TSI analyses why the government must take urgent steps to ban futures trading in the food items to save both farmers and consumers
A close look at Karamveer's face and one can't avoid but notice the contoured lines on his forehead - signs of early aging. The sugarcane farmer is a resident of Rasoolpur village in Hapur District of Uttar Pradesh where his ancestors have lived for more than a century. Nine years back, he used to sell sugarcane at the famed Hapur Mandi at Rs 95 for each quintal. The sugar, extracted in a series of mills in western UP, via hundreds of middlemen, was eventually sold in the market at Rs 12 per kg. An year ago, he sold all his produce to a middleman for Rs 165 per quintal. Sugar Prices were hovering around the Rs 40 a kg mark then. He had to bear a cost of Rs 6 per quintal for transportation.
The produce from thousands of acres of sugarcane land in western Uttar Pradesh lands up in sugar mills via middlemen who sell it on a cash payment basis to rich mill owners. Last season, one quintal fetched a middleman Rs 250-300 on the day of the delivery itself. For Karamveer, an agonising post-delivery wait of two to three months has become a part of his quotidian existence. In the off season, he produces Arhar. Karamveer found out last year to his dismay that the lentil he sold at Rs 2,700 per quintal to a local middleman was costing an end consumer a whopping Rs 8,100. Karamveer is not your run of the mill small-time farmer. He belongs to the upper echelon of farmers in his community with large volume sales. “Smaller farmers have to wait for six months for payment. The middleman comes and says that he'll make payment soon. He then disappears, sighting reasons like going to other areas for collecting payments from traders and mill owners. I deserved Rs 350 per quintal for my sugarcane. What I received was peanuts,'' sighs Karamveer on the sidelines of a farmers' organisation meeting in Delhi recently.
Under the Forward Contract Regulation Act of 1952, futures trading in all essential food commodities like wheat, rice and pulses was banned in India. The ban was slowly lifted on some commodities but in 2003, the then NDA government lifted ban on all food commodities including wheat and rice. And since 2006, the worst ever sustained food price inflation in Indian history has continued unabated. Massive speculation by big and small trading firms on fixed quantities of food grains results in a 2-3 time price surge in general. Traders and middlemen at multiple levels hoard hundreds of tonnes of food grains and sell them when the prices reach the zenith. This results in the end consumer buying the commodity at a price which is at least 4 times than what the poor farmer gets for his produce.
And the tragedy doesn't encompass a few crops. Rajinder, another farmer in the gathering, resembles a quintessential old timer from the B. R. Chopra classic Naya Daur. But this is not 1957. Another one of the comparatively bigger farmers in his region, he musters the guts to bare it all. He bought 4 quintal pea seeds at Rs 22,000 per quintal last year. He put in another Rs 1 lakh in sowing, growing and harvesting the peas. Then, the middleman told him that due to massive produce outstripping demand, he can't offer more than Rs 1,500 per quintal. Rajinder, in urgent need of money, had to sell his entire produce of 60 quintals. His loss? A shocking Rs 1 lakh, more than half of his entire cost. “We don't get to know what is happening in the mandi every hour. We can't afford to have a man placed there all the time. That's what the middlemen are for. They always say the demand is low and there's ample produce and we have to sell at the price they are offering. Then we get to know that the produce was sold at 3 times to a big trader,” says a visibly agitated Rajinder.
Dr Krishna Bir Chaudhary, president, Bhartiya Krishak Samaj, explains this clandestine system of thuggery. “There are at least three levels of middlemen between the farmers and the consumer. Cabbage fetched Rs 0.75 to 1.00 per kg ex-farm last year in Himachal Pradesh; the same cabbage was sold by local traders to Delhi-based wholesalers at a 20-25 per cent margin. The Delhi based-wholesaler sold the same cabbage to retailers again at a 20-25 per cent margin depending on demand and supply. The retailer then marked up the same cabbage by as much as 50-100 per cent and at times even 300 per cent which the consumer eventually paid. Much speculation takes place in food grains because they have a longer shelf life and can be stored for a long period under scientific warehousing conditions. This is where speculators can make a killing. That is why futures trading involves not “food” but food grains”, explains Dr Chaudhary.
The concept that futures trading results in price discovery and risk management for the farmer has proven to be a farce in India till date as the farmer does not have information or the resources to actually go in for trading on exchanges. The farmer never realises the correct price of his produce simply because the trading often happens after the farmer has sold the produce to traders. A lack of information system for poor farmers results in him not getting to know what the actual price in the futures market is.
