Regulatory policy

A stable policy is vital for a strong agricultural value chain

A confident and mature democracy should boast a stable political system and an ability to withstand temporary shocks to the economy. Especially when the nation aspires to be a developed nation within the next 25 years. Therefore, it is a bit surprising to see a notice from the Department of Consumer Affairs invoking the archaic Essentials Act of 1955 on the eve of Independence Day. This is a directive to state/UT governments to mandate disclosure by shareholders of Tur Dal (pigeon pea) and upload weekly stock data online to the Department of Consumer Affairs portal.

The action is presumably aimed at preventing traders from resorting to restricted sales in an effort to create artificial scarcity and price gouging and to protect consumer interests. The government is closely monitoring the overall availability and prices of pulses in domestic and overseas markets to take necessary preventive measures in case of unjustified price hikes during the festival months. Depending on historical trends, the next step could be to impose stock limits, although there is no chance of banning futures trading as Tur Dal contracts are not traded in the futures market.

Price volatility

Agricultural commodity price volatility is caused by multiple factors affecting both supply and demand. While short-term volatility is influenced by factors such as droughts and floods, unusual temperature swings, as seen in the case of wheat this year, and political responses – for example, governments promoting oilseed production or banning exports – there also seems to be growing evidence of a more structural supply problem that is fueling long-term volatility.

The volatility of agricultural commodity prices is systemic, as agricultural production depends on the monsoon. This leads to uncertainty about the pricing of agricultural products and the livelihoods of people dependent on agricultural value chains, be they traders, enterprises, processors, wholesalers or retailers.

Therefore, the debatable question is: are short-term measures such as stock limits, futures bans, etc., really helpful? A stable political regime requires certain clearly defined mechanisms and processes that take into account weather conditions and related factors. It should not only inform decision makers about the planting and cropping trends of a particular commodity, but also provide information on available stocks, current and likely prices in the crop cycle, likely yield/consumption pattern, etc can be done easily because the necessary tools are already available or subject to legislation.

In the interests of a stable and transparent regime, it is essential that the regulations of the Warehousing Development and Regulation Authority (WDRA) are approved by Parliament as soon as possible. This regulation will help bring transparency to the system. If the government requires that all warehouses over a particular capacity, say 2,000 tons, need to be registered with the WDRA, then with a single click, the WDRA and members of the government will know the stock of all warehouses WDRA approved.

The government can use the WDRA provision to promote eNWR (Electronic Negotiable Warehouse Receipt) which can be traded on repositories and can be easily funded by banks. eNWRs will be free from physical issues such as soaking, handling, mutilation, etc., and will eliminate the possibility of multi-funding and fraud. eNWRs can also reduce logistics expenses, as inventory can be traded through multiple buyers without physical movements and can be split for partial transfer or withdrawal and with proper recording.

The WDRA system, in conjunction with existing tools such as commodity derivatives markets, which are regulated by SEBI, can provide the government with the necessary tools to monitor value chains effectively. The combination would provide a reference price to farmers, based on which they could decide whether to plant a particular crop during the season. If the futures price is not in line with expectations, the acreage could decline and the government would know in advance if importing or a higher purchase price is essential to ensure increased planting. The futures contract also gives an indication of the expected return, as the prices in the contract can go up or down, depending on indications from the ground and the government can react accordingly, rather than reacting in an ad hoc manner.

Additionally, inventory positions in warehouses across the country and the movement of products can be easily monitored to ensure there is no undue grabbing of products and profiteering by any section to profit. of any perceived shortage. A stable policy regime is needed to ensure that farmers and the value chain benefit.

The author is MD and CEO, NCDEX

Published on

August 28, 2022