study potato men tha

ADVANTAGES OF

COMMODITY FUTURES TRADING THROUGH

ELECTRONIC TRADING PLATFORM

FOR FARMERS OF UTTAR PRADESH

A Study of Potato and Mentha

The original final report of consulting assignment Submitted to

MULTI COMMODITY EXCHANGE OF INDIA LIMITED,

MUMBAI

FEBRUARY 2007

Consultant

K.G. Sahadevan, Ph.D Professor of Economics Indian Institute of Management

Prabandh Nagar, Off Sitapur Road Lucknow 226 013 E-mail: [email protected]

Supply Chain and Futures Trading A study of Potato and Mentha

Acknowledgement

Executive Summary

Chapter 1 Introduction and Objectives

.. Introduction

.2. Objectives of the Study

.3. Scope of the Study

.4. Methodology

.4.. Primary Data

.4.2. Selection of Area

.4.3. Selection of Sample

.4.4. Secondary Data

.5. Organization of the Report

Chapter 2 The Market Profile of Mentha and Potato

2.. Introduction

2.2.TheProfileofPotatoMarket

2.2.. World Production of Potato

2.2.2.SignificanceofPotatointheIndianEconomy

2.2.3.SignificanceofPotatointheUPEconomy

2.2.4. Production Forecasts

2.2.5. Demand for Potato

2.3.TheProfileofMenthaOilMarket

2.4. Conclusion

Chapter 3 The Supply Chain and Market Structure

3.. Introduction

3.2.PotatoMarketingPractices

3.2.1.TheRisk-returnProfile

3.2.2. The Supply Chain

3.2.3. Cold Storages

3.2.4.PotatoFuturesMarkets

3.3.MenthaOilMarketingPractices

3.3.1TheRisk-returnProfile

3.3.2. The Supply Chain

3.3.3. Mentha Oil Futures

3.4. Constraints on Growth of Potato and Menth Oil Futures

3.5.SubjectiveInfluencesonDecisiontoTrade

3.6. Conclusion

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2 Supply Chain and Futures Trading A study of Potato and Mentha

Chapter 4 On-line Trading in Mentha Oil and Potato Advantages to Farmers

4.. Introduction

4.2.On-lineTradinganditsAdvantages

4.3.BenefitsofandtheNeedforPotatoandMenthaOilFutures

4.3.. Price Instability

4.3.2. The Problem of Storage

4.3.3.BenefitsofPotatoandMenthaoilFuturestoFarmers

4.4.NecessaryEnvironmentforSounduseofFutures

4.4.1.HowtoInvolveFarmersinFuturesMarkets?

4.4.2.HowtoEnsureCredittoFarmersThroughWarehouseReceipt

System?

4.4.3.EnhancingMarketAccessthroughExchangeTradedWarehouse

Receipts

4.5. Conclusion

Chapter 5 Conclusions and Policy Implications

5.. Potentials of Mentha oil and Potato for Futures Trading

5.2.HowFuturesBenefitFarmersandMarkets?

5.3.HowtoStrengthenFuturesinMenthaoilandPotato?

5.4. Implications for Institutional Capacity Building

References

Appendix1

Appendix2

Appendix3

Appendix4

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3Supply Chain and Futures Trading A study of Potato and Mentha

ACKNOWLEDGEMENT

ThestudyhasbenefitedfromthesupportextendedbymanyofficialsoftheDepartmentof

Horticulture,GovernmentofUttarPradeshwithoutwhichitwouldnothavebeenpossibleto

carryoutthesamplesurvey.Iwishtoacknowledgespecificallyforthetimelyhelpreceived

from Dr. S. P. Singh, Director; Dr. S. P. Joshi, Dy. Director (Statistics) and Mr. K. K. Maurya, PotatoDevelopmentOfficer(PDO)at theDirectorateofHorticulture,Lucknow;Mr.J.K.

Gupta,DistrictHorticultureOfficer(DHO)andMr.H.R.Sahu,DistrictHorticultureInspector

(DHI),Lucknow;Mr.M.K.Khan,DHOandMr.C.P.Awasthi,DHI,Barabanki;Mr.Motilal

Anuragi, PDO andMr.RamNathRajput, DHI, Farrukhabad;Mr. Lakhi Singh,Deputy

Director,DistrictHorticultureOffice,MoradabadandMr.JaikaranSingh,Superintendent,

DistrictHorticultureOffice,Rampur.

Thestudyhasalsobenefited fromaseriesofdiscussions that IhadwithDr.Chiragra

Chakrabarty,HeadTraining,ResearchandDevelopment,MultiCommodityExchange

ofIndia(MCX)Ltd.,Mumbai. IgratefullyacknowledgeMr.JosephMassey,DMD,MCX

Ltd.,Dr.ChiragraChakrabartyandDr.Shanmugham,ChiefEconomist,MCXLtd.,fortheir

highly insightful and valuable comments on earlier versions of this report.

MyspecialthanksareduetoDr.AshokKumarSingh,ProjectAssistant,forhisexcellent

support during the course of this study.

K.G. Sahadevan


EXECUTIVE SUMMARY

Thepresentstudyhasfour-foldobjectivesthatconcerntheagriculturaleconomyofUttarPradesh

(UP)particularlypotatoandmentha farmingsectors.First, itexamines thephysicalmarketand

supplychainofpotatoandmentha inUP.Secondly, itevaluates thebenefitsof futures in terms

ofmitigating themarket riskofvariousplayers in theentiresupplychainandof improvingprice

realization. Thirdly, it analyses the potentials of potato and mentha as candidates for introducing

futures.Finally,itexaminestheadvantagesofon-linetradingintermsofreach,access,transparency,

and price discovery.

Chapter of the report deals with methodology of the study. The analysis and the conclusions drawn

are mainly based on the data and observations obtained through administering a schedule on a set

ofsamples.Thefieldstudywhichhelpedunderstandthemarketdynamicshastwo-foldobjectives

viz., tounderstand thesupplychainandmarketingpracticesofpotatoandmentha farmersand

secondly tocapture thesubjective influencesandperceptionsabout futuresmarkets.Thestudy

haschosenthreedistrictseachforpotatoandmentha. TheyareFarrukhabad,Moradabadand

LucknowforpotatoandMoradabad,RampurandBarabankiformentha.Thestudyhasalsoutilized

published data of various governmental and private sector agencies.

