Bihar now a trusted source of maize

Bihar, which a few years ago was more in news due to the fodder scam, is now known for being one of the trusted sources of maize origination. Productivity of maize in Bihar is 2,541 kg/ha, which is far greater than the all-India average productivity of 1,907 kg/ha. Bihar’s maize, which is primarily a rabi crop, has been a success sector mainly due to the quality of the produce as well as a simplified tax structure compared to other states. Both traditional and hybrid seeds are grown in the state and are increasingly replacing up-land rice in the kharif season and wheat in the rabi season.

With rich water resources and available irrigation in winter and summer seasons, irrigated area under maize increased and so have the yields. For the last two seasons, increased participation of national players and a few multinationals has led to a structural change in the maize ecosystem in Bihar. Earlier, procurement was done by three Kolkata-based traders with a long deferred payment condition of 45 days. However, with a broad-based participation, improvement in overall payment conditions to producers has taken place and more transparent price discovery is already happening.

It is important that the state government continues with the efforts of having more secured enabling environment and also insulates the industry from kneejerk reactions, which some of the other states have sometimes resorted to. Any slippage on this account would lead to the underpinning being shaken in the maize sector. The differential (the spot market price minus the market support price) has increased from`100 to `1,600/mt (currently spot prices at `10,000/mt). This has led to higher farm-gate realisation in all the states including Bihar.

While a number of national and regional players are trying to set up the starch and feed industry, it would be more important if the state government acts in a rational manner rather than with a fear of price rise and pursues a consistent policy. This would enable Bihar to steal a march over the other states.

The National Commission on Farmers had found that the main anchor states of our food security system — Punjab, Haryana and Western Uttar Pradesh — are in a state of ecological and economic crisis. The “Alternative Fertile Crescent” has a large untapped yield reservoir, particularly Bihar, Eastern UP, Chhattisgarh, Orissa, West Bengal and Assam. This region has a well-endowed water resource. The commission recommended that the region can become another fertile crescent, if a synergetic package of technology, services and market opportunities are introduced. Bihar seems to be better positioned than any other state in the eastern crescent.

While the lack of market infrastructure and market information system is said to have dogged Bihar during the last few decades, an improvement in the environment has lead to creation of more feed processors showing interest in the state and a few starch manufactures have already started setting up units in Bihar. The value chain is being increasingly integrated in the state, new traders and players have already become active and the processors are trying to set up units.

The state will no longer remain only a sourcing destination but will be an important region of value chain in the maize industry. The state needs to guard itself from short-term reactive actions, greed of the petty local political interests and local-level officials who are disconnected with the overall development pursed by the policy makers of the state.

Published in The Economic Times 26 July, 2010

Commodity finance to stay fragmented unless banks understand market topology

A former banker working for the one of the largest trading houses of India often jokes that he is a supplier’s supplier. He is consistently emphatic that in commodities trading, the raw material is liquidity — the speed of availability of funds creates price arbitrage and liquidity creates price discounts.

The need of finance is more critical in this sector now than ever before. Commodity finance is nothing new in India although often glamourised by sophisticated MNC bankers. With the entry of private sector banks in the late nineties, the domain started becoming more fashionable attracting the ‘tie-walas’. One big bank (currently licking the commodity finance wounds) went to the extent of saying it was the pioneer in commodity funding in India, unfortunately not realising that some public sector cousins have more advanced products along with a more robust risk management system.

At present, most of the banks are in commodity lending out of sheer compulsion of meeting the priority sector-lending targets rather than making a self-concerted effort to be a reputed player in the market. Unless banks start to understand the entire commodities topology in India and put an operating system in place, they will continue to remain fence-sitters or marginal players. Although large individual players and corporates continue to use the banking system to their advantage, commodity financing remains sectorally fragmented.

A large number of products that are being offered by some of MNC banks are basically copies of the products that have been in use in the western economy. They either get entrenched in the quagmire of Indian regulations or remain unscalable. Local banks combining the knowledge of local markets with superior network have been able to deliver solutions which have been identified uniquely with the customer’s needs. A nationalised bank in central India has been offering freight financing for over the last decade.

Without announcing to the world, it only tried to tailor a client solution and captured the trade flows by financing the logistical leg which others were unable to identify. There is no shortcut in banking and especially not in commodity banking. Commodity-based collateral funding and warehouse receipt financing in the last few years have taken the fancy of many banks due to their short term and self-liquidating nature.

The nationwide finance is a mere estimate, fluctuating between `8,000 crore and `20,000 crore. “Measure twice but cut once” is an old and popular saying in the trade. However, the trade has hardly measured itself. If this is not the responsibility of RBI, then at least some state agency should start accounting for it.

Published in The Economic Times 19 July, 2010

Amarnarth

Serious players avoid commodity futures market

Commodity markets in India have become synonymous with the exchange-traded commodities on futures market for the last five years. However, after initial enthusiasm, the large players are no more serious about the roles of these exchanges, policy makers view this market with a doubtful look however perfect theoretical correctness it may have in price discovery.

Traders in commodity markets have benefitted from the opacity in price information from time immemorial. The transparency of prices on screen-based trading has not benefitted physical small-time traders and commission agents (aratiyas) and rather the most vociferous opponents are these interest groups. The indirect benefits of price transparency have percolated to the farmer community compressing the margin of these small-time traders. I recall, in a very comical incident, when the government was contemplating the ban on sugar contracts, one of these small-time traders was on a live show of a popular business channel, chastening the government for banning sugar. Within a few seconds of coming out of the live show, he was giving price execution orders on futures contracts contrary to the stance taken on the TV show. Sheepishly he told me 'desh ke sath sath, apna be khayal rakna parta hai' (along with the interest of the nation, I have to take care of myself).

Politicians have also benefitted by misrepresenting the reasons for the price rise and blaming the futures market for it. Incidentally, wheat futures were banned at a time when the government had decided to import wheat and there was a price spiral due to low perceived production. Even more surprising was the timing of the lifting of the ban on wheat. No logic, no reason.

Does that mean that one "discovers price" only when the agricultural commodity prices are going down? Unfortunately, the regulator, due to the lack of legislative teeth and regulatory mechanism, has often buckled under political pressures.

The regulators have often tried to control the market rather than trying to create a robust operating and governance mechanism for market growth. The focus should have been first to find out whether there is adequate representative participation from physical players rather than questioning the exchanges why prices have gone up or down and embarking on controlling prices through open interest and margin controls regimes. Secondly, to do a nationwide campaign to create an environment for broadbased participation rather than organising 'awareness programmes' in pockets.

While futures exchanges in India have seen a fantastic volumetric growth in monetary terms, the commodity futures sector lacks a clear policy roadmap. The lack of consistent policy, sudden ban on contracts, lack of active participation by commodity user groups and lack of legislative teeth for the regulator will make it a cesspool of financial market gamblers and keep the serious organised players away from this market. This is a point in case for not only for agricultural commodities but also for non-ferrous metals and energy contracts that are widely traded on commodity exchanges in India.

Published in The Economic Times 12 July, 2010