An Apt Use of Information & Communication Technology in applying Trade Networking Solutions

An Apt Use of Information & Communication Technology

in applying Trade Networking Solutions

• Predominantly marginal or small farmers – Hence small marketable

surpluses & limited bargaining power

• Poor availability of markets & monopolistic tendencies of APMCs

• Inadequate infrastructure in wholesale markets/ rural primary markets

• Lack of fair price discovery mechanism

• Multiple and exploitative intermediaries – low returns

• Fragmented supply chain, poor cold chain & high post-harvest losses

• Lack of cleaning, grading, packaging & quality certification facilities

• Limited access to market information and marketing opportunities

available

AGRICULTURAL MARKETING – CONSTRAINTS

www.nationalspotexchange.com

Market has to be –

• Efficient

• Transparent

• Neutral : both for Sellers and Buyers

• With backward and forward linkages

• Providing performance guarantee to counter parties

• Available to all, not proprietary of a particular corporate house

• Accessible to large number of buyers and sellers providing liquidity

•Market is pivotal to economic development, Market attracts investors, entrepreneurs, traders and all other class on its own without any grant, subsidy or tax holiday and All round development activities start happening, once it takes off

SIGNIFICANCE OF THE ELECTRONIC MARKET

Major challenges to "Agriculture Marketing Sector in India”

• Lack of "Common Platforms“ for bulk buyers and sellers for trading in agricultural commodities in India.

• Under utilization of resources and technology for efficient and swift trading opportunities.

• Quick, efficient, and transparent marketing provisions for participants with end to end trading solutions.

• Conflicting interests among the market players.

• Imbalance in the spread of marketing network as well as in supply chain management .


Online Spot trading benefits in agricultural marketing sector

• Timely information on prices of commodities across the major markets in India

• Better and spontaneous agricultural marketing practices with warehouse receipt financing

• Reduction of agricultural marketing risks and enhanced incomes for the participants

• Better awareness and information regarding commodity trading.

• Improved networking and communication between sellers and buyers.


Electronic Spot Market : Features


1. Organized Trading: It implies a set of trading rules to market players, which means that the traders/ farmers know the rules / conditions of the market on which they are going to trade.

2. Centralized trading: It is a single entity providing the platform where numerous buyers and sellers interface with one another to sort out deals with other participants.

3. Automatic monitoring and matching of trades: The trades and negotiations can be organized and monitored efficiently.

4. Remote Market Access: Neither buyer nor seller needs to be present at one location. The electronic mechanism can manage communication among large number of market participants simultaneously.

5. Quality Specified Commodities; The commodities which are traded on the Spot Exchange are already defined for its quality and quantity lots.

6. Pan India level participation: Facilitate buyers on pan India basis to purchase and sellers could sell goods to other state buyers

DEVELOPMENT OF ELECTRONIC SPOT EXCHANGES


The Government has allowed the National Commodity Exchanges to set up three spot exchanges in the country, namely the National Spot Exchange Ltd. (NSEL), NCDEX spot Exchange Ltd. (NSPOT) and National Agriculture Produce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges’ trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realization by farmers. They will also provide the most efficient spot price inputs to the futures exchanges. The spot exchanges will encompass the entire spectrum of commodities across the country and will bring home the advantages of an electronic spot trading platform to all market participants in the agricultural and nonagricultural segments. On the agricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing real-time access to price information and a simplified delivery process, thereby ensuring the best possible price. On the buy side, all users of the commodities in the commodity value chain would have simultaneous access to the exchanges and be able to procure at the best possible price. Therefore the efficiency levels attained as a result of such seamless spot transactions would result in major benefits for both producers and consumers. These Spot Exchanges will also provide a platform for trading of Warehouse Receipts.

-Economic Survey 2009-2010, Chapter 8, Section 106

Economic Survey : 2009-10

Spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realization by farmers.)

On the agricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing them real-time access to price information and a simplified delivery process, thereby ensuring them the best possible prices.

So far, Maharashtra, Karnataka, Gujarat, Rajasthan, Orissa and Madhya Pradesh have given licenses to the spot exchanges to undertake electronic spot trading. The agricultural commodities traded on the spot exchange platform are cotton, castor seed, desi chana, guar seed, RM seed, wheat, barley, red arecanut, maize, yellow peas, urad, lemon tur, soyabean, Jeera, ground nut, sugar, moong and pepper. In the process, Farmers’ realization has increased by 4-5 per cent.

Box 5.2 : Development of electronic spot exchanges

Some Quotes from Economic Survey : July 2009

The Government of India had appointed a committee under the chairmanship of Prof. Abhijit Sen, Member, Planning Commission to study the impact of futures trading, if any, on agricultural commodity prices. The Committee was appointed on March 2, 2007 and submitted its report on April 29, 2008.

The main findings and recommendations of the committee are:

• negative sentiments have been created by the decision to delist futures trades in some important agricultural commodities;

• the period during which futures trading has been in operation is too short to discriminate adequately between the effect of opening of futures markets, if any, and what might simply be the normal cyclical adjustments in prices;

Cont….

National Spot Exchange: Mission

“To develop a pan India, institutionalized, electronic, transparent Common Indian Market offering compulsory delivery based spot contracts in various agricultural and non agricultural commodities, with a view to reduce the cost of intermediation by improving marketing efficiency and thereby improving producers’ realization coupled with reduction in consumer paid price.”


