Vol 27, No 2; by Prabina Rajib; June 2015
India’s agricultural sector has improved significantly since independence. India is now a major producer of many agricultural commodities, fruits and vegetables. In spite of its significant contributions to the Indian economy, Indian agriculture suffers from several weaknesses such as excessive dependence on monsoon, lack of adequate warehousing infrastructure and ineffective farm-to-market linkages, leading to low price realization by Indian farmers. With expanding exporteimport activities, the Indian agri-commodity market is increasingly getting integrated with the rest of the world. Agri-commodity prices are not only affected by domestic supply and demand, but several global factors also contribute to increased price volatility.
During the last decade, six commodity derivatives exchanges have come up in India to facilitate price discovery and to mitigate commodity price risks. These commodity exchanges offer futures contracts on metal and mining, energy, and agricultural products. Futures contracts on a wide variety of agricultural commodities are offered in these exchanges keeping in line with India’s agricultural production and consumption diversity. However, Indian farmers’ participation in these exchanges has been rather muted. Against this backdrop, Mr. S. Sivakumar, Divisional Chief Executive, Agri Business Division (ABD) of ITC Ltd. and the architect of ITC’s e- Choupal initiative, shares his views on increasing farmers’ participation in commodity derivatives trading, and also elaborates on ITC-ABD’s commodity hedging strategies. ITC-ABD has been using Indian commodity exchanges to hedge price risks of soyabean and soyaoil. In fact, ITC-ABD started hedging soyabean and soyaoil price risks at the Chicago Board of Option Trade (CBOT) and later started to hedge in Indian commodity exchanges. Mr. Sivakumar shares his views on several interesting issues such as: limited yet important role speculators play in making commodity derivatives market more liquid, the need for modifying the Agricultural Produce Market Committee (APMC) Acts to allow aggregators and corporate buyers to enter into forward or options contracts with farmers, the reasons behind ITC-ABD hedging only soyacomplex price risks though it also procures other commodities such as wheat and potato, and how hedging mitigates only the residual risks and supplements its physical operations of buying, selling and crushing soyabean.
