Bringing Farmers on Commodity Exchanges

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					Bringing Farmers on Commodity Exchanges:
            NCDEX Experience



July 14, 2005
    Role of commodity exchanges

       Efficient price discovery
           Liquid contracts
       Price dissemination to ensure that farmers can view
        them
       Provision of delivery platform
       Warehousing logistics
       Quality assurance
       Developing grades and standards




2
    Farmers Interface: Pre-harvest




3
    Pre-harvest Concerns

       Choice of crop
         Cobweb syndrome
         Influence of MSP
         Grades and standards
       Price risk
       Volumetric risk
           Yield dependent on monsoons
       Credit availability limited
           Crop failure
                Default on crop loans



4
     ‘Arathiya’ and the exchanges

        Traditional integrated role provided by the arathiya
            Price
            Buyback
            Insurance
            Liquidity
            Flexible turn around time




    ..Need to replicate an efficient system bringing in
    exchanges, insurance companies, banks and aggregators

5
    Moving to an integrated approach
                         Price
                        hedging
                        NCDEX



      Aggregator        Farmers          Insurance




                          Bank
                         Finance

       Buffering yourself from nature’s vicissitudes
6
       Architecture for Price Discovery
                            620            Spot Price
                           members                              75,000
              6616                           polling
                                                                 daily
          terminals                                             trades

        490
                                                                         168,000
       centres
                                                                          daily
                                                                         orders

        37
                                                                         80% agri
    commodities
                                                                          volume

                  325                                    Monthly
               Awareness          120 delivery          Deliveries of
              Programmes            centres             40-45,000 t

7
        Price dissemination: Choose your crop

                                Radio
            TV Channels                       E-chaupals
                                                N-logue


    News agencies
                                                           PCOs


Newspapers &
                                                         Kisan call
     journals
                                                          centres

                          IFFCO, HAFED
           AGMARKNET                     Bank branches
                           Warehouses


8
     Subjectivity in grading
                                    Graders====
       sf     f      f      g      fg      sf      f      sf      sf     sf


      f+      f      f      c      fg      f      fg      f       f       f
Samples
       sf     sf     sf     g      fg      sf     sf      sf      sf      f


       sf     sf     sf     c       f      f       f     fg      fg      sf


          f   f     fg      g       f      f      fg      f      fg       f



    g-good, fg-fully good, f-fine, sf-super fine, c-choice or extra super fine
9
     Grading and Standards: Improve your
     prospects


             IARI
                                                  Quality
     Grading in rice, wheat
                                                  standards
             maize

                                  CIRCOT
                              Grading in cotton




10
     Farmers interface: Post-harvest




11
     Post-harvest conundrums
        When to sell the commodity?
            Spot market or futures market
        Where to sell?
            The closest mandi or the one offering best price?
        If selling in futures market, then
          How to tide over financial requirements in interim
           period?
          Warehousing facilities
        How to access the commodity futures market?



     ..How do we improve his holding power?
12
     Post Harvest Scenario
         Farmer sees NCDEX spot and futures prices

                                  Sells futures On NCDEX

Approaches mandi of choice
                                       Lodges goods
                                in NCDEX/NCMSL warehouse

                90
           WAREHOUSES                 Goods assayed
                                  by approved assayers
            Working with
             all leading           Warehouse Receipt
              assayers
                                     in electronic form
          NCMSL
          arranges               Bank finance against WR
           credit
13
     About NCDEX




14
        NCDEX – Current shareholders



         NABARD           NSE           IFFCO      CRISIL
           15%            15%            12%        12%




         ICICI Bank       LIC       Canara Bank     PNB
            15%           15%           8%           8%




     ……..All shareholders bring along their expertise

15
       Product Calendar
                      Apr-Dec             Jan – May
Dec 2003               2004                 2005               In pipeline


Gold, Silver,         Guar seed,           Gur, Rice,          Other base
Crude Palm            Jute                 Maize, Raw          Metals,
oil, RBD              sacking,             silk,               Energy
Palmolein,            Chana,               Cocoon,             Products,
Cotton,               Rubber,              Jeera,              More
Mustard               Pepper,              Chilli, Steel,      Agricultural
seed,                 Wheat,               Cashew,             products
Mustard oil           Castor               Cottonseed
Soybean,              seed, Guar           oilcake,
Refined soy           gum, Raw             Sesame                Indices-
oil                   jute, Urad,          seed, Tur,
                      Yellow               Arabica &           NCDEXAGRI
                      peas,                Robusta             FUTEXAGRI
                      Sugar,               Coffee,
                      Turmeric,            Copper              NCDEXRAIN
                      Soymeal              Cathode

     Each product is selected after an in-depth research & market feedback
16
           Average daily volumes                                                                                   Rs cr
3000

                                                                                                                             2575
2500
                                                                                                   2231
                                                                                                                2095
                    Peak Volume for a single day                                      2015
2000
                     Rs. 4271 cr on Mar 30 ‘05
                                                   1619
                                                                          1444
1500
                                       1231                  1229

1000
                              691

 500

             21       55
      0
             Q1 -    Q2 -      Q3 -    Oct -  D e c - '0 4   J a n '0 5   Fe b '0 5   M a r '0 5   A p r '0 5   M a y '0 5   June
            2004    2004      2004    Nov 0 4                                                                                 '0 5


  Impressive growth of NCDEX with 85% volume contribution from agriculture
          Volumes in Steel & Copper picking up- daily average steel trade- 10,000
 17
                                         tonnes
        Physical Delivery on the platform
     2005
      Jan             Feb     Mar      Apr           May      Jun     FH 05

     4686             22904   15624    28301         44909    36352   152776


            50000

            40000

            30000

            20000

            10000
             MT
                  0
                        Jan   Feb     Mar      Apr      May    Jun

18
     Collateral Management
      National Collateral Management Services Limited
       promoted by NCDEX
      Accreditation of Warehouses - parameter based
      Robust grading by reputed agencies
      Dematerialization of Warehouse receipts
      Bank lending against warehouse receipts
          Farmers deposit goods in accredited warehouses
          Goods assayed and graded
          Finance provided to farmers by banks against
           warehouse receipt




19
     Mention by Economic Survey
        Survey: 2003-04
          Innovative spot prices polling process introduced by
           NCDEX
          Innovative demat settlement of commodities introduced
          Holding of commodity balances in electronic form
        Survey: 2004-05
          Pilots in AP, MP and Gujarat
          Largest trading volumes in agriculture




20
     Policy requirements

        Banks to           Act as aggregators & cover
       participate                  own risk

                              Benefit of ‘upside’
         Options              Complement MSP?

        Weather              Substitute for weather
       derivatives                 insurance

      Public places
                           Wider price dissemination
       carry prices



21
     Thank You




22
     Shareholding of NCMSL               Rs crore
      Investor           Share Capital    % Share
      IFFCO                        2.0        13.3
      PNB                          2.0        13.3
      NCDEX                      1.75         11.7
      Corporation Bank           1.75         11.7
      Bank of India                1.5        10.0
      HDFC Bank                    1.5        10.0
      Canara Bank                  1.5        10.0
      Karur Vysya Bank             1.5        10.0
      ACE, (Geneva)              0.75          5.0
      HAFED                      0.50          3.3
      Yes Bank                   0.25          1.7
      Total                      15.0       100.0
23

				
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