Strengthening Farmer Links with Commodity Exchanges

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					 Strengthening Farmer Links with
 Commodity Exchanges
                                     Sanjay Kaul, CEO & Director,
             NCDEX Institute of Commodity Markets & Research (NICR)

September 20, 2007
                           Agenda


    Present Scenario

    Benefit to Farmers

    NCDEX Initiatives

    Reforms Required




2
    NCDEX Institute of Commodity Markets & Research (NICR)
          Issues for Indian Farmers

    Traditional cropping pattern

    Income variation due to price instability
       asymmetric price information

    Dependency on monsoon

    Irregular flow of credit
       reliance on money lender, arathiya

    Lack of warehousing infrastructure

    Absence of grading and assaying facilities

    Restrictive marketing environment
       APMC laws
       Absence of common economic market


3
    NCDEX Institute of Commodity Markets & Research (NICR)
    Limitations of the Spot Market
    Fragmented markets
       Bundled processes

    Long chain of intermediaries
       Price realization low




    Cumbersome licensing procedures

    Cascading complex tax structure

    Infrastructure gaps


4
    NCDEX Institute of Commodity Markets & Research (NICR)
                           Agenda


    Present Scenario

    Benefit to Farmers

    NCDEX Initiatives

    Reforms Required




5
    NCDEX Institute of Commodity Markets & Research (NICR)
          Role of the Futures Market


    Risk transfer platform
       from actual users to traders/speculators
       helps farmer concentrate on core activity, i.e. production



    Price discovery and long term price signals
       enables farmers to decide cropping pattern on the basis of
       futures prices




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    NCDEX Institute of Commodity Markets & Research (NICR)
                 Role of the Exchange
    Price discovery

    Neutrality
       conflict of interest avoided


    Transparent, real time pan-geographic price
    dissemination
       benchmark reference price
       liquidity to participants


    Risk mitigation and management
       robust clearing and settlement systems
       rigorous financial standards and market


7
    NCDEX Institute of Commodity Markets & Research (NICR)
                           Agenda


    Present Scenario

    Benefits to Farmers

    NCDEX Initiatives

    Reforms Required




8
    NCDEX Institute of Commodity Markets & Research (NICR)
Cropping Pattern based on Futures Prices

    Present scenario
       tendency to choose crops based on spot prices
       leads to cobweb syndrome of overproduction, lower prices
       and income
       subsequent shift to other crops yielding better returns



    Use of futures markets
       present syndrome can be avoided if futures prices are
       used for taking cropping decisions
       subsequent hedge on the commodity exchange to lock in
       the price




9
    NCDEX Institute of Commodity Markets & Research (NICR)
     NCDEX Approach to Price Knowledge

      Price dissemination
         Visual: TV channels
         Print: Price quotes in newspapers and journals, especially
         vernacular
         News agencies
         Kisan call centres


      Installation of 380 price ticker boards
         Criteria
           • Vicinity of farmer’s domain
           • Rural areas of high footfalls
         Locations
           •   Mandis, warehouses, rural bank branches, agriculture-based
               organizations, etc.


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      NCDEX Institute of Commodity Markets & Research (NICR)
                   AC Nielson Study

     NCDEX - common source of information for 70% of
     farmers in the narrow area sample (NAS)

     Over a quarter found it the most preferred source

     Farmers in the NAS received a higher range of prices
     compared with those in the wide area sample (WAS)

     Around 80% of the NAS farmers said that they
     benefited from NCDEX while only 12% said so in case of
     WAS.