The litany of such ordeals isn't concentrated in a region but is spread across the length and breadth of the country. Bijender Singh, a farmer from Kithwari village in Palval district of Haryana, cultivated green moong last season. He sold 100 quintal of his produce in June 2010 at Rs 4,200 per quintal. Within two to three days, he came to know that the price of moong in the wholesale mandi was hovering at Rs 8,000 per quintal. “I also know of numerous farmers in my community who sold Arhar at Rs 3,000 per quintal when the market price of the same was at Rs 80 per kg I.e Rs 8,000 per quintal,” says a distraught Bijender.
Strangely, the government seems to be echoing the sentiments of the corporations and traders. Although a ban on futures trading of certain essential commodities like wheat, rice and some pulses was put in place in January 2007, the same on wheat was lifted in May 2009. And the lobbysists are leaving no stone unturned to withdraw the ban completely. The UPA government had set up a five-member expert committtee in 2008 under Planning Commission member Abhijit Sen to prepare a report on the exact correlation between futures trading and food price rise. “The committee itself comprised commodity trading experts and people who support top agri trading companies. The composition of the committee itself was flawed and the outcome of the report supported futures trading except Abhijit Sen himself who gave a dissenting note,” says Devinder Sharma, noted agriculture expert and author. Interestingly, no committee or study till date has even been put in place to find out the involvement of a number of farmers in futures trading and the rise in real farming incomes after the ban was lifted in 2003.
In 1943, when one of the worst famines in Indian history claimed more than 3 million lives, many attributed it to the massive export of rice to the British military in West Asia and Africa during World War II and stoppages in rice exports from Burma into India.
But Nobel Laureate Professor Amartya Sen showed the flaws of this supposition. He highlighted how rumours of rice shortage, started mainly by future trading speculators, spread like wildfires which led to massive hoarding by traders, making rice the hottest futures trading commodity. The impoverished lacked the buying capacity and a calamity ensued. In sharp contrast to that was the drought of 1965-67. First, the ban on futures trading was in place since 1952 and secondly, the system of minimum support price (MSP) and food procurement by the state was already in place.
But, with the trading ban lifted in 2003 and not many commodities included, the MSP system is showing sure shot signs of crumbling. “The government gives the farmer Rs 1,100 for a quintal of wheat when the production cost per quintal is currently about Rs 1,600. The traders and middlemen cheat not just farmers but also the consumers. Post heavy speculation in the market, the value of the same quintal reaches Rs 1,800-1,900 and the end consumer buys wheat at that price. The same thing is happening in case of all essential food commodities,” says an angry Dinesh Kulkarni, all India organising secretary, Bhartiya Kisan Sangh, one of India's largest farmer organisations.
The recent case of the Supreme Court stepping in to order release of 50,000 tonnes of food grain to hungry BPL families is testimony to the collusion of politicians, bureaucrats, traders and speculators. The nexus is busy in siphoning of grains for speculation on the exchanges or the grain ends up rotting. As per an estimate, the total amount of rotting food grains in government warehouses in India is enough to feed the population of France for a month.
One way to control the massive gains made by speculators is to put a tax on commodity transactions. Recent global data shows that many countries have imposed taxes on all commodity futures transactions in their exchanges which has brought down trading volumes to some extent and has given the governments extra revenue to spend on social programmes.
In India, a proposal was mooted by the previous UPA government but never got off the the ground. “In P. Chidambaram's last Budget as finance minister in 2008-09, the government proposed a Commodity Transaction Tax (CTT) of 0.017 per cent on all commodity futures transations.
After the proposal, the notification was never issued for an entire year. Then, when Pranab Mukherjee became the finance minister, the enire proposal was swept aside,” reveals Sharma.
Even in the United States of America, where the largest commodity exchanges run and the maximum amount of trading is done, the government paid more than $300 billion worth of subsidies to farmers during 1998-2008. Most of it was in the form of direct income support. In India, during the same period, 2,00,000 farmers committed suicide. The European Union countries paid $70 billion in subsidies to its farmers last year, a huge chunk of which was direct income support. The contrast tells the whole tale.
“The Congress-led United Progressive Alliance (UPA) in May 2008 banned futures trading in soy oil, potatoes, rubber and chickpea for four months. It also banned futures trading in rice and wheat in March 2007 to contain sky rocketing prices of essential commodities, particularly of staple food grains. Yet the government insisted that futures trading would continue. Either the government does not know how markets are manipulated or the government itself is creating the market for speculators,” says Dr Chaudhary.
While oppression of the farming community at the hands of individual landowners (zamindars) was a highlight of pre-Independence rural India, the abolition of the Zamindari system, supposedly to end all miseries of the peasants, paved the way for institutionalised plundering of farmers’ produce through tools like futures trading.
