Constraints, Benefits, and Scope of Farmer Participation

Abstract

This chapter models the farmer participation and factors affecting the demand and supply of farmer participation and the distribution of futures trading terminals. It explores the key factors inhibiting and promoting farmer participation in the market. Extraction of statistically significant factors through an exploratory factor analysis is done, and farmer responses on futures market attributes and their benefits are recorded. It is found that most of the sample farmers are not aware of the markets in any depth, but they are of the view that futures can play a role in price discovery and reduce income variability. However, they are apprehensive of the risks of losses in trading and that this often outweighs the benefits, such as securing profits or payoffs. Specific factors constraining farmer participation include, namely, market instability (price volatility), mark-to-market settlement risk, and membership fee and margin money, lack of physical delivery, and frequency and severity of off-market trades. In other words, insufficient trading platform and exchange-accredited warehouse and low adoption rate of negotiable warehouse receipt by banks for commodity structured financing also inhibit their participation. However, factors inducing participation are futures role in price discovery, trading (arbitrage) opportunities, commodity financing, and multiple contracts for a single commodity. Results indicate that though the market is efficient in price formation, they may not be amenable for risk management or hedging. Delivery from forward/futures trading may not be preferable if the commodity is readily available in the physical or spot market at a price below the futures price. The result indicate that farmer awareness camps will be useful to enhance their direct and indirect participation in the futures market. The study has assessed the likelihood of farmer participation considering farmer financial literacy, farm income, landholdings, education level, and cell phone use, among other economic resources. Findings suggest that farmer risk aversion, loan/warehouse receipt financing facility, futures contract information (display) reach, training and visit by exchange officials, significantly explain the likelihood of farmer participation. Most sample farmers are apprehensive of bearing the risks of losses in the trading that could outweigh direct benefits like secured payoff or reduced income variability. However, they often develop price expectation for planned or standing crops and vary their agricultural investment and marketing risks indirectly through information from efficient futures markets. Heterogeneity in risk preference, collective investment, and liquidity are important attributes influencing participation and the performance of futures markets. Government market monitoring is important, and a robust surveillance mechanism under a prudent regulatory architecture can protect and assist growers from market imperfections and externalities.