Agri-trading and Hedging: Opportunities for Farmers

1. Agri-trading and Hedging: Opportunities for Farmers National Conference on Emerging Platforms for Agriculture Marketing Commodity Futures Market Project Ann Berg Futures and Commodity Markets Specialist Implemented by Financial Markets International of Washington, DC and Mumbai, India.

2. What is hedging?

3. Hedging is the transfer of risk from one party to another by buying or selling futures contracts These risks include: Price risks Counterparty risks

4. Futures defined Futures are purchase and sales agreements Futures are cleared by a central counterparty – called the Clearing House Futures are a zero sum game

5. Futures defined Futures are not stocks – no equity ownership exists Futures are not bonds -No fixed income return is guaranteed Futures are proxy instruments held until exchanged for the underlying good

6. Value of futures contracts Price transparency Price discovery Markets integrator Liquidity Infrastructure booster Forward price indicator

7. Forward price signalsClosing CBOT wheat prices Sept 14 2007

9. Why hedge? Lock in an attractive price Achieve income stability Avoid risk Plan cropping mix Obtain better credit arrangements

10. Who should hedge? Warehouses that stock seasonal inventories (short hedgers) Millers, processors, feedlot operators (long hedgers) Exporters Importers Any supply chain player wanting to avoid price risks

11. Which farmers should hedge? Large capitalized farmers able to withstand margin calls Farmers with year to year stable production Farmers with skill set and sophistication for futures trading Only about 30% of US farmers hedge

12. Short Hedging Short hedging involves the sale of futures contracts against ownership of the underlying commodity

13. Short hedging by warehouse Cash transactions Futures transactions Sell 4 contracts @ Rs. 850/q (30MT each) Buy 4 contracts @ Rs.500/q Profit Rs. 350/q Net profit = Rs.50/q buy 1200 quintals Potatoes @Rs. 800/q Sell 1200 quintals Potatoes @ Rs.500/q Loss Rs. 300/q

14. The HAFED Experience:Textbook case of wheat hedging HAFED began using futures soon after launch of wheat contract in July 2004 Strictly a short hedger – sold futures against cash purchases Quickly increased its use of the NCDEX wheat futures Quickly increased its use of the delivery mechanism

15. HAFED’s hedging program

16. HAFED took advantage of large carrying charge between harvest and mid-year prices and placed short hedge in December contract to maximize returns

17. HAFED’S hedge executions

18. Deliveries in NCDEX were scant during April May harvest months, occurring later in the year.

19. HAFED’s assessment of futures Auditable records of sales prices – i.e., futures transactions Aggregation of small purchases Quality assurance - achieved by strict assaying methods by registered warehouses Liquidity Price stabilization

20. Aggregation can optimize results for farmers Avoid margin calls Reduce distressed selling Benefit from quality production Reduce exploitation Increase credit availability Increase income Profit share in aggregation

21. Thank you