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Published January 06, 2014, 09:59 AM

Traders squeezed in India

Farmers such as 68-year-old Ghanshyam Gokale are quietly shaking up agricultural commodity trading in India, forcing the likes of top soybean processor Ruchi Soya to shift its business model away from futures contracts and toward the spot market.

By: By Rajendra Jadhav, Reuters

Farmers such as 68-year-old Ghanshyam Gokale are quietly shaking up agricultural commodity trading in India, forcing the likes of top soybean processor Ruchi Soya to shift its business model away from futures contracts and toward the spot market.

Gokale has stopped selling his crops immediately after harvesting. Instead, he has converted his old house into two warehouses, where he stores his produce and waits for prices to rise when supplies dwindle.

Rising wealth from a rally in agricultural crop prices, a jump in farm loan disbursement at more favorable interest rates and larger houses with space for storage are giving millions of farmers the freedom to decide when to sell their harvest.

That is disrupting seasonal supply patterns and squeezing processors and exporters, who have been left unsure whether they will get enough supplies on time to fulfill their contracted obligations.

“Money gives you the power to hold crops,” says Gokale, who kept back his entire harvest of 350 quintals (1,295 bushels) of soybeans from 30 hectares (75 acres). “Farmers are getting higher prices. They are becoming rich.”

Soybean, rubber, rice and sugar cane prices have more than doubled in five years, while wheat and corn prices have surged more than 60 percent, boosting earnings of farmers.

“Usually small farmers rush to sell their crops in the first three to four months after harvesting and prices fall,” says Gokale, who plans to build a cold storage for potatoes at his farm in Piwdai village, near the central Indian city of Indore, 370 miles north-east of Mumbai.

“I started selling crops after six months. By that time, supplies fall and I garner higher prices.”

Supply cycle disrupted

The number of farmers moving away from the traditional supply cycle is rising every year, forcing traders and exporters to adjust.

“We have changed our business model with more spot month basis soymeal sales than longer term,” says Nitesh Shahra, president of the refinery division at Ruchi Soya. “It is a step back from what is happening in the world, but we have to live with the situation.”

Spot sales are conducted for immediate settlement, whereas futures contracts involve selling goods for delivery some months ahead.

The shift does bring some advantages for Ruchi Soya, which crushes soybeans bought from farmers to produce oil and meal that it mainly exports.

“Since now it is more spot-to-spot trade, you don’t need to keep inventory. So cost of inventory and risk of carrying inventory will go down ... hedging requirement is also going down,” Shahra says.

In August and September, oil mills aggressively struck deals to export soymeal as soybean prices were around 3,400 rupees per 100 kilograms ($1 is 61.9750 Indian rupees), and were expected to fall with new season supply starting in October.

But when the mills started to execute exports orders, soybean prices jumped above 3,900 rupees as farmers held back supplies.

“Just to fulfill soymeal export obligations, some oil mills bought soybean at a higher price, but they incurred losses from the deals,” says Rajesh Agrawal, coordinator of the Soybean Processors Association of India.

Nasty surprise

India’s imports and exports of farm goods have become more volatile as a result of the shifting supply patterns.

Soybean supplies, in the first half of the 2012 to '13 marketing year, ended on Sept. 30, fell 7 percent from a year ago in top producing Madhya Pradesh state, while in the second half they jumped 85 percent. Consequently, India’s soymeal exports in the first quarter of the year fell nearly 27 percent from a year ago, but in the last quarter of the year jumped 157 percent.

India’s natural rubber imports in the September quarter more than doubled from a year ago because of a domestic supply crunch.

“You don’t know when you will get a nasty surprise,” says an official at the Automotive Tyre Manufacturers Association. “In July, tire companies were not getting enough rubber despite paying a nearly 10 percent premium over global prices. They were forced to increase rubber imports.”

In September and October, farmers’ holding back of supplies of onions, a staple of many Indian dishes, forced the government to organize emergency supplies from China and Iran to calm record prices ahead of elections in five states.

With the exception of highly perishable commodities such as some vegetables, farmers have started holding back almost every crop, from pulses to cotton to rubber, says Nitin Kalantri, a pulses miller based at Latur in the western state of Maharashtra. As a result, he struggles to operate his mills at full capacity.

Institutional credit

Jagdish Rawalia, another prosperous farmer from neighboring Sanawadia village, says there was less risk in delaying sales now that farmers mostly borrow from banks that charge around 4 percent interest per year.

“Just five years back, the interest rate was 16 percent,” says Rawalia. “Moneylenders were charging much more than that. Then there was more risk and less incentive in holding back supplies.”

Farmers usually borrow ahead of sowing to buy seeds and fertilizer. Private money lenders had been charging interest as high as 30 percent per year from farmers in the absence of institutional credit. So after harvesting, farmers were quickly selling their crops to repay the loans.

In 2008, the government waived agriculture debt of millions of farmers who had defaulted, reopening access to bank loans for many such farmers in a populist move that, along with an interest subvention scheme, made new credit cheaper.

“More and more farmers will borrow from institutions like banks and cooperative societies in coming years as the banking network is expanding in rural areas,” says a senior official at National Bank for Agriculture and Rural Development.

The government expects agriculture lending to rise to more than 7 trillion rupees ($112.95 billion) in the 2013 to 2014 financial year ending on March 31, compared with 2.5 trillion in 2007 to '08.

Farmers are using profits to build spacious new houses, where a portion can be used for storing crops.

“Many farmers don’t need to spend money to store crops in warehouses. They keep it in houses,” says Agrawal of SOPA.

And this is just the beginning. Industry officials believe the traditional supply pattern will change further as smaller farmers have started following their more prosperous peers.

“This trend is going to continue ... for farmers, now it has become a rule-of-thumb that prices will rise in the lean supply season,” says Shahra at Ruchi Soya.

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