Chapter2ofthereportprofilestheagriculturaleconomyofUPwithparticularreferencetopotato

and mentha and their supply conditions including cropping season, pattern, area under cultivation

andproductivity,andtheirvariety.Potatoandmenthaareeconomicallysignificantnotonlyfortheir

contribution to the livelihood of thousands of farmers and for their dominance in the agricultural

consumption basket of households but also for their growing linkages to fast growing potato

processingindustryandhighlydiversifiedindustrialuseofmenthaoilforconfectionary,cosmetics

andpharmasectors.Thesecharacteristicsmakethemveryhighpotentialcandidatesforfutures

trading.

Chapter3dealswiththreeimportantissues.First,itseekstoinvestigatethemarketstructure,supply

chainandmarketingpracticesinpotatoandmenthaoil.Secondly,ittriestoevaluatetheutilityof

futures to various constituents in the entire supply chain. Finally, it presents the survey results

on identifying thesubjective influenceson thedecisionof spotmarketplayers to takepositions

in futuresmarkets.Due to lackofan integratedand regulatedsystem formarketingagricultural

produce,farmersaredisadvantagedbyverypoorpricerealization.Theexistingmarketingchannel

isnotcapableenoughtotakecareofsmoothandeconomicaltransferofpotatoandmenthaoilto

thefinalconsumer.Amongtheintermediarieslinkingthefarmertotheconsumer,coldstoragesare

crucial to farmers in the supply chain of potato. The storage capacity is not enough to absorb the

entireproductioninUP.Thepriceriskinstorageposesseriousriskstostorageowneraswelland

thesolvencyofstoragehouses.Inviewofthis,futurescontractsinpotatothroughitsefficientrisk

transfercanbeapotentialavenuetothestoragehousesformitigatingthemarketrisk.


The sample survey conducted on potato and mentha farmers, and cold storages recorded the

awareness about futures, user status, the reason for not using futures and perception about

futures.The farmers responses indicate that certain subjective factors have deeply influenced

their decisions to use futures. The formation of negative attitudes among them and the inadequate

initiativesofthemarketauthoritiesandregulatorstochangemanyoftheunhealthyprejudicesand

negativeperceptionsaboutfuturestradinghavelimitedthepenetrationofthemarkets.Theprevailing

marketenvironmentthereforeposesseriousthreattotheservicesofferedbytheexchangewhile

opportunitiesareaboundduetoenormoussizeofthemarketthatremainunexplored.Thiscallsfor

aproactiveapproachinalleviatingallmisconceptionsandimprovingattitudesoftheexistingand

potential customers.

It is observed that the prevailing imperfections in the supply chain of potato and mentha oil and

consequentpricedisadvantagetotherespectivefarmingcommunitymakefuturesmarketsmore

relevantandbeneficialtothem.Theanalysisofthespotmarketpricetrendsofpotatoandmentha

oil after the launch of futures in them shows that there was substantial improvement in these prices.

Thisadvantageisveryclearlyvisibleinmenthaoilmarketinthreecountsespeciallyafterthelaunch

offuturestrading;(a)thespotmarketpricesofmenthaoilhavestrengthened,(b)theareaunder

menthacultivationanditsproductionhaveshownsubstantialincreaseand(c)theaverageexport

priceofmenthaoilhasrecordedsubstantialincrease.Yetanotherissueexaminedinthepresent

studyisthepotatoandmenthafarmersaccesstofuturesmarkets.Thestudyhasemphasizedon

theroleofcommoditypool investors(aggregators)asafeasibleremedy. Experiencesofmany

countriesshowthatfarmersassociations,marketingagenciesandco-operativescouldbepotential

aggregators in farm sector. This however requires initiative of the government, regulator and

exchangestowardsestablishingpooloperatorsincommodityfuturesmarkets.

Chapter4hasthrownsomelightsonthepotentialrolethatcoldstoragesinpotatomarkets,and

dealersandcommercialdistilleriesinmenthaoilmarketscanplayinthisregard.Thefinalchapter

of the report presents the summary of conclusions of the study and their policy implications. The

government, the regulator and exchanges have a role in transforming futuresmarket tomore

participative and broad based. The most important step in this direction would be the establishment

ofaggregatorswhocanoperateaspooloperatorsinfuturesmarkets.Farmersassociations,co-

operativesandnationalandstatelevelmarketingfederationscanassumetheroleofaggregators.

Moreover,inviewoftheprevailingmisconceptionsandlackofawarenessaboutfuturesmarkets,

there is need for a comprehensive awareness raising and training programmes. There are ways to

improve the supply chain which in turn help farmers realize better prices. Farmers organizations

in addition to improving the supply chain can also ensure indirect participation of small farmers in

futuresmarkets.Moreimportantly,developmentofaformalfinancingsysteminagriculturethrough

cropcollateralwillgoalongwayinensuringafairdealtosmallfarmersinthemarket.Thiscallsfor

building necessary institutional capacity for warehouses, credible collateral management system

and institutional credit flow in agriculture.Commodity exchanges have a crucial role to play in

developingasoundwarehousingandcollateralfinancingsystem.


CHAPTER1

INTRODUCTION AND OBJECTIVES

1.1. Introduction

Instability of commodity prices has always been a major concern of the producers, processors,

merchandisersaswellastheconsumersinanagriculture-dominatedcountrylikeIndia.Farmers

directexposuretopricefluctuations,forinstance,makesittooriskyforthemtoinvestinotherwise

profitableactivities.Therearevariouswaystocopewiththisproblem.Apart fromincreasingthe

stabilityofthemarketbydirectgovernmentintervention,variousactorsinthefarmsectorcanbetter

manage theiractivities inanenvironmentofunstableprices throughderivativesmarketsmainly

futuresandoptionsonfutures.Thesemarketsservearisk-shiftingfunction,andcanbeusedto

lock-inpricesinadvanceinsteadofrelyingonuncertainpricedevelopmentsinfuture.Apartfrom

beingavehicleforrisktransferamonghedgersandfromhedgerstospeculators,thesemarkets

also play a major role in price discovery.

Futuresmarketshaveplayedavitalroleinthedevelopmentofagriculturalsectorinmanycountries

intheworld.TheUS,theUK,andevensomeofthedevelopingcountriesinAfricaespeciallyKenya

andZambiaandAsiancountries likePhilippines,Malaysiahavebenefited fromfuturesmarkets.