Salient Features : National Spot Exchange

• Pan India Electronic Exchange, which can be accessed from any location through computers

• Demutualised Exchange

• Transparency in operations and decision making

• Dissemination of real time price and trade information

• Delivery based System

• Settlement Guarantee

• Counter Party Risk

• Loan against pledge of warehouse receipt

• Efficient clearing and settlement system

• Institutional support

• Impartial management


Connectivity for Market Access

• Secured access to Trader Workstation (TWS) through

– Very Small Aperture Terminal– Leased Line– Internet

• Mapping with reference to networking

• Unique Member ID and User ID

• Password of Member Admin terminal and Trader Workstation to be changed within 14 days


• All contracts with single day duration.

• All positions outstanding at end of day will result into compulsory delivery.

• Fully automated screen-based trading system with national reach.

National Spot Exchange : Trading Mechanism

• An order driven trading system.

• Transparent and Fair system for automatic order matching.

• Identity of the participants undisclosed.

• Flexibility for placing orders.

National Spot Exchange Operating States


1. Gujarat2. Rajasthan3. Maharashtra4. Karnataka5. Tamilnadu6. Andhra Pradesh7. Madhya Pradesh8. Orissa9. West Bengal10.Bihar11.Delhi12. Chhattisgarh13. Haryana14.Kerala


National Spot Exchange: The Process


National Spot Exchange: Commodity contract

Based on participants

1. Farmer’s contract: Only farmer is seller, smaller trading unit, price quotation without APMC cess Market hours : 10 am to 4 pm on WeekdaysMarket hours (kapas): 10 am to 8 pm on Weekdays

2. Traders' contract: APMC cess paid commodity, large trading unit, any body can be buyer or seller

Market hours : 10 am to 6/11.30 pm ( Agri/Non Agri) on Weekdays 10 am to 2 pm on Saturdays

Based on type of Market

1. Spot Contract: Single day contract with many to many market structure.

2. Auction Contract: In the auction contract, the trading is done for the specific commodity related to certain brand and bidding open for only few hours. The auction market structure for one to many or many to one.


Types of contracts: Farmer’s Contract

Mandi cess unpaid contract 1 bag as the minimum trading lot Ex mill delivery contracts are also launched, where farmers can sell

directly to the mill through NSEL

Advantages to the farmers: Instant payment Higher price realization Low cost of intermediation

Advantages to the buyers / Millers:Saving in transportation costSavings in brokerage and other expenses Scientific quality testing, weighing and low

handling lossFinancing arrangements through NSEL:• Bank Finance• Market based Finance( T + 2, T +15)


Trading on mandi cess paid

Minimum trading lot:1 truck load ( 10 MT)

Delivery on Ex-mill basis or Ex-warehouse basis

Types of contracts: Trader’s contract

Advantages to the traders: Counter party guarantee

Timely payment

Bank finance

Avoidance of un-scientific deduction on

account of quality

Advantages to the mills / Industry: Transparency in price discovery, trading,

delivery and settlement

Financing arrangements

Bulk procurement, Bulk warehousing,

direct buying at various states, where the

mills are not able to buy directly

Saving in brokerage expenses


Types of contracts : Electronic Auction by Government companies

Daily auction between 12 pm .to 3 pm

Imported pulses are sold in a transparent manner

Different buyers can participate in bidding, see the price quoted by top 5

buyers and revise their prices, if required

No tender form, no demand draft, Traders can millers can buy sitting in

their office

Advantages to Government companies:

Transparent price discovery

Counter party guarantee

Faster settlement

Better price realization due to competitive bidding

Advantages to Mills/ bulk buyers:

Direct procurement from Government companies

Available in smaller lots of 1 truck load

Saving in brokerage

Transparent mechanism

Ease of operation, no tender form, DD requirement,

etc.


Why Farmer realize more price on NSEL platform compare to APMC market?

In APMC, there is a practice of deducting 3 to 4 Kg weight from each bag of 75 Kg on account of impurities. This implies 4 – 5 % loss to the farmer. On NSEL, there is no such deduction applicable

In APMC auction, farmer has to bear the expenses of hamali charges, unloading and weighing charges, while in case of NSEL, no such expenses are payable by the farmers.

Buyer pays higher price on NSEL, because he saves brokerage cost and commission.The net impact of all these saving is a benefit of at least 7-8 % increase in farmers’ price realization.

This is reflected in the graphs to follow.

Impact analysis : NSEL prices higher than mandi price: case study: Castor Seed at Kadi, Gujarat


Impact analysis : NSEL prices higher than mandi price: case study: Castor Seed at Palanpur, Gujarat


Forward Auction by HAFED on NSEL


Commodity Price quote through physical tender

Price quote through Electronic Auction

Profit

Basmati Paddy Rs. 2100 per quintal Rs. 2160.70 per quintal Rs 60 per quintal

Bajra Rs. 980 per quintal Rs. 1010 per quintal Rs. 30 per quintal

Hafed has sold about 3830 MT of Basmati paddy and 9910 MT of Bajra on National Spot Exchange (NSEL) Platform.

Price realization on NSEL platform has been significantly higher compared to physical tender and as a result, Hafed made a profit of Rs. 58.31 lacs through higher price realization for grains by using NSEL platform.

National Spot Exchange Limited ,102 A, Landmark, Suren Road, Chakala, Andheri (East), Mumbai - 400093. Tel: +91-22-67619900 Fax: +91-22-67619931

E-mail: [email protected]

Thank You

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An Apt Use of Information & Communication Technology in applying Trade Networking Solutions