With agricultural commodities such as mustard and soyabean currently ruling below the Minimum Support Price (MSP), the government should look at supporting the Farmer Producer Organisations (FPOs) to take up ‘advance put option’ trade on the commodity exchanges to protect them from fall in prices and expand the current MSP ambit, according to Arun Raste, managing director and CEO, NCDEX.
The commodity bourse National Commodity and Derivatives Exchange (NCDEX) is currently in talks with Nabard and Centre to provide FPOs loans for their participation in ‘put’ options, he added.
Under the ‘option in goods’ trade, FPOs lock in the price by paying a small premium on an average 4-5% prior to the sowing. If the prices fall below the locked-in price, they can deliver the commodity on the exchange platform and realise their money.
If the spot or market prices are higher than the locked-in prices, farmers can forgo the premium paid and sell their produce in the spot market.
The method of trade covers the downside risk in the prices as well as FPOs to retain upside benefits in case prices move up after the lock-in.
Sources said Andhra Pradesh is expected to subsidise FPOs premium for taking part in put options soon.
In July 2020, following the nod from the market regulator Securities and Exchange Board of India (SEBI), NCDEX became the first commodity bourse to launch options in goods contracts in agri-derivatives.
In November, 2020 to encourage FPOs to take benefit of trading in ‘options in goods’, NCDEX had announced to bear a premium for trading up to 5,000 tonne of chana and mustard seeds as part of its familiarisation initiative. Subsequently soyabean, guar gum refined splints and guar seed were added.
“In the method of trade, farmers would not have to sell their commodities below MSP and more commodities can be covered under price support system,” Raste said. At present, the MSP for 22-23 commodities are declared annually by the government.
However, he said there should be a mechanism to support or provide subsidy for upfront payment of premium for covering options for the FPOs so that more farmers could take the benefit of this trading option.
“As the premium is known in advance in option trade, FPOs can factor it in their cost of cultivation”, an official said. He said it would help FPOs and farmers in calculating their return and taking an informed decision while selecting new crops for sowing.
Since the launch, 41 FPOs representing more than 0.19 million farmers have participated in a program and locked-in price by buying ‘put option’ on behalf of its farmer members. Currently, 170 FPOs are actively taking part in derivatives trade on NCDEX of the 500 who have registered with it.
Meanwhile, with the fall in prices of mustard seeds, which are currently ruling around Rs 4,900/quintal against the MSP of Rs 5,450/quintal due to bumper output, FPOs have revived their demand for resumption of futures trade in mustard on the commodity exchanges. Current mustard mandi prices are the lowest in two years.