An overwhelming majority of the world’s poor rely on agriculture for subsistence. For these households, output risk and price risk constitute major obstacles to asset accumulation. Because farmers operate on thin margins and are often in debt, negative price shocks can have devastating consequences. The small farmers at the origin of the supply chain --the people who are the most vulnerable to these shocks-- face a host of difficult investment decisions with significant consequences for themselves. Farmers’ choices about which crops to sow, when to sow them, whether to invest in high-yield seed or fertilizer, when to harvest, and when and where to sell the output can mean the difference between meager subsistence and profitability.
Unfortunately, small-scale farmers in developing countries like India often have only imprecise knowledge of market prices, and even less ability to predict prices into the future. These inefficiencies at the origin of the supply chain also affect overall agricultural productivity. The recent increase in commodities prices presents both challenges and opportunities for developing countries: food prices have escalated, but on the other hand, farmers could potentially earn more. Realizing the opportunity, however, depends on markets functioning well and, in turn, on individuals making efficient decisions about planting, harvesting, and selling their crops.
This is where our project comes in. Our goal is to supply future price information to farmers on their specific crops so that they can make more informed predictions of which crops will be most profitable in the coming seasons. Additionally, after the harvest, we will provide spot prices at their various local markets for the crops they are selling. This lets the farmers know which market to take the crop to without wasting money shipping their crops from one market to the next (typically, small farmers pool their resources to hire a truck).
Having more efficient production and distribution benefits farmers by increasing incomes for those who depend on agriculture for their livelihoods, and benefit everyone, by reducing wastage, increasing output, reducing prices, and potentially lowering volatility.
In 2003, the Indian government legalized futures in all agricultural commodities, leading to the establishment of two large exchanges in Mumbai. These unfolding changes are spurring dramatic growth in futures volume and the range of contracts available, with large farmers gaining access to trading and market information.
The futures market is at the center of a vigorous policy debate in India. In particular, critics of the commodity exchanges often claim that futures speculation has caused increases in the price of food grains. Although a government commission appointed to investigate this claim came back with mixed findings, it is not surprising that futures markets have come under fire in India.I'll write again soon with more details about how we're actually diseminating the price information.
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