An opportunity for farmers to minimise risks

The gradual evolution of commodity market in the developed countries has been of great significance for our country's economic prosperity. For instance in the commodity market there are so many varieties of products including agricultural products like rice, wheat, cattle etc; energy products like coal, petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There are some delicate but perishable commodities such as sugar, cocoa, and coffee that cannot be put in stock for long time. The commodity futures' exchanges were evolved in 1800 with the sole objective of meeting the demand of exchangeable contracts for trading agricultural commodities. Nowadays a wide range of agricultural commodities, energy products, delicate items and metals can be sold under standardised contracts on exchanges prevailing across the globe. Commodities have gained importance with the development of commodity futures' indices along with the mobilisation of more resources in the commodity market. Agricultural commodity futures are market-based instruments for managing risks and they help in orderly establishment of efficient agricultural markets. Future markets are used to hedge commodity price-risks. They also serve as a low cost, highly efficient and transparent mechanism for discovering prices in the future by providing a forum for exchanging information about supply and demand conditions. The hedging and price discovery functions of future markets promote more efficient production, storage, marketing and agro-processing operations and help improve overall agricultural marketing performance. What is the significance of a commodity exchange? A commodity exchange is an integral segment for an agriculture-based economy like that of Bangladesh. Most of the people in our country are involved in the agriculture sector. Even though our capacity has increased over the years, the farmers are still very poor. One of the extreme reasons for this poverty is our defective pricing system in the local farmers' market. Poor assortment, lack of pricing information and poor infrastructure have created syndicates and middlemen in the agriculture market. They are making a huge amount of money by manipulating the market and depriving farmers and consumers of their rights. A well-functioning commodities' future exchange market will eliminate the problems, dismantling the syndicates and middlemen. It will bring about coordination among the market participants through a regulated and compact trading system. Moreover, the traditional view of the small farmer as someone exogenous to the market system is no longer accepted. On the contrary there is growing recognition that he too is an active participant in the market process not merely as a buyer of commodities but also as a seller. Basically, there is an attempt to find whether there is price bias in favour of any particular class of farmers who come to the market to sell their produce and whether these price advantagesdisadvantages are specific to particular crops or choice of market outlets. The study finds no conclusive evidence to support the view that small farmers are paid less for their produce than those offered to big farmers or that there is any conscious and deliberate attempts at price discrimination against them in the commodity market. How commodity market serves farmers: To realise the benefits from such initiatives, the bulk of farmers, who are small and marginal, require access to finance immediately after harvest, though they possess limited collateral to obtain bank funding. Physical collateral such as land and agricultural implements are of little value in mitigating a financier's risks as the collateral is difficult to enforce and has a low re-sale value. However, commodity futures' markets allow commercial producers and commercial consumers to offset the risk of adverse future price movements in the commodities that they are selling or buying. (a) Price Discovery: Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, government policies, market dynamics, hopes and fears, the buyers and the sellers conduct trading at futures' exchanges. This transforms into continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal. (b) Benefit for farmers agriculturists: Price instability has a direct bearing on farmers in the absence of futures' market. There would be no need to have large reserves to cover against unfavourable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins, enabling more returns on produce, storing more and being more active in the market. (c) Information Accessibility: The price information accessible to the farmers determines the extent to which tradersprocessors increase price. Since one of the objectives of futures' exchange market is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time gap between planning and production, the market-determined price information, disseminated by futures exchanges, would be crucial for their production decisions. (d) To improve product quality: The existence of warehouses for facilitating delivery with grading facilities, along with other related benefits, provides a very strong reason to upgrade and enhance the quality of the commodity to a grade that is acceptable by the exchange. It ensures uniform standardisation of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade. (e) To develop farmer's life-style: Predominantly, Bangladeshi farmers are poor due to exploitation by syndicates and local middlemen. A commodity futures' exchange will ensure that farmers are getting market prices for their products. If we can increase their purchasing power, it will improve their living standards. Besides that, the stage is being set for farmers to get the benefits of the commodity futures' market and this is not a foe but a friend of the farmers. The authorities concerned must take suitable steps towards these ends. At the same time, a commodity exchange is needed to encourage farmers and their cooperatives and other agencies to use the futures' markets for risk management. Thus, a commodity exchange is long overdue for an agricultural-based economy like that of Bangladesh. It is the best medicine to dismantle the grip of syndicates on our farmers and consumers as well. The writer is a stock market analyst and a professional trainer at BRAC. He can be reached at email: toufique2010@gmail.com