For the Indian farmer, a revolution in marketing his produce may be around the corner. With the National Spot Exchange as well as National Commodity and Derivative Exchange likely to be launched in the coming months, he may no longer be dependent on the Agriculture Produce Marketing Committees (APMCs) to find buyers for his crops. The exchanges promise to reduce the intermediaries between the farmer and the end consumer, and help farmers find the best prices.

Under the present system, the APMC serves as the primary market-maker between the farmers and traders. Prices at the 7500-or-so regulated mandis are dependent upon local demand and supply factors, and farmers have no choice but to accept the price offered by the traders through the APMC. There is no knowledge of commodity prices prevailing elsewhere. Also, at APMCs, only licensed traders may purchase produce, and private buyers, such as the corporate houses now entering food retail in a big way, are kept out. "APMCs encourage monopolies. In the present system, there are a large number of sellers and few buyers, so the buyers dictate the price. It should be the other way round," explains Dr M S Jairath, Director of National Institute of Agricultural Marketing at Jaipur.

The National Spot Exchange is a joint venture of Financial Technologies (India) Ltd, Multi Commodity Exchange, and National Agricultural Cooperative Marketing Federation of India Limited. NCDEX is an online multi-commodity exchange promoted by ICICI Bank, Life Insurance Corporation of India, National Bank for Agriculture and Rural Development and National Stock Exchange of Indian Limited. NCDEX is also planning to launch a spot exchange soon.
Traders too face some risks in the current system, although they often make huge profits by controlling prices. They have to carry the risk of defaults in the marketing chain, and also have no dispute redress system to turn to when complexities arise. These difficulties too could be addressed by the electronic trading systems.

"We envision that after the launch of National Spot Exchange, the canvas of commodity trading would be complete, with India having both the spot and future markets available on electronic platforms with national reach," says Anjani Sinha, Managing Director and CEO. The NSX is initially targeting Gujarat, Maharashtra and Rajasthan, 10 centres will be launched in these states. "The Spot Exchange will provide a platform where farmers can sell at the best possible rate, and end users can buy at the most competitive rate. The exchange will also provide other services - quality certification, storage of goods, and other customised value-added services."

How the exchange will work

Sinha explains how the system will actually work, "The NSE will have multiple contracts available on the system. For instance, you can have multiple contracts for tur, and these can be for delivery to different locations - Jalna, Jalgaon, Latur and so on. Farmers in Latur will sell in the 'Latur delivery' contract, deliver to the Latur warehouse of the spot exchange, and the buyers could be mills located in Jalgaon, Jalna, Nagpur, or anywhere else. Trading will happen through the electronic platform, which would be available with brokers, sub-brokers, franchisees etc. Farmers can trade through the members of the exchange, or themselves become members directly.

The pricing will be ex-warehouse basis. The buyer knows that he is buying tur at ex-Latur basis and has to incur the transportation cost. The entire nation will become a common Indian market. Whosoever will offer the highest price will get the commodity. Similarly, whichever farmer offers the lowest price, his commodity will be sold first. We will offer a platform that will be used by both buyers and sellers spread across the country."

The spread of choices will be beneficial to both buyers and sellers. A buyer will be able to look at different prices prevalent in the country, and then decide on a contract. The seller will also have a stronger hand, as he will be able to see different bidders for his wares than simply the nearest one of the APMC. Traders too will benefit; not only will they be able to take loans from banks based on receipts from spot exchange, there won't be any payment default since the Spot Exchange would be providing counter guarantees on the transactions.

A new framework

The key advantage that the Spot Exchange offers to farmers is a transparent price at the time of sale of their produce, something that is not available to them today at the mandis. If the new electronic trading systems can live up to this promise, a lot could change.

But there are hurdles that remain. A major one to be overcome is the APMC Act, which has kept private players out of agriculture purchase markets so far. "We want an amendment to the Act which would give recognition to spot exchanges. Then we should be allowed two days after the deal to make a payment. In the current Act, the buyer is supposed to make the payment immediately. We also want to be regulated by State Agricultural Marketing Board, which is the apex body. We don't want to be regulated by the APMCs," says says Mukund S Annigeri, Head (Spot Market), National Commodity and Derivative Exchange Limited (NCDEX). A few states have taken steps to revise their APMC Acts, based on the Centre's model legislation passed in 2003.

Another obstacle to be overcome is the unfamiliarity of farmers with this new direction to agriculture marketing. Some farmers' organisations have hailed the move to electronic exchanges, but the real test will lie in getting individual farmers to bring their produce to this route for marketing. Lack of familiarity can completely thwart the potential benefit, as witnessed with derivatives trading, where despite theoretically being able to trade on the derivatives market many producers have stayed away because they don't understand it.

"A great deal of work will need to be done to familiarise farmers with the modalities and the advantages of the spot exchange," says Sharad Joshi, Rajya Sabha MP from Maharashtra and president of Shetkari Sangathana, a farmer's organization in the state that has led demands for better prices for farm products. "Once the farmers see the advantages they will take recourse to the new system. We support the initiative and feel that it has the potential to become a success if some problems like network and APMCs Act are resolved," he adds.

"We believe that word-of-mouth publicity will play a major role in the success of the project. Spot exchanges and APMCs will co-exist because some farmers will like to sell only to their familiar local trader, and it is only when they see other farmers making more profits or getting a better price from the exchanges that they are likely to change. We would be happy if we can get 30 per cent to 40 per cent of the trading that is happening in the market today in the next five to six years," says Annigeri.

Sinha adds, "If we are able to show results in some areas [then it will take root]. If we are able to prove that the farmer's price realisation has increased because of the exchange without increasing the prices that consumers pay, and there has been reduction in the intermediaries cost and there has been improvement in marketing efficiency ... if we are able to show all this in 10 to 20 centres, then the entire country will realise the advantages of this option, and then the process of replicating this model in the entire country will be faster."