Most of these countries have utilized agricultural commodity futures for reducing direct government

subsidy to farmers.TheChicagoMercantileExchange(CME);ChicagoBoardofTrade(CBOT);

NewYorkMercantileExchange(NYMEX);InternationalPetroleumExchange(IPE),London;London

MetalExchange(LME);EuronextLondonInternationalFinancialFuturesExchange(LIFFE);Tokyo

CommodityExchange(TOCOM);CentralJapanCommodityExchange(C-COM);SidneyFutures

Exchange;SingaporeExchange (SGX);BursaMalaysiaDerivatives;BolsadeMercadorias&


Futuros (inBrazil), theBuenosAiresGrainExchange,etcaresomeof the leadingcommodity

exchangesintheworldengagedinfuturestrading.

EveninChinaaspartofliberalizationofinternalmarketmanyexchangesweresetupforpromoting

futurestradinginmanycommoditiesandmostofthemlikeShanghaiFuturesExchange;Zhengzhou

Commodity Exchange, Dalian Commodity Exchange, etc. have witnessed tremendous growth

duringthelastfiveyears.

Commodityfuturesmarketsoffercertaineconomicbenefits.First,futurestradingisaveryefficient

means of determining the future price level for a commodity. The price discovery is the best and the

consensusmarketforecastoffuturepricesofcommoditiestradedinthemarketastherearemany

potential buyers and sellers competing freely. There are innumerable small and large numbers of

producersofcommoditiesacrosstheworldcompetinginworldorinnationalmarkets.Thesewidely

dispersedproducersfinditdifficulttoknowwhatpricesareavailable.Moreover,theopportunityfor

farmer,processor,traderandconsumertoascertaintheirlikelycostanddeveloplongrangeplans

is limited. Therefore, the price discovery is of crucial importance to farmers as it helps them predict

their earnings and plan their future investments accordingly. It also enables consumers, traders and

processors to get very highly reliable future price information which help them in quoting a realistic

price and execute their buy and sell contracts. Thus the price discovery essentially provides

all segments in the society with a guide to what various commodities are worth now as well as

todays best estimate for the future. Therefore, the price discovery has the potential to minimize

uncertaintieswithregardtofuturepricesincommoditymarkets.

Secondly,futurescontractsareusedforpriceriskmanagement.Commodityfuturesmarketsoffer

farmers,commoditydealers,processors,andconsumersameansofpassingthepricerisksinherent

intheirbusinessestotraderswhoarewillingtoassumetheserisks.Inotherwords,commercial

usersofthemarketscanhedge,whichistoenterintoanequalandoppositetransactioninorder

toreducetheriskoffinanciallossduetoachangeinpriceand,bydoingso,lowertheircostsof

doingbusiness.Thisresultsinamoreefficientmarketingsystemand,ultimately,lowercostsfor

consumers.

Finally, therearecertain indirectbenefitsof futuresmarkets.Sincefuturesmarketsarenational

on-linemarketsofferingcontinuousauctionofcontractsitautomaticallyensureanintegratedprice

structure throughout the country and also ensure balance in supply and demand position throughout

the year. Moreover, they act as focal point for the collection and dissemination of price statistics and

othervitalmarketinformationwhichprovidevaluablesignalstoallplayersinthemarkets.

Multilateral agencies like World Bank and UNCTAD have been taking initiatives for building

capacitiesinmanycountriestodevelopamarketdrivenpriceandincomesupportsystemthrough

futuresmarkets.Indiabeinganagriculturaldominatedeconomyfuturesmarketshavesignificant


relevance and can play a supporting role. However, enough attention has not been paid to this

segment.Themarketisinverynascentstage.However,Indiahasnotutilizedthebenefitsoffutures

insignificantscaleyet inmanycommoditysegments.Thegovernment isstill relyingheavilyon

explicit and implicit subsidies to farmsector.Thesubsidyhasbecomeunsustainable in viewof

itswiderfiscal implications.TheMinistryofConsumerAffairs,FoodandPublicDistribution,and

ForwardMarketsCommissionhavebeenenvisaging far reaching reforms in commodity futures

marketsinIndia.

Government has initiated the process of deregulation of domestic trade in commodities in 997

by lifting prohibition of futures trade in a large number of commodities and facilitating setting up of

nationalmulti-commodityexchanges.Subsequently,thegovernmenthasabolishedprohibitionof

forward trading on all the remaining banned commodities in April 2003. These two initiatives have

triggeredmassivegrowthoffuturesmarketsinIndia.Bytheendof2003,threeon-linecorporatised

multi-commodityfuturesexchangesbecameoperational.Currentlythereare24exchangesinIndia

with derivative contracts on more than 20 commodities available for trade. The aggregate turnover

ofalltheexchangeshasshotupfromRs.28419crorein1998-99toRs.129364crorein2003-04

andfurthertoRs.571760crorein2004-05(ForwardMarketsCommission,2005).Thetotalvalue

oftradeduring2005-06hascrossedRs.1000000crore.Simultaneously,bothmarketparticipation

andtradingpracticesunderwentrevolutionarychanges.Thenewgenerationexchangesbroughtin

technology and worlds best trading systems and practices which helped them garner more than

90 per cent of the total volume in less than two years. The traditional and localized commodity

exchanges, in spite of some of them introducing on-line trading, are struggling to retain their

supremacyintheirspecificcommoditydomain.TheinternationalpepperexchangelocatedinKochi

whichhasthereputationofbeingtheonlypepperfuturesexchangeintheworldhasalreadylost

substantialportionoftheirbusinesstothenewmulti-commodityexchanges.Thewritingonthewall

iscleartootherlocalizedexchangesaswell.Indicationsarethatmanyofthemmayeventuallygive

waytotheon-linemulti-commodityexchangesandfaceclosure.

TheNationalAgricultural Policy -2000 has also emphasized the need for promoting futures as

amarketdrivenmechanism forensuring fairpriceand income to farmers.TheMinistryand the

ForwardMarketsCommissionwhichregulatesfuturestradehavecommissionedmanystudiesand

receivedexpertviewsonmeasurestobeinitiatedforrevampingtheageoldmarkets.TheWorld

Bank funded project implemented in 2001 has brought to light through a number of consulting

reports thedirectionof reformstobe initiated forstrengthening the futuresmarkets in India.Yet

anotherjointprojectinitiative,CommodityFuturesMarketDevelopmentProject,oftheMinistryand

theUnitedStatesAgencyforInternationalDevelopment(USAID)hasjustconcluded.

