FPO Participation in Futures Trading: Managing Price Volatility in Agri-Markets

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86% of Indian farmers belong to the small and marginal category, and as such, lack access to market and efficient price discovery mechanisms. Farmer producer organisations (FPOs) have been aiming to fill this gap by building cohesion between small and marginal farmers and enabling their access to markets.

However, spot markets or APMC (Agricultural Produce Market Committee) market yards have their own challenges and face price volatility during the post-harvest season. This usually happens when there is an excess of supply in the market.

Futures markets or commodity exchange platforms like NCDEX and MCX offer a unique opportunity for FPOs to manage price risk while gaining access to a transparent and efficient price discovery system. FPOs can track prices of commodities on these digital platforms and when the prices look profitable, they can enter into a contract with a buyer and lock in the prices. FPOs can enter into contracts at any time during the production stage, including preharvest.

However, due to a multitude of reasons, only a handful of FPOs trade on commodity exchange platforms; on a three-year average, only 45 FPOs have traded on NCDEX. Lack of awareness and capacity, limited access to finance, including credit and working capital, and inefficient post-harvest management practices have compounded this problem.

This perspective explores the roadblocks to the scaling up of futures trading for FPOs and provides a solution roadmap that can be orchestrated by facilitating collaboration between multiple stakeholders working in the ecosystem. It also explores and draws lessons from historical cases where such collaborations have worked well.

The proposed orchestrated solution requires nonprofit organisations, social enterprises including non-banking financial companies (NBFCs), and storage solution providers to come together to enable mature FPOs to address the key challenges that prevent them from effectively exploring futures trading. The perspective recommends that nonprofits build the awareness and leadership of FPOs, NBFCs contribute to building business acumen and financial awareness, while also providing low-cost credit, and storage solution providers support FPOs with logistics and technical support to meet quality standards. It is only with a collaborative effort across multiple organisations that FPOs can grow their business, and actively access futures markets to ensure efficient price discovery and price risk management, and thereby lead to increased income for farmers.

Author: Aparna Bhaumik

Technical Review: Debaranjan Pujahari

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