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     NCDEX Institute of Commodity Markets & Research (NICR)
                            NCDEX
       An agri based commodity exchange

                Share of segments in total volumes
                            of NCDEX
                    1%
             12%



                                              Agriculture
                                              Bullion
                                              Others




                            87%




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     NCDEX Institute of Commodity Markets & Research (NICR)
                       Market Share

                 Market Share for Futures Trading
                   in Agricultural Commodities
                        April - August 2007

                               8%         9%
                          2%



                                                        MCX
                                                        NCDEX
                                                        NMCE
                                                        NBOT



      Total Volume:
      394800 crores                 81%




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     NCDEX Institute of Commodity Markets & Research (NICR)
      NCDEX Initiatives: Spot price polling

      Mandi                                             Exchange Website
                                                        Exchange Website
      Mandi

     Traders
     Traders
                                                        Trading Terminals
                                                        Trading Terminals
                                Statistical
                                Statistical
Mill owners
Mill owners
                                Cleansing               Near real-time
                                Cleansing              nationwide prices
 Refiner Polled Prices              of
                                     of
                                 raw data
                                  raw data           Info-vendor terminals
                                                     Info-vendor terminals
 Commission
 Commission
   Agents
   Agents

     Manufacturers
     Manufacturers                                Media– electronic & print
                                                  Media– electronic & print

         Polling done independently by CMIE & Crisil MW
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         NCDEX Institute of Commodity Markets & Research (NICR)
                   Weather Stations
     200 weather stations across the country installed by
     associate company, NCMSL.

     Covers 15 states and 81 districts

     Tracks data in locations which are generally not covered
     by IMD
        Regular and timely weather data through a network of
        decentralized weather stations
        Stations being set up in relevant crop areas


     Uncertain monsoons no longer a cause for distress




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     NCDEX Institute of Commodity Markets & Research (NICR)
     Development of Backward Linkages

     Use of certification agencies/assayers

     Reputed assaying agencies for quality certification

     560 delivery centres

     Development of standards and grades
        Working with institutions such as IARI and CIRCOT
          •   to develop objective system of grades and standards

     Tie ups to promote warehousing infrastructure and
     warehouse receipt financing.

     The challenge – to increase this capacity to provide
     better access to farmers

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     NCDEX Institute of Commodity Markets & Research (NICR)
     NCDEX e-Mandi: Spot Market Foray
     Present Conundrum

                                                     Price Tickers in village enables
       Price Information                                one to see spot prices in
                                                   several mandis and futures prices


                                                           NCDEX terminals
        Decision to sell                          used to sell produce to participants
                                  NCDEX                    in entire country

                                Processes
                                                    Brought to NCDEX warehouse
       Physical Handling                                      after sale



                                                          Payment received
      Financial Settlement                                 once goods are
                                                              certified




         All processes                                   Unbundled
       happen in mandi                                    process

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         NCDEX Institute of Commodity Markets & Research (NICR)
                            Agenda


     Present Scenario

     Role of Futures Market

     NCDEX Initiatives

     Reforms Required




18
     NCDEX Institute of Commodity Markets & Research (NICR)
       Issues in Farmer Participation

     Liquidity and price risk

     Minimum lot size

     Demat requirements

     Margin requirements

     Delivery requirements

     Stringent rules and heavy penalties

     Infrastructure costs


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     NCDEX Institute of Commodity Markets & Research (NICR)
               Aggregation Model – Pre Harvest


                         Price Hedge
                         Price Hedge
     MSF1*

                                                 Comex’s
                                                                       Banks
                                                                        Banks
                                                 Comex’s
                                                                     Insurance
                                                                      Insurance
     MSF2                       Aggregators                           NCDEX
                                                                      NCDEX
                                                                      NCMSL
                                                                      NCMSL
                                                  Weather
                                                  Weather
                                             Derivatives/Insur
                                             Derivatives/Insur
      MSFn                                      ance /Crop
                                                ance /Crop
                                                 Insurance
                                                 Insurance
                           Volume
                           Volume
     * MSF: Marginal       Hedge
                            Hedge
     & Small farmers

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            NCDEX Institute of Commodity Markets & Research (NICR)
      Aggregation Model – Post Harvest



     MSF1*               A
                         A                                    Sell
                                                              Sell
                         G
                         G                                  forward
                                                            forward
                         G
                         G
                         R
                         R                                   Storage
                                                             Storage
                         E
                         E
                                        NCDEX                facility
                                                              facility
     MSF2                G
                         G              NCMSL
                         A
                         A
                                                            Assaying &
                                                            Assaying &
                         T
                         T               Banks               grading
                                                              grading
                         O
                         O
                         R
                         R
     MSFn
                         S
                         S                                   Commodity
                                                              Commodity
                                                            backed bank
                                                             backed bank
                                                            finance (WR)
                                                            finance (WR)
 * MSF: Marginal &
   Small farmers



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         NCDEX Institute of Commodity Markets & Research (NICR)
       How to make the Model work?

