Market for Electronic Trading of Agricultural Commodities in India

The key objectives of this note are to suggest certain areas of improvement and unconventional solutions which could provide an impetus to the market for the agricultural commodities (grains, millets and specially vegetables) in our country. Some of the areas where the Government could play a proactive role are as follows:.

• Promote and encourage electronic trading of agri commodities between farmers, traders, market makers, food processors, e-commerce players and also end users using e-marketplaces like E-NAM and ONDC. The infrastructure exists. This will expand the market for the farmer
• Encourage trade finance in the agri market expanding the market for the farmer
• Create and support a new set of digital market intermediaries called “Market Makers” who will provide two-way (buy and sell) quotes. They will provide continuity and bring down the difference in the spread between the buyer and the seller of agri commodities and derivatives based on agri commodities
• Support financially and/or subsidize the equipment cost to enable farmers to set up solar powered mini cold storages
• Design a special mutual fund product based on the benefit of a systematic investment plan; the fund assets consisting of agri commodities or their index based on futures and options. Such instruments will act as an auto hedge against the fluctuations in the price of the commodity

These solutions as and when implemented have the potential to improve the farmers’ income, increase volume trading of agri commodities and also bring down the cost to consumer

Price discovery and expansion of market footprint historically has been a major problem for farmers. By and and large, they have been dependent on mandis for this. Among other things, this was one of the issues that the farm bill set out to correct. Currently APMC provides data related to price discovery, place of transaction completion and also as a place to handover the goods. Both mandis and e-NAM act as price broadcasters.

The modern form of commodity trading has been allowed in India since 2002. One can trade in the agricultural commodity market by buying and selling futures contracts on any of the six exchanges that allow agri commodity trading. Out of the six exchanges that allow commodity trading on their platforms, two of them are specifically focused on agricultural commodities trading. These exchanges are National Commodity & Derivatives Exchange Limited and National Multi-Commodity Exchange. Trading in agri commodities used to be complicated before 2017. However, in that year, the Securities and Exchange Board of India, allowed trading in commodities from regular Demat accounts.

The AGMARKNET portal serves as a single window for accessing websites of various organizations concerned with agricultural marketing. It also provides weekly price trend report for important markets in respect of major agricultural commodities. It is linked with online exchange portals for providing spot and future prices for important commodities. International price trends of various agricultural commodities are also accessible through this portal, https://agmarknet.gov.in/PriceTrends/Default.aspx.

Further, Research and Information Network (MRIN), and part of agmarknet.gov.in was launched in March 2000 to provide electronic connectivity to the wholesale markets of the country. The objective is to collect, analyze and disseminate market information to the farmers, traders, policy makers and other stakeholders. More than 3,200 markets are covered under the scheme and 2,700 plus markets are reporting data at Agmarknet portal. More than 350 commodities and 2,000 varieties are covered under the scheme. The scheme is being implemented by the Directorate of Marketing & Inspection with technical assistance from the National Informatics Centre (NIC) and in association with the State Agricultural Marketing Boards/Directorates and APMCs.

The question now arises as to whether the benefits of these Government initiatives have accrued to the farmer. Let us look at the salient points guiding this area of discussion.

• Traditionally, the price was set by a buyer and seller by covering their hands with a towel. This is a practice set up ages ago and continues in some markets. There was privacy but the pricing was not disclosed to the market. This meant that a buyer and seller had to talk to each participant to arrive at the best price, still not knowing what the best price was. Then came the APMC as a result of the APMC law. The supply and the price is controlled, since everything happens in a closed circuit and physically. A few people formed a cartel and decided the prices. Since that group was in majority and vocal, the others thought that this was the best price

• Asample study of the APMC Vashi Navi Mumbai Vegetable market and retail vegetable market in Mumbai reveals a minimum 2X between APMC prices and retail prices. The maximum distance traveled is not more than 30 kilometers. At the farm, say in Nashik (around 160 kilometers from Mumbai), the price is still lower and multiples could be as much as 5X. This means lower income for the farmer. There is also a huge fluctuation in the pricing throughout the year making it difficult for both the farmers and the consumers to predict their budgets
• The price published is not live. Further there is no method to transact electronically with the widespread participation from a larger number of farmers or buyers

Some of the issues that may be causing discomfort to the farmers are highlighted below:
https://www.newindianexpress.com/opinions/2020/dec/12/how-farmers-view-the-existing-mandi-system-2235123.html#:~:text=Over%20half%20of%20the%20farmers,low%20quality%20of%20mandi%20infrastructure

• Over half of the farmers who were interacted with (57%) were unhappy with the mandi system of sale. The reasons are exploitation by intermediaries, lower price realization, lack of transparency in the trading process, collusion among traders, price cartelisation, delay in payments and low quality of mandi infrastructure
• The pricing published by the mandis were end of the day post transaction delayed prices and not based on live quotes
• The average land holding of the farmer is below a critical mass. This prevents the farmer from having a decent income and thus a disparity to other professions or rural areas. This is one of the reasons as to why our PM is aiming to double farm income
• Rain fed agriculture exposes the farmer to weather disturbances
• Farmers are largely dependent on MSP for income guarantee which has limitations

Here are some areas where one could possible work on to benefit our farmers.

Improvements to Existing Solutions

Encourage E-Market Places

The government has now allowed spot trading via electronic means in order to give life to the Honorable PM’s vision of One India One Agri Marketplace. The price discovery will be LIVE, widespread and cannot be manipulated easily based on buy and sell quotes. It will be based on Order Matching Systems for better pricing. There are electronic agri marketplaces or exchanges that are offering Spot and Futures respectively on Agricultural commodities that are already working. The systems and software have been set. There are market participants already. The systems have surveillance mechanisms to prevent price manipulation. The systems also provide clearing payments for goods delivered-Delivery vs Payment, on T+0 or T+1 or T+2 basis based on distance to delivery. Therefore, further push to these e-marketplaces must be given so that the farmers, market makers, food processors, e-commerce organizations, traders and end consumers all transact online.

• Better Prices to the farmer
• Farmer has a choice- Farmer decides which mandi, Food Producer Company or Cooperative to contract with before the produce leaves the farm
• Scope for higher food stocks
• Scope for better quality assurance and increased export
• Probability of better prices for Indian consumers as it deepens the farm to fork cycle
• E commerce companies can also pick up the produce from the mandis at a better price
• Manage and reduce core food inflation
• Information Sharing- Status updates by farmers or farmers' children on the portal can give advance harvesting or logistic updates for supply prediction. The same applies to consumers also.There will be separate pricing for new and older arrivals based on the product. This will increase the option for the consumers
• Exchange based lending with hold of money and keeping goods as collateral possible will make financing transparent
• No dramatic revamp- the current system of mandis and their support ecosystem will still be an important intermediary
• Reduce governments exposure to MSP over a period,as there will be individual market guarantees

It would be good for the country if we work on the actionable items required to promote digital mediums of price discovery, market making and the backend logistics in order to improve both the prices and the market reach of agricultural commodities. Some of the entities that can be involved are the E-NAM, ONDC, subsidiaries of BSE (BEAM) and subsidiaries of NSE or any other recognized stock exchange. As it develops, a regulator for this marketplace for spot trade will also be needed.