The desire to manage or eliminate risk is one of the most entrenched traits of humanity. This is underpinned by the necessity of security against the possibility of ruin that provides the impetus for our evolution as a species and development of cultural superstructure. The earliest evidence of managing price risk by trading commodities separated in time is from Sumer - at around 4000 BC, merchants were monitoring commitments made by others to deliver goods at specified future dates using clay tablets with cuneiform markings! These are probably the first forward contracts in human history. There is even a hadith where the Prophet bought a camel (Sahih al-Bukhari 2097) in a manner that fit a forward contract!
Even though Bangladesh is a country with a rich and varied economic history, it is regrettable that institutionalisation of commodity trading is yet to become a reality, an avenue in which our neighbors are currently eons ahead. Although over-the-counter commodity forward contracts are known (used for example by mango traders and farmers in Rajshahi region to manage price risk), no exchange exists to cater to the need of farmers who have limited options to manage their risks. The consequences are apparent: the appropriation of most of the profits by crooked middlemen, massive wastage, and recurrent price volatility at retail level every year.
The examples of the type of market that I am taking about are all abound in Africa and South Asia. PMEX of Pakistan, MEX Nepal Ltd of Nepal, GCX of Ghana, and KACE of Kenya are all success stories in national efforts to make the farmers prosperous. The benefits of such markets - apart from resolving the two challenges mentioned earlier - are the standardisation of quality and reputation building and networking opportunity for rural farmers. These benefits can even spill into the financing mechanism, by making it easier for financial institutions to finance the working capital needs of farmers and investors by mandating disclosure and accumulation of relevant information about traders active in the market and help deal with the problem of information asymmetry that prevents growth.
Since Bangladesh depends on imports of sugar, cotton, and wheat, allowing local importers to hedge their risks by taking services from exporting countries' futures markets could have been of good use. However, there is major barriers from regulatory side over this policy. The hesitation to open up the domestic market to use services of foreign futures exchanges can be attributed to concerns about money laundering and possibility of sudden foreign currency drain due to liquidation of massive unhedged positions at large losses. However, developing local commodities trading markets should not suffer from indecisions regarding the former, since there is no balance of payments and money laundering issues going beyond the ordinary. Moreover, the recent boom in mobile financial services industry has opened up an entirely new avenue for making such an idea accessible to the common farmer.
I intend to propose some measures that can make the concept work and be popular in the context of Bangladesh. Here most farmers are not technologically proficient and movement from village to cities is still not smooth due to the enormous pressure on decaying infrastructure. However, with the advent of mobile telecom services and the profusion of technologies that rely on this platform at record pace in this part of the world, we have the key to a very different kind of trading platform, compared to the type we are familiar with globally. Most people in rural areas are now familiar with mobile financial services (MFS) like bKash, Nagad and Rocket. The app-based delivery of financial services can be extended to include commodity trading as well. Since traded contracts in exchanges are standardised in their general form, virtual contracting over cellphones that comply with the requirements of making them legally binding are enough to engender trust in the market.
Once the risk of running into frauds in such platforms are within the purview of the courts, the participants can rely on the market to deal with issues that actually matters for the sustainability of their livelihoods. Tagging such platforms with MFS providers can further allow banks and other FIs to tap into the market for financing smallholders in their trading businesses directly. The accumulation of information in such platforms can help better design products and services in much the same way Google and Facebook are using their data to better target their audiences (issues of morality or privacy aside, as these are not relevant in our case when people will be volunteering to participate in this market knowing the issues at stake). Given the new opportunities to avoid current costly practices that reduces the economic value created by the farmers, they will be able to post a part of the savings from access to this market as their equity to participate, while FIs can help them with financing their mark-to-market margins with innovative debt products. The tagging with MFs or banks can further enhance credit risk by introducing guaranteed settlement clauses standard much like L/C settlement in foreign trade.
By Guaranteed Settlement, I mean that the buyers (long position in futures) should have their banks guaranteeing their counterparties' their due payment on condition of proper delivery. The bank will pay the seller from its own money as soon as the buyers' representative acknowledges receipt of the goods at the designated warehouses (sponsored by the exchange itself) at good condition and in specified measures in the app. They will then either set off the payment with their client's money in the account maintained with them, or by creating liability in their name under preset conditions. This will build confidence in the farmer (seller) side, who are more vulnerable to and need to be protected from credit risk should the buyer default.
Knowledge about how corporate agro-commodity buyers such as Habiganj Agro Limited (of Pran-RFL Group) or ACI Limited (seeds business, or its privately held subsidiary, ACI Agrolinks Limited) buys from farmers directly, as well as traditional practices around forward buying of seasonal produce can also help in better structuring the standardised contract format and settlement practices to fit with local conditions. It must be noted that to enhance trust and prevent the possibility of swindles, only physical delivery based contracts should be permitted, which would prevent speculators to run the show and drive up volatility in the market with their gambling at the expense of real farmers. If these recommendations are put into practice, we might expect the ushering in of a new era of innovation in agro-commodities supply chain development where the farmer will be the principal beneficiary and the chief destination of the economic value created by their effort.
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The writer is currently working in the treasury department of an FMCG company. He can be reached at [email protected]
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