Empowering small farmers in supply chains: the roles of a commodity exchange

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1 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT UNCTAD Expert Meeting "Enabling small commodity producers in developing countries to reach global markets" Organized by UNCTAD Commodities Branch Web: December 2006 Empowering small farmers in supply chains: the roles of a commodity exchange by Mr. Lamon Rutten Joint Managing Director, MCX The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

2 Empowering small farmers in supply chains: the roles of a commodity exchange Lamon Rutten Joint Managing Director Enabling small commodity producers in developing countries to reach global markets UNCTAD Expert Meeting, Geneva, December 2006

3 Over-arching theme: without a focused effort to empower farmers, the benefits of better organized supply chains will largely bypass them. You prate of the wealth of nations, as if it were bought or sold; The wealth of nations is men, not silk and cotton and gold. Richard Hovey ( )

4 Overview Mega-trends in the agricultural sector Re-shaping agriculture The commodity exchange as a catalyst Conclusion

5 I. Mega-trends in the agricultural sector We live in a moment of history where change is so speeded up that we begin to see the present only when it is already changing. R.D. Laing

6 Five inter-related mega-trends in agriculture Reduction of government intervention Globalisation (competition vs. market opportunities) Technology revolution: information and bio-sciences The consumer as queen New corporate business models

7 21st century Virtually Integrated business model for agriculture Electronic commerce Professionally managed improve business-to-business information flow - enhance communication and coordination of activities - achieve price discovery - manage price risk facilitate financing Wholesalers/Retailers I I CONSUMERS Technology providers I $ Input Suppliers I $ Growers I $ Traders I $ Processors $ $ A commodity exchange helps build the links between these parts of the chain.

8 In India, commodity exchanges got to play a major role through a deliberate, donor-supported process of change management. In India, in the course of the 1990s, the government started seeing the need for a structural change in its agricultural policies but it was skeptical about the ability of the private sector to contribute to an equitable process of reform. During this decade, UNCTAD played an important catalytic role in making the reform of India s commodity futures markets possible, as the major international agency providing advice and training to the government and the private sector. This resulted, in 2000, in a new government policy, opening the door for modern commodity exchanges that met certain tough conditions. MCX is one of the three exchanges that qualified, and now the largest, with more than 60% of total volume.

9 II. Re-shaping agriculture When old words die out on the tongue, new melodies break forth from the heart; And where the old tracks are lost, new country is revealed with its wonders. Rabindranath Tangore

10 One problem that we see in our operations in India. Indian agriculture (19 th Century) Indian agriculture (21st Century) Still the same

11 he exchange as a change agent In the three years of its existence, MCX has grown to a 2.5 billion dollar a day turnover with a direct presence in 800 cities and towns in India, and an indirect presence (through its brokers) in hundreds more. Although still new, its impact has been felt: - Many physical markets now only start once MCX starts trading, as everyone wishes to know current market conditions - Many farmers stop selling when they see that futures prices are too much above the prices that traders offer them - Farmers are now demanding the quality of seeds that allow them to produce goods of a quality that can be delivered to MCX - Farmers are making planting decisions on the basis of MCX prices.

12 he exchange as a change agent (2) - As a result, new money has started flowing to rural areas, and a few hundred thousand jobs have been created directly, through the 20,000 trading terminals (plus many Internet terminals) connected to MCX, and indirectly, through mobile-connected sub-brokers and many support staff. - City-based financial investors are now going out and are buying on the countryside (and investing in storage) when traders offer prices that are too low. - New investments are being made in modern storage, grading and other logistic supports. - Banks are coming in, providing new forms of crop finance. Farmers are empowered through better information, higher competition among buyers, and more flexibility.

13 One example the potato sector (Economic Times, 16 November 2006) Cold-storages join party as retailers cook potato futures POTATOES are getting off the couch and into the thick of action. Large veggie retailers Reliance Fresh and Pantaloon have begun buying potato futures on MCX to get delivery of high-quality spuds certified by the exchange. With volumes in potato futures increasing rapidly, cold-storage owners appear delighted with this unique business model. Futures trading in Agra potatoes has become a winner for MCX, vegetable retailers and traders alike, with almost 40,000 tonnes traded daily. Reliance and Pantaloon have begun buying from our platform. They get two advantages by buying futures: One, they can be completely confident of the potato quality when they take delivery at Agra or Tarkeshwar; two, they save on commission paid to traders and middle men, said Sanjit Prasad, vice-president of business development at MCX. As the quality of its delivered potatoes is the crux of MCX s branding exercise, the exchange is taking no chances. All selected warehouses will be fitted with a meter to constantly monitor temperature and moisture. The meter will be connected through a radio antenna with MCX s servers in Mumbai. As a result, the minute any meter records a drop in ambient conditions, alarm bells are expected to ring fast for speedy remedial action.