     Need of an aggregator
        Self Help Groups
        Non Governmental Organizations
        Co-operatives
        Banks


     Awareness Programmes
        650 awareness programmes already conducted
        Ticker boards
        Pilot projects




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     NCDEX Institute of Commodity Markets & Research (NICR)
       Agri Financing against Produce

     Warehousing (Regulation and Development) Act 2007 is
     a landmark legislation.

     Following sequential steps envisaged:
        Large network of accredited warehouses;
        Collateral manager certifies quality and quantity of
        produce;
        Farmers deposit produce in such warehouses;
        Hedge produce in commexes through
        aggregators/depositories;
        Warehouse issues Warehouse Receipt (WR)
        WR lodged with bank;
        Bank mitigates value at risk through collateral manager
        and commexes;
        Bank provides credit to farmers.


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     NCDEX Institute of Commodity Markets & Research (NICR)
              Warehouse receipt based
               Commodity Financing


                                       Price Risk                         Bank
                                                                          Bank
       Farmer
       Farmer




                                                          Value at risk
                           Commodity
                           Commodity
                            Exchange
                            Exchange




     Warehouse
     Warehouse                                      Collateral Company
                                                    Collateral Company



                              Depositories

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      NCDEX Institute of Commodity Markets & Research (NICR)
                    Need for Options

     Limitation of Futures
        Future price is locked.
        Thus, farmer cannot take advantage of favourable price
        movement in spot market.



     Advantage of Options
        Farmer has the right to sell but not the obligation.
        Thus, in case of favourable price movement in spot
        market, he can decide against exercising the option.
        The only loss – option premium.
        Options can be a substitute of MSP.




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     NCDEX Institute of Commodity Markets & Research (NICR)
                     Other Reforms


     Greater autonomy to the FMC

     Permission to banks to participate in commodity
     exchanges

     Weather derivatives

     Electronic pan-geographic spot exchange




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     NCDEX Institute of Commodity Markets & Research (NICR)
                              Our Shareholders
                     Institution        Share    Domain Expertise


                     NABARD               15 %   Apex bank for agricultural lending


                     NSE                  15 %   Largest stock exchange in India. Highest volume in single stock
                                                 futures in world.


                     LIC                  15 %   Largest life insurance company in India


                     CRISIL                12%   India’s first & largest credit rating agency. Now a Standard & Poor
                                                 company

                     IFFCO                 12%   Largest farmer cooperative with affiliation of 36,000 cooperatives



                     PNB                    8%   Large public sector bank with strong rural reach specially in North
                                                 India


                     Canara Bank            8%   Large public sector bank with strong rural reach specially in South
                                                 India

                     Goldman Sachs          7%   Global Expertise in commodity markets



                     Intercontinental       8%   6th largest commodity futures exchange in the world
                     Exchange*




 *Acquired from ICICI Bank

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        NCDEX Institute of Commodity Markets & Research (NICR)
                       Exchange Profile
                  Number       Remarks
     Products     54           41 agro, 2 bullion, 3 polymers, 2
                               energy and 6 metals
     Members      890          Spread across India
     Terminals    18,500       Accessible from 655 centres
     Delivery     560          Storage    capacity    of   1    million
     Centres                   tonnes
     Depository 55
     Participants
     Clearing     12
     Banks
     Weather      200          By associate company NCMSL
     Stations

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       NCDEX Institute of Commodity Markets & Research (NICR)
                        Thank You




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     NCDEX Institute of Commodity Markets & Research (NICR)