The working group on risk management in
Download 0.68 Mb. View original pdf
|
- Navigate this page:
- Credit availability
| 7.2 Pre harvest concerns The major risk factors facing the farmers today in the pre- harvest stage are: (i) Price risk: The farmer is not sure at the point of sowing, about the price he will get at harvest, and his income varies according to the vicissitudes of nature. (ii) Volumetric risk: He is not sure of the harvest yield – the volume of production Weather conditions can play truant, and affect his output. Crop insurance and weather insurance schemes are only gradually spreading, and are not all-encompassing as yet. (iii) Credit availability: While banks do lend as part of priority sector lending, the ability of the farmer to repay the loans depends on his income, which is subject to both price and volumetric risk. Moreover, banks take a cautious approach as they do not have any control over the cash flow and payment received by the farmers, on the sale of their produce. More favorable terms of credit maybe obtained, in case these two risks are taken care of by other institutions. Farmers can sell their produce forward on the exchanges after sowing their seeds. Ideally, they should be dealing in options rather than futures, which are presently not permitted by the extant legal structure. Futures, provide the farmers well before harvesting, a firm price in advance, realizable when harvesting does take place. Futures assure farmers, of a firm realization level. Thus, they mitigate the price risk that the farmer runs. Farmers then do not have an exaggerated notion of the expected value of realization and do not contract debts, disproportionate to realistically possible realization levels. This leaves the third risk, the volumetric risk to be covered. Exchanges can launch weather derivatives i.e. rainfall indices relevant to each meteorological zone, so that farmers can use it as a buffer against yield deviations, from normal weather. If the farmer wants to sell in the futures markets, he can take a position on the commodity exchange, and simultaneously lodge the goods in the accredited warehouse of the exchange. The goods once accepted, after being graded and certified by an assaying agency, move in an electronic commodity balance, which is a substitute for the physical warehouse receipt practice of today. Once they deposit commodities in accredited warehouses, farmers, if they desire may not take a position on the futures platform. If the position on futures platform is not taken, the farmer may avail a bank loan up to say of the value of the commodity, in the spot market against warehouse receipts. If a farmer takes a position on the future/spot exchange, his bank account can be credited, after taking into account the interest burden for financing, margins, mark-to-market (M2M) provisions of the exchange and warehouse charges, till the expiry date of the contract. If the regulator for this space, the Forward Markets Commission (FMC) permits, the physical deliveries made by the farmer, can be considered as early pay-ins and margin and MM requirements maybe waived, under special circumstances. This system assures full repayment of bank loans, thus covering credit risk. In the process, the quality of the asset also gets upgraded and the cost of credit comes down. Looking ahead, futures prices can also be used by farmers as signaling devices for determining crop sowing patterns. Decisions on sowing, maybe taken based on futures, rather than spot prices, to enable better returns at the time of harvest. Futures trading platforms can be used to provide effective risk-cover to farmers, on both the price and volume ends and further between future and spot prices, in a seamless manner. While, commodity exchanges may not be a panacea for all risk related issues of the farmers, their platforms can be effectively harnessed, to deliver effective results, along with other risk mitigation measures such as contract farming, product diversification, market development, etc. Download 0.68 Mb. Share with your friends:
|