A recent policy paper by the Food and Agriculture Organization (FAO) concludes that “the worldwide rise in food prices two years ago might have been amplified by speculators in organised futures markets. However, limiting or banning speculative trading might do more harm than good”. The question as to why the world’s apex body on food and agriculture cannot answer the exact causes of the global food price rise with some certainty raises serious doubts on the credibility and objectivity of the important paper.
There’s no denying the fact that the basic rationale behind trading of futures contracts of food commodities as is promulgated globally (read by commodity trading companies) is to let the farmer realise the correct price for its produce and is able to do a sort of hedging against price risks.
But, with only 2 per cent of all futures contracts resulting in the actual delivery of the commodity, the amount and magnitude of speculation rises manifold. The illiterate farmer living in ill-connected villages can only hope that he may have a chance to know the exact demand and supply situation existing in the mandi on time, he may have a chance to know and understand the dynamics of the commodity exchange market, he may get to trade on the market through a representative and he may be able to realise some profit from its produce. The long procession of ‘may’s only makes a mockery of the idealised economics behind futures trading that only exists in research papers and policy reviews. The reality on the ground is something very different.
The only solution lies in an effective ban on futures trading on all essential food commodities in India through a legislation or law till the country becomes consistently self-sufficient in food commodities for many years.
The information dissemination infrastructure in our rural areas also needs to be strengthened to let farmers participate in trading to get the right price for their produce.
The best short-term solution to a farmer's woes is to entitle him to a cost plus benefit price (at least 20 per cent of production cost) for his produce. For the same thing to be implemented, it is important to have a system devised to estimate the correct price of the produce and the actual costs incurred by the farmer.
But with big corporations and traders running the show from Delhi and other cities, the farming community is quickly running out of democratic options. “Large scale protests are bound to erupt if something is not done soon,” Rajinder warns.
“If this continues, a second Naxalite movement is imminent in India. And this will not be in some faraway hinterland but will surround Delhi from all sides,” sums up Karamveer, vowing to rise up against the institutionalised tyranny farmers like him are living under. The farmers' murky future might soon evolve into a long dark hour for the government if New Delhi decides to do nothing.
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A close look at Karamveer's face and one can't avoid but notice the contoured lines on his forehead - signs of early aging. The sugarcane farmer is a resident of Rasoolpur village in Hapur District of Uttar Pradesh where his ancestors have lived for more than a century. Nine years back, he used to sell sugarcane at the famed Hapur Mandi at Rs 95 for each quintal. The sugar, extracted in a series of mills in western UP, via hundreds of middlemen, was eventually sold in the market at Rs 12 per kg. An year ago, he sold all his produce to a middleman for Rs 165 per quintal. Sugar Prices were hovering around the Rs 40 a kg mark then. He had to bear a cost of Rs 6 per quintal for transportation.
The produce from thousands of acres of sugarcane land in western Uttar Pradesh lands up in sugar mills via middlemen who sell it on a cash payment basis to rich mill owners. Last season, one quintal fetched a middleman Rs 250-300 on the day of the delivery itself. For Karamveer, an agonising post-delivery wait of two to three months has become a part of his quotidian existence. In the off season, he produces Arhar. Karamveer found out last year to his dismay that the lentil he sold at Rs 2,700 per quintal to a local middleman was costing an end consumer a whopping Rs 8,100. Karamveer is not your run of the mill small-time farmer. He belongs to the upper echelon of farmers in his community with large volume sales. “Smaller farmers have to wait for six months for payment. The middleman comes and says that he'll make payment soon. He then disappears, sighting reasons like going to other areas for collecting payments from traders and mill owners. I deserved Rs 350 per quintal for my sugarcane. What I received was peanuts,'' sighs Karamveer on the sidelines of a farmers' organisation meeting in Delhi recently.
Under the Forward Contract Regulation Act of 1952, futures trading in all essential food commodities like wheat, rice and pulses was banned in India. The ban was slowly lifted on some commodities but in 2003, the then NDA government lifted ban on all food commodities including wheat and rice. And since 2006, the worst ever sustained food price inflation in Indian history has continued unabated. Massive speculation by big and small trading firms on fixed quantities of food grains results in a 2-3 time price surge in general. Traders and middlemen at multiple levels hoard hundreds of tonnes of food grains and sell them when the prices reach the zenith. This results in the end consumer buying the commodity at a price which is at least 4 times than what the poor farmer gets for his produce.
