Financing the MSME Sector

Ms. Seema Nayak

Chief Compliance Officer NCDEX

“The Potential of Agri Commodity Derivatives in India”

Here’s what we learnt from this

Cover Interview

Ms. Seema Nayak is currently associated with NCDEX in the Chief Compliance Officer (CCO) capacity. She has been associated with NCDEX for 5 years. Here are some of the things we learnt from her work at NCDEX on the topic of the potential of Agri commodity derivates in India.

Question: What are Agri-Commodity derivatives, and what is the current scenario of that market in India?

I will take a different approach to answer this question; the answer you would be expecting is that the value of derivates is derived from an underlying commodity, and these would be traded on a regulated platform called an exchange, but let's look at a different perspective that will help us understand this better. Let's look at the purpose of an exchange. Price discovery is at the heart of any exchange, which refers to determining a common price for an asset. In our case, it happens to be an Agri commodity derivative. Price discovery happens every time a seller and a buyer interact in a regulated exchange space, so because of the efficiency of the futures market and the ability for instant dissemination of information, bid and ask prices are available to all participants and are instantly updated across the country. This makes it fair and transparent, and it is a vital function of an exchange. Another key function of the commodity market is risk management. Since derivates are contracts for the future you enter into today, to buy or sell at a future date, this helps at least one party to free itself of a specific risk. Let's understand this with an example of McDonald's: they need a constant supply of raw materials like potatoes for its fries. The price of the French fires is more or less fixed throughout different seasons irrespective of the cost of the potatoes, which keeps fluctuating. This can have an impact on the profits of the company, which makes it a risk. But if McDonald’s was to enter into a futures contract to buy potatoes at a fixed price decided today, it would be freed from the risk of change in the price of potatoes and assured of the supply. Similarly, the farmer who is the seller in the contract is assured of a fixed price, so when the harvest is ready, both the parties' risk is addressed by one transaction, which is a win-win. That is the derivatives market for you in a nutshell. Now coming to the second part of the question; clearly, there is a huge potential for the Agri commodities market in India, and we are not even scrapping the bottom of the proverbial barrel as of now. There are multiple reasons for that, but I will majorly focus on a couple of issues as of now. The first is the lack of awareness amongst the policymakers and even stakeholders about the economic utility of the exchange. The second one is the inherent state of Indi-