Currently,thereisarenewedinterestinfuturesmarkets.TheGovernmenthasbeeneyingfora

marketdrivenpricingand riskmanagement system inagriculture forensuringstable income to

farmerswhichwouldhelpeasepressureofsubsidyonfiscalsituation.Moreover,thegovernments


commitments under WTO Agreement on Agriculture to phase out direct price and income support

tofarmersrequired,interalia,introductionofamarketdrivenpricestabilizationmechanismthrough

futurestradeinorganizedexchanges.Thisre-orientationofgovernmentpolicytowardsagricultural

productmarketshasbeengiventhrustintheNationalAgriculturalPolicy2000.Inpursuanceofthis

policy, government has removed ban on futures trading for all commodities in 2003.

1.2. Objectives of the Study

The Indian farmers are handicapped by many systemic inadequacies. The price distortions due

to long supply chain in marketing their produce has long been exposing them to lower price

realizationsmakingtheirinvestmentsnonviableandunattractive.TheNationalAgriculturePolicy,

2000 has emphasized on liberalization aiming at augmenting farmers income and on efforts to

ensure that farmers receive prices commensurate with their efforts and investments. In line with its

commitmentforenlargingthecoverageoffuturesmarketstominimizepricefluctuationsasalsofor

hedgingrisks,thegovernmentliftedallrestrictionsandpermittedfuturestradinginallcommodities

in 2003. However, in spite of India being one of the pioneers in commodity futures questions and

concernsarestillbeingraisedbymanyabouttheeconomicbenefitsoffuturesandespeciallyits

utility to the farmers.

ThepresentstudyseekstoexaminethefollowingaspectsofthefarmsectorofUttarPradesh(UP)

with a special focus on two crops viz., potato and mentha.

1. Toevaluatethebenefitsoffuturesintermsofmitigatingthemarketriskofvariousplayersintheentire

supply chain and of improving the price realization of the farmers

2. ToexaminethephysicalmarketandsupplychainofpotatoandmenthainUP

3. To analyse the potentials of potato and mentha as candidates for introducing futures and to

substantiate the rationale for futures in these commodities

4. Toexaminetheadvantagesofon-linetradingintermsofreach,access,transparency,betterprice

discovery and price dissemination.

1.3. Scope of the Study

ThescopeofthestudyislimitedtotheagriculturaleconomyofUPwithfocusonpotatoandmentha

crops.Whileexaminingtheadvantagesofon-linefuturestradingingeneralemphasiswillbeonits

benefitstopotatoandmenthafarmersofUPinparticular.

1.4. Methodology

The study is primarily an empirical one. It has relied on two sources of data.


1.4.1. Primary Data The analysis and the conclusions drawn are mainly based on the data and observations obtained

throughadministeringascheduleonasetofsamples.Thefieldstudywhichhelpedunderstand

themarketdynamicshastwo-foldobjectivesviz., tounderstandthesupplychainandmarketing

practices of potao andmentha farmers and secondly to capture the subjective influences and

perceptions about futuresmarkets among various stake holders.The decisions of farmers and

various othermarket intermediaries to trade on potato andmentha futures are assumed to be

greatlyinfluencedbytheperceptionsthattheyhaveconceivedabouttheutilityandmodusoperandi

ofthefuturesmarkets.

1.4.2. Selection of area The study has chosen three districts each for potato and metha. Three leading potato producing

pocketsinUParelocatedintheseidentifieddistricts.Thedistrct-wiseareaandproductionofpotato

andmenthaareprovidedinappendix1and2respectively.TheyareFatehgarhinFarrukhabad

district, Sambhal inMoradabad district andBakshi-ka-Talab and surrounding areas in Lucknow

district.Similarly,threemajormenthafarmingcentresareidentifiedwhichareSambhalinMoradabad

district,SadarinRampurdistrictandFatehpurinBarabankidistrict.

1.4.3. Selection of Sample The criteria used for selection of sample farmers are the volume of annual production and area under

cultivation. Farmers who prefer to hedge their output and initiate futures position independently on

thetradingplatformofMultiCommodityExchangeofIndiaLtd(MCX)shouldideallyhavecertain

minimum output. Considering the standard trading and delivery unit for potato on MCX platform

being 30 metric tonne (MT) and the average production per acre being 5 MT farm size of 0

acre has been considered as suitable sample for the study. Therefore, each sample potato farmer

chosen for the study has the potential to take 5 units of contracts. This ensures that they are

potentialplayersasgenuinehedgersinpotatofuturesmarkets.

Samples are chosen at random from the population of farmers holding more than 0 acres under

potato cultivation.Ten samples are chosen from each areawith the help of the officials of the

respectiveDistrictHorticultureOffice.ThejudgmentoftheDistrictHorticultureInspector(DHI)with

regard to identifying progressive farmers was duly considered in all these areas while selecting

thesample.SinceDHIsaregovernmentofficialswhostayregularlyintouchwithfarmerstheyare

assumed to have complete and authentic domain information. Cold storages are very important

intermediaryinpotatomarketingchannel.Theyconstituteaverystronglinkbetweenthefarmers

andbigdealersinreadymarketsandprocessorsfromvariouspartsofthecountry.Theyhavea

potentialroletoplayindevelopingpotatofuturesmarketsandcanhelpsmallfarmersasapooled

investor/aggregator. The samples of three cold storages which fulfill two important criteria are

chosen at random from each area. These sample storage houses have not less than 90,000 quintal

capacity and are operating at not less than 80 per cent of their capacity. This ensures that all of them

Supply Chain and Futures Trading A study of Potato and Mentha

areactiveandpotentialplayeraspooledinvestorinpotatofuturesmarket.

Similar procedure has been followed in collecting samples of mentha farmers in Sambhal in

Moradabaddistrict,SadarinRampurdistrictandFatehpurinBarabankidistrict.Potentialsamples

areidentifiedbasedonvolumeofmenthaoiloutputandareaundermenthacultivation.Considering

thestandardtradinganddeliveryunitformenthaoilonMCXplatformbeing360and720kilogram

(kg) respectivelyand theaverageproductionperacrebeing45kga farmer,holding8acre for

mentha has been considered as suitable sample for the study. Therefore, each sample mentha

farmerchosenforthestudyhasthepotentialtotakeatleast1unitofcontract.Thisensuresthat

theyarepotentialplayersasgenuinehedgersinmenthaoilfuturesmarkets.Samplesarechosen

at random from the population of farmers holding at least 8 acres under mentha cultivation. Ten

samplesarechosenfromeachareawiththehelpoftheofficialsoftherespectiveDistrictHorticulture

Office.Moreover,contractfarmersofpotatoandmenthaareexcludedfromthesampleastheyare

notexposedtomarketriskandhencedonotrequireanyhedgingmechanism.Nevertheless,the

studyunderlinestheimportanceoffuturesmarketstocontractfarmingasfuturespricesserveas

thepotentialbenchmarkforthecontractualprocurement.

