Confident about the growth of futures and options trading in agricultural commodities, officials said a large number of farmers are beginning to understand the benefits of ‘option trading’ of pre-fixing the price of the crop at the time of sowing at the cost of cultivation.
Confident about the growth of futures and options (derivatives) trading in agricultural commodities in the future, officials said a large number of farmers can realize the benefits of ‘option trading’ of pre-fixing the price of the crop based on the cost of cultivation at the time of sowing. Beginning to understand.
An official said a special ‘option introduction program’ for FPOs (Farmer Producer Organisations) has also helped farmers learn techniques to deal with price risk and focus efforts on increasing the yield of their crops. “The success of the program will encourage them to participate in similar contracts in other agricultural commodities as well,” he said.
The program was launched by commodity exchange NCDEX in November 2020, wherein FPOs registered as clients with NCDEX members were eligible for ‘put options’ in two commodities – gram and mustard seed and price lock-in in both the commodities . This allows farmers and FPOs to manage their price risk.
The premium cost up to Rs 300 per quintal for buying put options was reimbursed by NCDEX out of the regulatory fee waived by market regulator SEBI.
Price lock-in for 2000 ton mustard seeds
According to an official, more than 40 FPOs participated in the event and locked-in prices for the sale of 1,030 tonnes of gram and 1,980 tonnes of mustard seeds on behalf of farmers. Under the programme, subsidy was given on the premium cost of buying ‘put options’ above Rs 80 lakh.
Price protection through ‘put option’ enabled FPOs to get financing at reasonable cost as it gives certainty to banks and financial companies about the minimum price that farmers will get for their produce.
In order to encourage farmers, FPOs to trade on commodity derivative exchanges, SEBI has decided to exempt them from regulatory fees. The exemption thus granted is allowed to be used by the Exchange to meet the premium for mandi charges, grain cleaning, drying and put option for farmers and FPOs.
What is ‘Put Option’?
The holder of a ‘put option’ has the right, but not the obligation, to sell a product on the specified date at the price specified for it. Any farmer or FPO who buys the put option gets protection from the risk of falling prices while he gets the benefit of rising prices.
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