The Commodity Participants Association of India (CPAI) has recommended to the government that put options in commodity exchanges should be utilized as a mechanism for managing Minimum Support Prices (MSP).

The crop insurance provide cover for loss of crop due to climatic conditions but farmers are still exposed to price risk, said CPAI in its pre-Budget submission to the government.

The government can help farmers pay a small premium and buy a put option (an option to sell produce at a pre-defined minimum support price on a future date), it said

This will ensure that the farmer gets a guaranteed minimum price for his produce. If the price is above the MSP, the farmers can sell their produce in the open market and forego the premium paid, it added.

Narinder Wadhwa, National President, CPAI said commodity futures and options help farmers and other producers to ‘lock in’ the prices of their future output and inputs by hedging against the volatility in commodity prices.

Stakeholders benefit from commodity derivatives by securing their expenditures on raw materials or final products and safeguarding their profit margins from fluctuating commodity prices.

It also provides a higher degree of comfort to lenders by offering loans against warehouse receipts for capital investment, he said.

The CPAI suggestion comes even as Security Exchange Board of India (SEBI) extended the ban on derivatives trading in seven key agriculture commodities till end of this year on concern of it stoking inflation.

CPAI urged the Government to allow banks to trade in commodity derivatives to facilitate more scientific price discovery. Policy makers should take initiatives to remove any reservation or apprehension that the banking regulator RBI may have on allowing banks to trade in commodities, said Wadhwa.

The anomaly of including exchange traded deliveries of commodities under IGST (integrated GST) leads to compulsory GST registration at all delivery centres of exchanges. This is a required for all institutional and other value chain participants such as AIF, Mutual Funds and PMS hindering the expansion of commodities markets, he said.

A robust derivatives market ecosystem, coupled with adequate warehouses, assaying facilities, and appropriate packaging, shields farmers from forced sales of their produce under unfavourable conditions.

When potential buyers disagree about the quality of the produce, farmers often have limited flexibility, even if their product is of superior quality; however, a credible third-party assaying agency can significantly eliminate this uncertainty, said Wadhwa.

The farmers do not have recourse to the storage facility and have to sell the produce as and where condition, he said.

He added that having warehouses equipped with assaying facilities and offering free storage for 15 days near the mandi locations would enable farmers to secure a more favourable price for their produce.

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