And the tragedy doesn't encompass a few crops. Rajinder, another farmer in the gathering, resembles a quintessential old timer from the B. R. Chopra classic Naya Daur. But this is not 1957. Another one of the comparatively bigger farmers in his region, he musters the guts to bare it all. He bought 4 quintal pea seeds at Rs 22,000 per quintal last year. He put in another Rs 1 lakh in sowing, growing and harvesting the peas. Then, the middleman told him that due to massive produce outstripping demand, he can't offer more than Rs 1,500 per quintal. Rajinder, in urgent need of money, had to sell his entire produce of 60 quintals. His loss? A shocking Rs 1 lakh, more than half of his entire cost. “We don't get to know what is happening in the mandi every hour. We can't afford to have a man placed there all the time. That's what the middlemen are for. They always say the demand is low and there's ample produce and we have to sell at the price they are offering. Then we get to know that the produce was sold at 3 times to a big trader,” says a visibly agitated Rajinder.
Dr Krishna Bir Chaudhary, president, Bhartiya Krishak Samaj, explains this clandestine system of thuggery. “There are at least three levels of middlemen between the farmers and the consumer. Cabbage fetched Rs 0.75 to 1.00 per kg ex-farm last year in Himachal Pradesh; the same cabbage was sold by local traders to Delhi-based wholesalers at a 20-25 per cent margin. The Delhi based-wholesaler sold the same cabbage to retailers again at a 20-25 per cent margin depending on demand and supply. The retailer then marked up the same cabbage by as much as 50-100 per cent and at times even 300 per cent which the consumer eventually paid. Much speculation takes place in food grains because they have a longer shelf life and can be stored for a long period under scientific warehousing conditions. This is where speculators can make a killing. That is why futures trading involves not “food” but food grains”, explains Dr Chaudhary.
The concept that futures trading results in price discovery and risk management for the farmer has proven to be a farce in India till date as the farmer does not have information or the resources to actually go in for trading on exchanges. The farmer never realises the correct price of his produce simply because the trading often happens after the farmer has sold the produce to traders. A lack of information system for poor farmers results in him not getting to know what the actual price in the futures market is.
The litany of such ordeals isn't concentrated in a region but is spread across the length and breadth of the country. Bijender Singh, a farmer from Kithwari village in Palval district of Haryana, cultivated green moong last season. He sold 100 quintal of his produce in June 2010 at Rs 4,200 per quintal. Within two to three days, he came to know that the price of moong in the wholesale mandi was hovering at Rs 8,000 per quintal. “I also know of numerous farmers in my community who sold Arhar at Rs 3,000 per quintal when the market price of the same was at Rs 80 per kg I.e Rs 8,000 per quintal,” says a distraught Bijender.
Strangely, the government seems to be echoing the sentiments of the corporations and traders. Although a ban on futures trading of certain essential commodities like wheat, rice and some pulses was put in place in January 2007, the same on wheat was lifted in May 2009. And the lobbysists are leaving no stone unturned to withdraw the ban completely. The UPA government had set up a five-member expert committtee in 2008 under Planning Commission member Abhijit Sen to prepare a report on the exact correlation between futures trading and food price rise. “The committee itself comprised commodity trading experts and people who support top agri trading companies. The composition of the committee itself was flawed and the outcome of the report supported futures trading except Abhijit Sen himself who gave a dissenting note,” says Devinder Sharma, noted agriculture expert and author. Interestingly, no committee or study till date has even been put in place to find out the involvement of a number of farmers in futures trading and the rise in real farming incomes after the ban was lifted in 2003.
In 1943, when one of the worst famines in Indian history claimed more than 3 million lives, many attributed it to the massive export of rice to the British military in West Asia and Africa during World War II and stoppages in rice exports from Burma into India.
But Nobel Laureate Professor Amartya Sen showed the flaws of this supposition. He highlighted how rumours of rice shortage, started mainly by future trading speculators, spread like wildfires which led to massive hoarding by traders, making rice the hottest futures trading commodity. The impoverished lacked the buying capacity and a calamity ensued. In sharp contrast to that was the drought of 1965-67. First, the ban on futures trading was in place since 1952 and secondly, the system of minimum support price (MSP) and food procurement by the state was already in place.
But, with the trading ban lifted in 2003 and not many commodities included, the MSP system is showing sure shot signs of crumbling. “The government gives the farmer Rs 1,100 for a quintal of wheat when the production cost per quintal is currently about Rs 1,600. The traders and middlemen cheat not just farmers but also the consumers. Post heavy speculation in the market, the value of the same quintal reaches Rs 1,800-1,900 and the end consumer buys wheat at that price. The same thing is happening in case of all essential food commodities,” says an angry Dinesh Kulkarni, all India organising secretary, Bhartiya Kisan Sangh, one of India's largest farmer organisations.