Thereareintermediariesoperatinginthehighlyexportdrivenmenthaoilmarket.Thelocaldealers

anddistilleriesarevery importantamong them.Distilleriesareessentiallyexporters.During the

field study effortsweremade to interactwith some of them inMassauli (Barabanki), Sambhal

(Moradabad) and Rampur. They were not willing to share any information relating to their business

for obvious reasons.

Perceptionsofvarioustargetgroupsinbothpotatoandmenthaoilaboutthefuturesmarketsare

important.Theirattitudesdeterminenotonlythepenetrationofthemarketbutalsothesuccessof

futuresinachievingthemostefficientpricediscovery.Theschedulehascapturedcertainsubjective

influencesontheirdecisiontoparticipateinthemarkets.Moreover,basedontheexchangetraded

dataperformanceofpotatoandmenthaoil futurescontractswith respect to risk reductionand

ready-futuresmarketsintegrationareempiricallyevaluated.

1.4.4. Secondary Data The study has utilized published data of various governmental and private sector agencies, and

internationalorganizationslikeFAO,InternationalPotatoCentre,etc.Thereadymarketpricesof

potato(Farrukhabad)aresourcedfromUPAgriculturalProduceMarketingBoard(MandiParishad)

whileformenthathespotpricesinSambhalreleasedbyMCXLtd.,areutilizedfortheanalysis.

Most of the state level data are sourced fromDirectorate ofHorticulture, LucknowandDistrict

HorticultureOfficesoftherespectivesampledistrictsinUP.


1.5. Organization of the Report

The report is organized into four chapters. Chapter covers objectives, methodology and data of the

study.Chapter2examinestheimportanceofmenthaandpotatointheagriculturaleconomyofUP.

GiventhefactthatUPisthebiggestproducerofthesetwohorticulturalcropstheirphysicalmarkets

havenationallevelrelevanceintermsofdeterminingprices.Thechapterpresentsabriefprofileof

theagriculturaleconomyofUPwithafocusonthesetwocropsandtheirsupplyconditionsincluding

cropping season, pattern, area under cultivation and productivity, and their variety. Chapter 3 has

four-foldobjectives.First,itseekstoinvestigatethemarketstructure,supplychainandmarketing

practices in potato and mentha based on the data and observations obtained through sample

survey. Secondly, it tries to evaluate the utility of futures to various constituents in the entire supply

chain.Thirdly,itpresentsthesurveyresultsonidentifyingthesubjectiveinfluencesonthedecision

ofphysicalmarketplayers to takepositions inpotatoandmenthaoil futuresmarkets.Finally, it

proposesamarketingapproachtotheexchangeinthelightoftheevidenceonprevailingmarket

perceptions among prospective players and the prevailing supply chain in both potato and mentha.

Chapter4examinesthepotentialsofmenthaandpotatoascandidatesforintroducingfuturesand

theadvantagesofonlinefuturestradingwithregardtoitsbenefitstomenthaandpotatofarmers

inUttarPradesh.Thechapter,inadditiontodiscussingtheutilityoffuturestofarmersingeneral

and potato and mentha farmers in particular, has elaborated on the necessity of creating various

infrastructures and institutional capacities including commodity aggregators and warehouse receipt

systems for helping farmers benefiting from futuresmarkets.The final chapter summarises the

findingsofthestudyalongwiththeirimplications.


CHAPTER2

THE MARKET PROFILE OF MENTHA AND POTATO

2.1. Introduction

Thischapterintendstoexaminetheeconomicimportanceofmenthaandpotatointheagricultural

economyofUP.GiventhefactthatUPisthebiggestproducerofthesetwohorticulturalcropstheir

physicalmarketshavenationallevelrelevanceintermsofdeterminingprices.Thechapterpresents

abriefprofileoftheagriculturaleconomyofUPwithafocusonthesetwocropsandtheirsupply

conditions including cropping season, pattern, area under cultivation and productivity, and their

variety.

2.2. The Profile of Potato Market

TheimportanceofpotatohasbeensuccinctlysummarizedbyJohnReaderinManonEarth,1998.

It reads as follows.

In thespaceof just400years, thepotatohasbecomeastaplecropofmanypeoplearound

the world whose antecedents had subsisted perfectly well upon grain crops for anything up to

4000 years. The reason for this somewhat surprising development is that the potato is the best

all-aroundbundleofnutritionknowntomankind.Itsrationofcarbohydratetoproteinissuchthat

anyone eating enough potatoes to satisfy their energy requirements will automatically obtain most

oftheproteintheyrequire.Furthermore,thebiologicalvalueofpotatoprotein(anindexofthe

nitrogen absorbed from a food and retained by the body for growth and maintenance) is 73, second

only to eggs at 96; just ahead of soybeans at 72, but far superior to corn (maize) at 54 and wheat


at53.Potatoesalsocontainsignificantamountsofessentialvitamins(theBritish,infact,usedto

derive30%oftheirvitaminCintakefrompotatoes.)Exceptionalproductivityisanothervirtueofthe

potato.Afieldofpotatoesproducesmoreenergyperhectareperdaythanafieldofanyothercrop.

Potatoes grow well from sea level to 4,000 feet on a wider variety of soils, under a wider range of

climatic conditions, than any other staple food. The potato matures faster in 90 to 20 days, and will

providesmallbutedibletubersinjust60days.Allinall,thepotatoisabouttheworldsmostefficient

means of converting plant, land, water and labour into a palatable and nutritious food.

2.2.1. World Production of Potato According to the data released by Food and Agriculture Organization (FAO) (FAOSTAT, September

998), potato production worldwide stands at 293 million tons and covers more that 8 million

hectares.With thebreak-upof theformerSovietUnion,China isnowtheworlds largestpotato

producer.Indiaranksnumberfour.OtherleadingpotatoproducingcountriesareUkraine,Poland,

Germany, Belarus, Netherlands, France, UK, Canada, Turkey and Romania. Although potato

productioninEuropehasfallensincetheearly1960s,thisdeclinehasbeenmorethanoffsetbythe

growthinAsia,AfricaandLatinAmerica,therebyexplainingtheriseinglobalpotatotonnage.

