Commodity exchange can help farmers get fair prices

Although the share of agriculture sector to the country's Gross Domestic Product (GDP) has decreased over time, as compared to that of service and industry sectors, it remains the largest employer in the country by far. Available statistics show that over 47 per cent of the population of Bangladesh is directly employed in agriculture and around 70 per cent depends on agriculture in one form or another for their livelihood.
Agriculture is the key source of food for people through crops, livestock, fisheries and the source of raw materials for industry. The sector offers linkages of the country with the rural economy and plays a fundamental role in reducing poverty. The sector directly contributes to the development of the agro-industrial sector, input production and other related services.
For achieving the goals of Millennium Development Goals (MDG) and post-MDG, and turning Bangladesh into a middle-income country by 2021, the GDP has to grow at a minimum rate of 7.0 per cent per year and agriculture should contribute more. To ensure due contribution of the sector, it is crucial to handle the major challenges in the country's agriculture.
Inadequate access to finance and absence of a formal market for agricultural products are among crucial challenges of the agriculture sector. For improving financing to the sector and rural economy, the Bangladesh Bank (BB) has undertaken some remarkable inclusive financial measures in recent time that came up with positive changes. Total disbursements of agricultural credit are on a steadily rising trend since 2009. Agricultural credit at concessional interest rate is being extended by banks to farmers. Banks get interest subsidy from the government through the BB against these loans.
To support sharecropper farmers, the BB launched a refinance scheme for landless sharecroppers. Moreover, donor-assisted crop diversification project is extending credit for growing higher-value crops in the country's poverty- ridden region. Apart from this, state-owned banks are extending loans to the sharecroppers.
The BB exercises close monitoring on the activities and credit volumes in the agricultural sector. In spite of some notable initiatives by the BB and some remarkable changes, agriculture financing is yet to be recognised as commercial investment to the country's banks in general. To promote effective financing and to ensure greater contribution of agriculture sector, some direct measures are needed by the fiscal policy authority to create a mechanism of marketing and price discovery in the formal set-up.
Price instability of agricultural commodities and absence of effective agricultural marketing system have always been among the main sources of challenges for Bangladesh. In the primary sector, farmers are adversely affected due to seasonal variation in prices and at the same time the government's agricultural price support programme face increased pressure on its budget.
Moreover, absence of efficient agricultural commodity market and exposure to price risks affect a country's earnings from exports, revenues of the government, and incomes of enterprises. In a country like Bangladesh, performance of the markets for agricultural commodities is often hampered by poor infrastructure, inadequate information, high transaction cost, and price volatility. In response to price instability and inefficient marketing, there are scopes to develop agricultural commodity markets and introduce usable instruments.
In a number of economies, organised agricultural marketing system known as agricultural commodity exchanges have efficiently linked farmers and agricultural producers with domestic and international consumers through establishing effective value chain, reducing transaction costs, and handling price volatility. The basic purpose of a commodity exchange is to discover the price at which willing buyers and willing sellers are prepared to trade. The agricultural commodity market of Bangladesh is fragmented and dominated by layers of middlemen. It is featured by a large number of middlemen due to absence of suitable intermediaries. The market has been facing the challenges of commercialising smallholders and integrating them within new or existing supply chains.
Agricultural commodity exchanges are organised set-ups where multiple buyers and sellers trade on commodity-linked contracts on the basis of certain laid-down rules and procedures. The commodity transactions or contracts include spot or cash commodity market, exchange traded standardised derivatives and Over the Counter (OTC) derivatives. Spot is the basic transaction of a commodity exchange. Generally, an exchange has a sales hall where traders/manufacturers examine samples and then prices are set through auction. The spot prices that are set or collected by an exchange are being disseminated through its website, local centres, news agencies, newspapers etc.
Some exchanges offer trading and clearing services in different locations through their local centres. Commodity trading through derivative allows buyers and sellers to hedge against price changes that may adversely affect their business to make an informed decision to increase profits or cut losses. There are large commodity exchanges in several developed and developing countries, which trade both spot and derivatives and are performing well. In recent years, some exchanges in neighbouring countries and in Africa brought remarkable positive benefits.  
It has been observed that a well-functioning warehouse receipts system produces multiple benefits to the farmers. Currently, there is hardly any scope for farmers to get credit facilities for availing the benefits of price rise of their produces in the country. For nationwide commercial operation of the kind of product, regulatory support and a separate arrangement for collateral management, certification and grading are preconditions. It also requires good warehousing facilities. An effective commodity exchange can smoothly ensure warehouse receipt financing services to small agricultural
produces.
For establishing a commodity exchange, we have already got some basic infrastructures. Creation of an effective marketing information system is a precondition for success of commodity exchanges and agricultural marketing systems. For designing and implementing an effective management information system, the Ministry of Agriculture of Bangladesh may create a network with tele-centre operators. Setting up of tele-centres at Union Parishad buildings has already opened a new avenue in this connection. It can be used as local hub for offering both price information and clearing and trading services for a national level agricultural commodity exchange.
For price risk management, developing countries like Bangladesh need not set up a domestic future exchange for managing price risk. An exchange should rather focus on facilitating trade in the spot commodity markets. Existing international exchanges or OTC market may provide solutions to handle global commodity price movements by importers and exporters of the country. In this connection, the initiative of the BB for hedging commodity prices may be helpful to the traders if based on appropriate information and trend analyses.
Simply administrative decision on setting up of commodity exchanges will not bring success. For sound operation of commodity exchange, the government has to play roles in the form of offering policy and regulations that uphold the transparency and integrity of commodity markets.  The government also needs to provide security to the exchange users by a proper policing role. For success, some crucial steps must complement the initiative of setting up of a commodity exchange that include setting up of government warehouses or licensing of private warehouses, local level service points with the existing tele-centre networks and expansion of the provision of finance against warehouse receipt.
In connection with promoting agricultural development at this moment, the first and foremost recommendation for the upcoming budget is an increase in allocation. Subsidy has become a part and parcel of ensuring increased agricultural production.
This is important for keeping cost of production affordable for farmers. Input prices have increased pushing up the overall cost of production of the agriculture sector which is not matched by the selling prices of agricultural products. In such a circumstance, the most crucial task seems to be a policy initiative to develop an agricultural commodity exchange to promote marketing and commercialisation of agriculture in the country by allocating adequate funds in the budget.
The writer is Director (Training), Bangladesh Institute of Bank Management (BIBM).
 ahsan@bibm.org.bd