14 III. The commodity exchange as a catalyst To be a catalyst is the ambition most appropriate for those who see the world as being in constant change, and who, without thinking they can control it, wish to influence its direction. Theodore Zeldin

15 new commodity futures exchange paradigm A great many people think they are thinking when they are merely rearranging their prejudices. William James For MCX and its parent company, technology is a means to re-invent the commodity business. No walls, no silos, no ceiling. The sky is the limit.

16 We are supporting the development of new modes of operation the farmer of the future would probably begin his day by connecting to the Net Hindu Business Line, 24 March 2004 I know of no pursuit in which more real or more important services can be rendered to any country than by improving its agriculture. George Washington

17 Realizing our vision for agriculture The synergy of exchanges, warehouses and a modern information/communication system will make it possible to cross over into a new era for agriculture. exchanges warehouses communications nresponsive and non-competitive agriculture Bridging the efficiency gap Flexible and profitable agriculture

18 In other words, we try to build a new ecosystem Nat. Spot Exchange Solar panels Major farmers association India s

19 One example of the impact of the ecosystem approach We are enabling a new, bureaucracy-free form of agricultural finance: - Our collateral management firm, NBHC, has master agreements with a number of banks. - Under these agreements, when a farmer or trader deposits goods that meet MCX quality requirements, a loan can be provided automatically. - Our staff fills out the forms, and the next day the money will be at the bank. - We will soon start installing ATMs at our warehouses to make a visit to the bank completely unnecessary.

20 Our next projects: National Spot Exchange (operational: January 2007), and Safal National Exchange (April 2007) - Joint projects with a major farmers organization, respectively the National Dairy Development Board. - Will, at the end, have a physical presence (trading terminals and delivery points) in thousands of locations. - Buyers and sellers will be able to put up bids and offers for commodities (in case of SNX, perishables) for delivery within 9 days. Quality will be verified, warehousing supported. - System works through gatekeepers (brokers), who put up financial guarantees with the exchange. Similar to the well-known e-choupal model, but with multiple buyers, and far greater reach

21 Using technology, MCX and its parent company, FTIL, are bridging the rural-urban divide. We have trading stations in places where roads do not reach

22 Some examples With MCX, it is global farm mandi Futures trading prepares farmers for WTO regime Harvinder Khetal Tribune News Service Chandigarh, December 4 -- In the one year since it was established in November 2003, the Multi Commodity Exchange of India Ltd (MCX) has set the farmers on a revolutionary path of business by giving them an opportunity of hedging in the futures market.

23 Improved price information is making an impact

24 A bit more on the Post Office initiative Through a strategic alliance with India Post, MCX (including its associates and stakeholders) will cater to the marketing, warehousing and advisory needs of the farmers through the established and wide-spread India Post offices (over 155,000) across the country. The services offered through this alliance will make it possible for farmers to seek expert advice on agri-based issues, to seek better market price for their produce, better warehousing, quality testing and grading facilities, in addition to providing a host of other services.

25 A bit more on the Post Office initiative (2) The approach is simple: -A central terminal is placed in the Post Office. It is connected realtime to the exchange (through leased line, or satellite). The operator charges for his services; this can bring in valuable new revenue to the Post Office, and create many new jobs. - Blackboards are put in the surrounding villages. The local postmen and women receive each day, when they pick up the mail for distribution, a print-out of the last available prices which they then write on the blackboards. - As a result, all farmers know the day s prices; they can use the terminal to manage their price risk, and in the near future, sell their crop or order inputs. And with a (non-subsidized) credit scheme for the original investment, the whole system is financially self-sustainable

26 A technology-savvy market solution can succeed where donor efforts have failed MCX has created its own, non-subsidized market information system, collecting spot prices from many dozens of markets three times a day and making them available to the whole of India almost instantaneously, through multiple means. Aid donors have wasted tens of millions of dollars to try and create such market information systems, without much success. Once subsidies stopped, programmes collapsed.

27 the ultimate scope can be huge (and all this is in our projections) Agro practices & diseases Agriculture price & arrivals All are E-Networked Crop insurance Agro inputs Weather advisory Warehousing & Quality Certifying information Demand, supply, crop forecast & news Markets & Seasons Procurement Information Rural employment & government schemes Markets, credit facilities

28 Conclusion Be the change you wish to see in the world. Mahatma Gandhi

29 Bringing a new green revolution to the countryside An electronic commodity exchange like MCX is an incarnation of the modern economy, with technology seamlessly integrated in business operations. This technology is a vector for change. The possibilities offered on and by the exchange create incentives for people to invest, and open up new opportunities. By its very nature, a commodity exchange will help to make growth inclusive: it will act as a catalyst for bringing the new to the old world. Even small farmers can become part of the national and global market place, for inputs, credit and outputs. This model can work in many other countries. Governments and international agencies should thus consider how they can use commodity exchanges to leverage their own programmes.

30 Weep not that the world changes did it keep a stable, changeless state, it were cause indeed to weep Thank You ~William Cullen Bryant Lamon Rutten Joint Managing Directo Lamon.Rutten@mcxindia.com