Major Potato Producing Nations

Qua

ntity

( M

T)

The latest available estimate released by Central Potato Research Institute (CPRI) Shimla, the

averageworldproductionduring2001-03 is to the tuneof313.7million tonswithareacovering

morethan19millionhectares.AsperCPRIestimatesIndiaisrankedthreeintermsofproduction

whileoccupyingfourthpositionintermsofareaunderitscultivation.Thecountry-wiseproduction

statistics are provided in table 2..


Table 2.1: Potato statistics of India vis--vis other countries

Area (average of 2001-2003) Production (average of 2001-2003)

Rank Country Ha Rank Country Mt China 4,630,454 China 68,892,594 2 Russia 3,95,433 2 Russia 34,860,837 3 Ukraine ,599,000 3 India 23,9,200 4 India ,255,667 4 USA 20,53,490 5 Poland 92,29 5 Ukraine 7,487,833 6 Belarus 570,33 6 Poland 6,2,420 7 USA 504,890 7 Germany ,073,854 8 Germany 283,267 8 Belarus 7,929,433 9 Romania 280,6 9 Netherlands 6,925,75 0 Peru 259,985 0 UK 6,5,333

World 19,124,181 Total 313,770,638

Source: Potato Statistics, Central Potato Research Institute, Shimla

2.2.2. Significance of Potato in the Indian Economy Potatohassignificantshareintheoverallagriculturalproductioninthecountry.Atcurrentprices,

fruits and vegetables share close to 25 per cent of agricultural production and within the fruit and

vegetablesegment theshareofpotatowasestimated tobearound8percentduring1998-99.

Thedisaggregateddataonvalueofoutputfromagricultureareprovidedintable2.2.At1993-94

prices, the value of potato is estimated to be Rs. 46 crore against total production of fruits and

vegetables amounting to Rs. 57988 crore and value of overall agricultural output amounting to Rs.

2.38lakhcrore(NationalAccountsStatistics,2002,CSO).

(at current prices, Rs. crore)

Table 2.2: Value of Output from Agriculture

Item 1993-94 1996-97 1998-99 2000-01 Cereals 74523 07499 28505 45824 Pulses 228 7204 959 5758 Oilseeds 24096 34459 36926 25246 Sugars 4627 9474 23076 27647 Fibres 896 4437 369 42 Indigo, dyes 7 4 7 9 Drugs&narcotics 4066 6227 852 70 Condiments&spices 6740 045 485 447 Frutes&vegetables 38420 62275 90025 85732 Potato 33 5528 748 2640 Other crops 5397 9250 9495 9796 By products 4360 966 2343 24745 Kitchen garden 396 838 2659 2405 Value of output from agriculture 204874 302744 370365 369795

Source:NationalAccountsStatistics2002,CSO,GOI.


Although potatoes are widely grown in India the climatic variations across the country determined

its distribution and cropping patterns. More than 80 per cent of the potato crop is raised in the winter

season (Rabi) under assured irrigation during short winter days from October to March. It is mostly

concentratedalongtheIndo-GangeticPlaintothenortheast,wheremostpotatoesaregrownduring

the short winter days from October to March. Generally one crop is grown in this belt during winter,

plantedfromlateOctobertoearlyNovemberandharvestedinJanuarythroughFebruary.However,

inUPand insomeof theeasternstatesfarmersgofor twocrops insuccession, thefirstduring

SeptembertoNovember-December,andthesecondfromNovembertoMarch.

The Storage PeriodJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Main Harvest

Rabi Storage Early Harvest

Rabi

Theautumncrop,plantedaroundmid-OctoberandharvestedinFebruaryorMarch,isimportant

to the Punjab area to thewest, adjacent to Pakistan (where it is themost important seasonal

potatocrop).Rainyseason(Kharif)potatoproductionistakeninKarnataka,Maharashtra,Himachal

Pradesh,JammuandKashmirandUttaranchal.Potatocultivationinthesouthisgenerallylimited

byanexcessivelyhotclimate.Theoptimaltemperaturerangeforpotatoisfrom15to25C(59

to77F).However,nighttemperatureiscriticallyimportanttotuberdevelopmentandshouldnot

exceed20C(68F).PlateauregionsofSouth-eastern,centralandpeninsular India,constitute

about 6 per cent area where potatoes are grown as a rainfed crop during rainy season (July to

October).However,inasmallareacoveringmainlytheNilgiriandPalanihillsofTamilnadu,thecrop

is grown round the year both as irrigated and rainfed crop.

Areas of high relative concentration of potato cultivation include:

ThestatesofUttarPradesh,WestBengal,andBiharaccountingformorethan75percentof area under cultivation and about 80 percent of total production;

Punjab state to the west, adjacent to Pakistan, where roughly seven percent of area and production occur;

Higheraltitudeareastothenorth,whereasummercropaccountsforaboutfivepercentoftotal production;

Thesouthernpeninsula,whereapproximatelysixpercentofthetotalcropisgrownonrelatively highaltitudeplateaus,suchastheNilgiriandPalinihillsofTamilNadu,underalternatingrain-

fed and irrigated conditions throughout the year.

In India, theCPRIwhichwas set up in 1949 has been instrumental formajor breakthrough in

potatocultivationandproductivity.ALargenumberofvarietiesaremadeavailablewithmanyof

themdevelopedbyCPRI.By2002,CPRIhasreleased35varietiesinadditiontotheexisting32

varieties(seeappendix3forthelist).Acomparativestatisticswhichcoverthegrowthduringthelast


forty years is provided in table 2.3. While productivity increased by 256 per cent total production

increasedphenomenallyby843percentduringtheperiod1963-2003.Withaccesstoirrigation,

chemicalinputssuchasfertilizers,continuedexpansioninpost-harvestinfrastructureintheformof

roadsandcoldstoragefacilities,producerscontinuetofindpotatoesanextremelyattractivecrop

to grow. Strong demand both in the countryside and in rapidly growing urban areas continues to

stimulate increases in area planted.

Table 2.3: India: Potato Production Trends1961-63 2001-03 Comparison

Total Area Cultivated (000 Hectares) 383 ,28 334% Per Capita Area Cultivated (Square Meters) 8.3 2.2 48% Average Yields (Tons per Hectare) 7.3 8.7 256% Total Production (000 Tons) 2,844 23,980 843% Per Capita Production (Kilograms) 6. 22.8 372%

Notes:Dataarethree-yearaverages,comparisonof2001-03to1961-63.

Populationestimatesforpercapitadata:1961-63=46.29crore;2001-03=104.95crore

Source: FAOSTAT.

