Commodity derivatives are good for farmers – if govt stops meddling in markets
Mint reported on Monday that the finance ministry has notified 13 new commodities for derivatives trading so that businesses (whether companies or farmers), producers and consumers can better manage price risks. The new commodities include farm products such as apples, cashews, garlic, skimmed milk powder, white butter, timber and bamboo. India launched derivatives trading in agricultural commodities more than two decades ago but frequent suspensions and bans imposed by governments have prevented farmers from benefiting from this important risk-mitigation tool.
In August 2021, derivatives trading in chana was suspended. In October 2021, trading was suspended for mustard, non-Basmati paddy, wheat, soya bean and its derivatives, crude palm oil, and moong dal. The government's go-ahead for derivatives trading in apples and other agri products could be a great move for improving price discovery in markets for farmers’ produce – provided it isn’t disrupted by suspensions and bans.
It will help encourage more farmers to move away from minimum support price (MSP) crops. MSP crops don’t fetch great prices in markets, as production exceeds consumption demand in most years. The latest monthly consumption expenditure estimates for households show that even rural Indians are consuming less of these crops.
Without the support of subsidies and MSPs, which impose heavy costs on the budgets of the central government and state governments and divert tax money from development heads, the production of these crops isn’t remunerative or globally competitive. Small farmers, which constitute 86% of agricultural households, prefer to produce these crops as the government’s procurement at MSPs and subsidies assure them returns. That’s because
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