would create a separate fund earmarked for the benefit of farmers and farmer’s producer's organisations in which the fee foregone by SEBI would be deposited. The exchange needs to draw an action plan for the fund for full utilisation of foregone fee in any financial year during the succeeding years. Facilities like wavier or subsidy in warehousing charges, reimbursement of cost bags provided to farmers for deposits on the exchange platform and subsidising of broker fee for farmers could be considered by the exchanges for preparing an action plan.

These game-changing initiatives can propel India on to a completely different level of sustainable growth.