The working group on risk management in
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| 2.3.2.2. Price Risk Management One way producers have traditionally managed price variability is by entering into pre- harvest agreements that set a specific price for future delivery. These arrangements are known as forward contracts and allow producers to lock in a certain price, thus reducing risk, but also foregoing the possibility of benefiting from positive price deviations. In specific markets, and for specific products, these kinds of arrangements have evolved into futures contracts, traded on regulated exchanges on the basis of specific trading rules and for specific standardized products. This reduces some of the risks associated with forward contracting (for example, default. A further evolution in hedging opportunities for farmers has been the development of price options that represent a price guarantee that allows producers to benefit from a floor price but also from the possibility of taking advantage of positive price changes. With price options, agents pay a premium to purchase a contract that gives them the right (but not the obligation) to sell futures contracts at a specified price. Futures and options contacts can be effective price risk management tools. They are also important price discovery devices and market trend indicators. As yet, private mechanisms that offer insurance against price risks, are limited. Futures markets have along history in India. However, non-conducive government regulations and extensive government intervention, in the major commodities, have limited the scope to minor commodities, in the last three decades. Recent policy changes are more permissive of futures markets. However, world over, the principal benefits of futures are indirect from price discovery and helping to manage price risk. In Indian markets, price oscillations, such as cobweb cycles are often seen. Commodities traded in world markets, are also subject to such price variability. The problem of matching supply to demand, requires coordinated actions amongst producers. Such coordination can arise from the dissemination of market information and price discovery mechanisms. Price support mechanisms have been limited to some regions only. Inmost cases, farmers face a serious price risk, because of the immediate necessity to dispose of stocks for want of storage, as also to repay loans. Contract marketing / farming is an important price risk mitigation tool, becoming popular in the country and should play an important role during the XI Plan period. Contract farming also has many more direct benign impacts on farm incomes. Market risks are large in specialty crops and vegetables that deter most farmers from investing in them. Through price insurance, credit and technological inputs, contract farming could bean important mechanism by which small farmers can supply high value crops to urban and international markets, while benefiting from assured higher incomes. |