ThetrendinproductionofpotatohasbeenstableinUP,WestBengal,Bihar,HaryanaandPunjab

states. The all India production of potato has been growing at CAGR of around 3 per cent during

the last ten years. Potato occupies a major share in overall vegetable production in the country.

As shown in table 2.4 in terms of area it shares more than 25 per cent while close to 35 per cent

in overall vegetable production.This signifies the dominant role potato plays in the agricultural

economy of the country.

Table 2.4: Area, production and yield of potato in India

Year Area (000 Hect.)

% Of Veg. Area

Productivity (Mt/hect.)

Production (000 Mt)

% of Total Veg.

Production 1991-92 35. 20.3 6.0 895.0 3. 1992-93 240.0 24.6 4.9 8479.0 29.0 1993-94 047. 2.5 6.6 7392.4 26.4 1994-95 069.4 2.3 6.3 740.3 25.9 1995-96 09.0 20.8 7.0 8843.3 26.3 1996-97 248.8 22.6 9.4 2425.9 32.3 1997-98 208.9 2.6 4.6 7652.3 24.3 1998-99 280.2 2.8 7.6 22494.7 26. 1999-2k 340.9 22.4 8.6 25000. 27.5 2000-01 2.3 9.4 8.4 22242.7 23.7 2001-02 259.5 20.5 9.4 24456. 26. 2002-03 337.2 22.0 7.3 236.4 27.3 2003-04 484.7 25. 8.8 27925.8 32.9 2004-05 542.3 26. 8.9 2988.6 34.4 CAGR % 2.35 2.96 .33


Source: Directorate of EconomicsandStatistics,MinistryofAgriculture,GOI

IndianHorticultureDatabase2005,NationalHorticultureBoard,GOI

Production Trend of Potatoes

35

30

25

20

15

10

5

0

2004-05

2003-04

2002-03

2001-02

2000-01

1994-95

1990-91

1984-85

1979-80

1974-75

1970-71

1960-61

1950-51

Pro

duct

ion(

Mill

ion

Tonn

es)

2.2.3. Significance of Potato in the UP Economy AgricultureisthebackboneoftheUttarPradesh(UP)economy.Ithascontributed32.4percentof

statedomesticproduct(SDP)during2001-02.UPenjoysaverysignificantplaceintheagricultural

economy of the country. It is a leading producer of pulses, cereals and vegetables. Table 2.5

presents thestatessector-wisecontribution to theoverallagriculturalproduction in thecountry.

While the state shares 2 and 8 per cent respectively of the total cereals and pulses production, its

contributiontototalvegetableproductioninthecountryisestimatedtobe17percentduring2001-

02 (Agricultural Statistics at a Glance, 2003 and 2004, Ministry of Agriculture). Among vegetables

UPleadsintheproductionofpotatoandgreenpeas.

Table 2.5: Area and Production of different crops in Uttar Pradesh & India (2001-02)

Area in thousand hectares Production in thousand MTCrop Uttar Pradesh India

Area Production Area Production CEREALSRice 607 2856 44900 93340 Wheat 9256 25498 26340 72770 Sorghum 323 309 9800 7560 Pearl millet 85 968 9530 8280 Maize 93 57 6580 360 Other cereals 282 6 360 4380 Total Cereals 17714 41759 100760 199490


PULSES

Gram 84 87 6420 5470 Pigeon Pea 394 456 3330 2260 Lentil 625 500 470 970 Other pulses 823 603 0790 4670 Total Pulses 2683 2376 2200 3370 OILSEEDSGroundnut 08 90 6240 7030 Rapeseed&

Mustard

566 574 5070 5080

Soybean 8 6340 5960 Sunflower 0 80 680 Other oilseeds 535 347 380 90 Total Oilseeds 230 030 22640 20660 FRUITSSugarcane 2035 7982 440 29720 Banana .4 33.5 466.2 4209.9 Citrus 0.9 2 68.5 4789. Guava 7.3 36. 54.6 75.5 Litchi 0.2 0.2 58. 355.9 Mango 253 950 575.8 0020.2 Papaya 0.3 6.4 73.7 2590.4 Other fruits 5.2 44.6 643. 576.4 Total Fruits 288.3 2282.8 400. 43000.9 VEGETABLESBrinjal .5 59.6 502.4 8347.7 Cabbage 7 209.4 258. 5678.2 Cauliflower 3.4 50.7 269.9 4890.5 Okra 3.2 54.8 347.2 3324.7 Green Peas 47.4 79.2 303.3 2038.2 Tomato 4 0.3 458. 7462.3 Onion 25.2 278.5 495.8 5252. Potato 389.9 9570 259.5 24456 Sweet Potato 22.6 259.8 3.9 30.3 Other vegetables 73.8 328.6 890.6 9526.2 Total vegetables 777.9 5044.8 655.7 88622. FLOWERS 6.33 5350 06.5 25647 SPICES 42.4 3.4 3224 534.6 Source:AgriculturalStatisticsataGlance2003&2004,DepartmentofAgriculture&Cooperation,MinistryofAgriculture,

Government of India

IndianHoticultureDatabase-2003,NationalHorticultureBoard

UPhasthedistinctionofleadingpotatoproducerinthecountry.Thestatecontributesalmost35per

centoftotalproductioninthecountry.Thestate-wiseproductionstatisticsareprovidedintable2.6.

In terms of productivity the state is way ahead with 22.3 tonne per hectare as against the national

averageof18.8.UPisalsoamajorsuppliertopotatoprocessingindustrymostlylocatedinwestern


andsouthernpartofthecountry.ManyareasinthestateincludingAgra,Farrukhabad,Kanaujare

knownforhighqualityprocessingvarietypotatoes.Potatoesarealsobeingexportedfromthestate

tomanycountriesincludingSriLanka,SaudiArabia,etc.

Manyvarietiesaregrown inUP inaddition toDesi.Desivariety isgenerallycultivatedbysmall

farmerstomeetthelocalmarketrequirements.Thevarietychosenbythefarmerdependsonthe

markethetargets.Forexample,Rajender1andRajender2aremainlytocatertothemarketsin

BiharwhileprocessingvarietiesKufriChipsona-1andKufriChipsona-2aregrownextensively in

Agra,Farrukhabad,Kannaujandotherleadingproductionareasformeetingtherequirementsof

theprocessingindustry.OtherpopularvarietiescultivatedinUPareKufriAnand,KufriBahar,Kufri

Jyoti,KufriChandramukhi,KufriLalimaandKufriBadsha.Theagrozone-wisevarietiesarelisted

in table 2.7.

