6 India 2007

Cumulative Rainfall in recent years: 

Cumulative Rainfall in recent years Rainfall has displayed considerable variation over the years

Link between Rainfall and Production: 

Link between Rainfall and Production Indian crops are vulnerable due to strong dependence on rainfall

Financial Risks faced by the Farmer: 

Financial Risks faced by the Farmer Risks faced by the farmer: Price risk (crash in prices due to a bumper crop) Volumetric Risk (weather leading to crop failure) Solutions Price risk can be hedged on commodity exchanges Volumetric risk can be covered through weather insurance and weather derivatives

Global Perspective: 

Global Perspective

NCDEX approach: 

NCDEX approach

NCDEX Integrated Solutions: 

NCDEX Integrated Solutions Bringing price knowledge to the doorstep of farmers 365 ticker boards, 18,500 terminals Replacing traditional sale model of farmer through an institutional route Price knowledge  NCDEX Sale of produce  Spot or futures Volumetric risk Insurance/weather derivative Price risk  NCDEX Post-harvest hedge NCDEX (based on warehouse receipt finance

Weather derivatives vs Traditional crop insurance: 

Weather derivatives vs Traditional crop insurance Cover volumetric risks caused by climate and weather conditions Unlike insurance no need to submit a claim and demonstrate loss to receive a payout, payment automatic upon exercise Weather derivatives overcomes problems of traditional crop insurance such as moral hazard and adverse selection Moreover, farm insurance though seen in some pockets of the country is still not all pervasive

NCDEX Rain Index: 

NCDEX Rain Index Rainfall Index Rainfall Index for Mumbai launched on June 01, 2005 Index for Belgaum, Erode, Guntur, Karimnagar, Ganganagar, Kottayam, Murshidabad, Rajkot and Ujjain launched on June 01, 2006 Index based on Long Period Average, Normal, Expected rainfall Rainfall data is being sourced from IMD and NCMSL NCDEX Rainfall Index tells what percentage of cumulative normal expected rainfall is realized A higher index would mean that, compared to the cumulative long period average rainfall up to the date of index, there has been more rainfall

The Rainfall Index: 

The Rainfall Index Based on historical data, normal expected rain by June 02, 2005 – 28.6 mm Actual rain by June 02, 2005 – 0.65 mm Rainfall index (scaled by 1000) on June 03, 2005 : [(0.65/28.6)*1000]= 22.7 It has rained 2.27% of normal by June 02, 2005 Index for Chana, Turmeric, RM seed, Sugarcane, Chilli, Guarseed, Jeera, Soyabean and Urad

Mumbai Rainfall Index 2005: 

Mumbai Rainfall Index 2005

Rainfall Index for Maize at Karimnagar: 

Rainfall Index for Maize at Karimnagar

Trading of a Weather Index: 

Trading of a Weather Index A weather index would be traded on the exchange and would be linked with a monetary value. The farmer would be typically selling the index at the start of the monsoon, and will buy it back at the end of the monsoon. A monsoon failure will imply a lower index and lower monetary value. The index thus bought back by the farmer will compensate for the loss suffered on the output front.

Trading of a Weather Index: Example: 

Trading of a Weather Index: Example Suppose we consider a small rice farmer Acreage:1.5 lakh hectares of land Yield of crop: 2000kg/ha Output produced (yield *acreage)= 3 tonnes (valued at Rs 33,000) Farmer hedges his risk against bad monsoon Farmer buys a weather index option Notional value of Rs 10,000 Premium priced at 3%

Trading of a Weather Index: Example contd…: 

Farmer buys a put option on August 15, paying a premium of Rs 300 at an index level of 1265 Multiplier (for every unit shortfall in the index) will be Rs. 8 (viz. contract value / index value) On expiry of the contract on September 20, the index drops to 1206 due to shortfall in rain Farmer exercises his option and gets paid Rs 472 and makes a gain of Rs 172 Trading of a Weather Index: Example contd…

Rainfed Crops: 

Rainfed Crops

Weather Stations of NCMSL: 

Weather Stations of NCMSL Installed 201 weather stations across the country Covers 15 states and 90 districts Tracks data in locations which are generally not covered by IMD Regular and timely weather data through a network of decentralized weather stations Stations being set up in relevant crop areas Information being shared and used by NCDEX: 67 stations AIC: 20 ICICI Lombard: 91 Others: 23

Commodities in Indian context: 

Commodities in Indian context What are commodities ? Defined by FCRA (1952) as “Every kind of movable property other than actionable claims, money and securities.” What are not commodities? Indices and weather What are the instruments that are traded? Only futures permitted Options are not allowed though this issue is being actively considered

Regulatory Facilitation: 

Regulatory Facilitation

Medium term outlook on water management: 

Medium term outlook on water management Water should be treated as an economic good Price should reflect the full cost of water supply Increase the water use efficiency through water conservation technologies Micro irrigation methods such as drip and sprinkler irrigation must be encouraged Water credits market which help in providing incentives for better use of water. Nodal water bodies must be setup to improve and revive water availability

Thank You: 

Thank You