The recent case of the Supreme Court stepping in to order release of 50,000 tonnes of food grain to hungry BPL families is testimony to the collusion of politicians, bureaucrats, traders and speculators. The nexus is busy in siphoning of grains for speculation on the exchanges or the grain ends up rotting. As per an estimate, the total amount of rotting food grains in government warehouses in India is enough to feed the population of France for a month.
One way to control the massive gains made by speculators is to put a tax on commodity transactions. Recent global data shows that many countries have imposed taxes on all commodity futures transactions in their exchanges which has brought down trading volumes to some extent and has given the governments extra revenue to spend on social programmes.
In India, a proposal was mooted by the previous UPA government but never got off the the ground. “In P. Chidambaram's last Budget as finance minister in 2008-09, the government proposed a Commodity Transaction Tax (CTT) of 0.017 per cent on all commodity futures transations.
After the proposal, the notification was never issued for an entire year. Then, when Pranab Mukherjee became the finance minister, the enire proposal was swept aside,” reveals Sharma.
Even in the United States of America, where the largest commodity exchanges run and the maximum amount of trading is done, the government paid more than $300 billion worth of subsidies to farmers during 1998-2008. Most of it was in the form of direct income support. In India, during the same period, 2,00,000 farmers committed suicide. The European Union countries paid $70 billion in subsidies to its farmers last year, a huge chunk of which was direct income support. The contrast tells the whole tale.
“The Congress-led United Progressive Alliance (UPA) in May 2008 banned futures trading in soy oil, potatoes, rubber and chickpea for four months. It also banned futures trading in rice and wheat in March 2007 to contain sky rocketing prices of essential commodities, particularly of staple food grains. Yet the government insisted that futures trading would continue. Either the government does not know how markets are manipulated or the government itself is creating the market for speculators,” says Dr Chaudhary.
While oppression of the farming community at the hands of individual landowners (zamindars) was a highlight of pre-Independence rural India, the abolition of the Zamindari system, supposedly to end all miseries of the peasants, paved the way for institutionalised plundering of farmers’ produce through tools like futures trading.
A recent policy paper by the Food and Agriculture Organization (FAO) concludes that “the worldwide rise in food prices two years ago might have been amplified by speculators in organised futures markets. However, limiting or banning speculative trading might do more harm than good”. The question as to why the world’s apex body on food and agriculture cannot answer the exact causes of the global food price rise with some certainty raises serious doubts on the credibility and objectivity of the important paper.
There’s no denying the fact that the basic rationale behind trading of futures contracts of food commodities as is promulgated globally (read by commodity trading companies) is to let the farmer realise the correct price for its produce and is able to do a sort of hedging against price risks.
But, with only 2 per cent of all futures contracts resulting in the actual delivery of the commodity, the amount and magnitude of speculation rises manifold. The illiterate farmer living in ill-connected villages can only hope that he may have a chance to know the exact demand and supply situation existing in the mandi on time, he may have a chance to know and understand the dynamics of the commodity exchange market, he may get to trade on the market through a representative and he may be able to realise some profit from its produce. The long procession of ‘may’s only makes a mockery of the idealised economics behind futures trading that only exists in research papers and policy reviews. The reality on the ground is something very different.
The only solution lies in an effective ban on futures trading on all essential food commodities in India through a legislation or law till the country becomes consistently self-sufficient in food commodities for many years.
The information dissemination infrastructure in our rural areas also needs to be strengthened to let farmers participate in trading to get the right price for their produce.
The best short-term solution to a farmer's woes is to entitle him to a cost plus benefit price (at least 20 per cent of production cost) for his produce. For the same thing to be implemented, it is important to have a system devised to estimate the correct price of the produce and the actual costs incurred by the farmer.
But with big corporations and traders running the show from Delhi and other cities, the farming community is quickly running out of democratic options. “Large scale protests are bound to erupt if something is not done soon,” Rajinder warns.
“If this continues, a second Naxalite movement is imminent in India. And this will not be in some faraway hinterland but will surround Delhi from all sides,” sums up Karamveer, vowing to rise up against the institutionalised tyranny farmers like him are living under. The farmers' murky future might soon evolve into a long dark hour for the government if New Delhi decides to do nothing.
For More IIPM Info, Visit below mentioned IIPM articles.
Run after passion and not money, says Arindam Chaudhuri
IIPM BBA MBA B-School: Rabindranath Tagore Peace Prize To Irom Chanu Sharmila
Award Conferred To Irom Chanu Sharmila By IIPM
IIPM’s Management Consulting Arm - Planman Consulting
IIPM Lucknow – News article in Economic Times and Times of India
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