Table 2.6: State-wise area, Production and Productivity of Potato

States Area (in 000 hectare) Production (in 000 MT) Productivity (in MT/ha) 1991-92 2003-04 2004-05 1991-92 2003-04 2004-05 1991-92 2003-04 2004-05

Uttar Pradesh 323.0 422.1 440.0 6145.6 8825.6 9821.7 19.0 20.9 22.3 West Bengal 206.3 306.0 320.6 4531.8 7591.7 7106.6 22.0 24.8 22.2 Bihar 305.0 318.1 318.1 3250.0 5656.7 5656.7 10.7 17.8 17.8 Punjab 46.6 71.9 72.9 923.1 1439.7 1470.2 19.8 20.0 20.2 Gujarat 16.8 35.8 43.3 412.5 780.0 978.2 24.6 21.8 22.6 Madhya Pradesh 31.7 46.6 52.2 368.0 698.7 782.5 11.6 15.0 15.0 Karnataka 35.4 59.5 60.0 650.0 526.7 603.2 18.4 8.9 10.0 Assam 61.7 78.0 73.1 473.3 543.1 589.1 7.7 7.0 8.1 Uttaranchal NA NA 22.1 NA NA 448.5 NA NA 20.3 Haryana 13.8 17.9 18.4 205.0 440.1 441.7 14.9 24.6 24.0 Others 194.8 128.9 121.7 1235.7 1423.5 1290.2 6.3 11.0 10.6 Total 1235.1 1484.7 1542.3 18195.0 27925.8 29188.6 14.7 18.8 18.8

Source:IndianHorticultureDatabase2005,NationalHorticultureBoard,GOI.

Leading Potato Producing States(2004-05)

Utta

r P

rade

sh

Wes

t Ben

gal

Bih

ar

Pun

jab

Guj

arat

Mad

hya

Pra

desh

Kar

nata

ka

Ass

am

Utta

ranc

hal

Har

yana

10000

7500

5000

2500

0

Pro

duct

ion

in 0

00 M

T

441.7448.5589.1603.2782.5978.21470.2

5656.7

7106.6

9821.7


Table 2.7: Agro Zone-wise Varieties Recommended by NHRDFAgro-ecological Zone Recommended Variety North-WesternPlains Kufri Chandramukhi, Kufri Jawahar, Kufri Kuber, KufriAlankar,

Kufri Badsha, Kufri Dewa, Kufri Pukhraj, Kufri Sheetman, KufriSutlej

NorthEasternPlains KufriAshoka, Kufri Kuber, Kufri Chipsona 1, Kufri Chipsona 2,KufriLalima,KufriPukhar,KufriRed,KufriSutlej

West Central Plains KufriSafed,KufriSindhuri,KufriChandermukhi,Kufri Jawahar,KufriKuber,KufriChamatkar,KufriKisan,KufriSindhuri

Plateau Region Kufri Chamatkar, Kufri Jawahar, Kufri Jyotir, Kufri Kuber, KufriLauvkar,KufriPukhraj

NorthWesternHills Kufri Giriraj, Kufri Jyoti, Kufri Kundan, Kufri Jeevan, Kufri KumarNorthEasternHills Kufri Giriraj, Kufri Jyoti, Kufri Megha, Kufri Khasigaro, Kufri

NaveenNorthBengal,SikkimHills Kufri Jyoti, Kufri Kanchan, Kufri Sherpa, Kufri Giriraj, and Southern Hills KufriMuthu,KufriSwarna,KufriNeela,KufriNeelamani

Source:NationalHorticulturalResearchandDevelopmentFoundation,Nasik

Thedistrict-wisepotatoproductionfiguresaregivenintable2.8.Aspertheproductionestimatesof

theDirectorateofHorticulture,GovernmentofUPcloseto45percentiscontributedbysixdistricts

ofUP in2005-06.TheyareAgra (9.85),Firozabad (8.64),Farrukhabad (8.06),Kannauj (6.77),

Badaun (4.70) and Hathras (4.57). The share of another ten districts adds to 66 per cent of total

productioninthestate.TheyareBarabanki(2.75),Mathura(2.44),Mainpuri(2.44),Aligarh(2.39),

Moradabad(2.36),Etawah(2.31),Ballia(2.22),Shahjahanpur(2.12),Allahabad(2.09)andEtah

(2.02).

Table 2.8: District-wise Potato Production in Uttar Pradesh

(Area in hectare, production in MT and productivity in MT per hectare)District 1995-96 2000-2001 2005-2006(EST.)

Area Prod. Pvty Area Prod. Pvty. Area Prod. Pvty.

Saharanpur 574 13527 23.566 791 16684 21.092 733 16443 22.432

Muzaffarnagar 2942 69331 23.566 2603 54902 21.092 2653 59512 22.432

Meerut 7983 165695 20.756 7353 158950 21.617 6114 99004 16.193

Bagpat - - - 366 7879 21.526 264 4559 17.267

Bulandsahar 5282 124988 23.663 6563 141276 21.526 7350 125156 17.028

Ghaziabad 5176 121978 23.566 4547 97879 21.526 6309 117524 18.628

Gaut. Budh Nagar

- - - 336 7233 21.526 267 4610 17.267

Aligarh 5502 124526 22.633 5531 145737 26.349 10291 239163 23.240

Hathras - - - 12544 370688 29.551 15940 455964 28.605

Mathura 5866 132764 22.633 6137 161704 26.349 8391 244061 29.086

Agra 8747 260941 29.832 18662 569023 30.491 39800 983936 24.722

Firozabad 12502 325552 26.040 18508 435012 23.504 33975 863135 25.405

Mainpuri 10486 243443 23.216 10328 236553 22.904 11760 243996 20.748

Etah 7760 141791 18.272 7058 130121 18.436 10234 202132 19.751

Bareilly 5677 105450 18.575 4664 100140 21.471 6030 117760 19.529

Badaun 15788 293830 18.611 16612 304282 18.317 23119 469662 20.315

Shahjahnpur 5995 111356 18.575 5151 110596 21.471 6423 212171 33.033

Pilibhit 844 15677 18.575 581 12475 21.471 638 14335 22.469


Bijnor 1040 21155 20.341 958 18924 19.754 888 21576 24.297

Moradabad 10675 263096 24.646 8239 227899 27.661 9179 235294 25.634

Jyoti-phule Nagar - - - 4647 91797 19.754 4303 92261 21.441

Rampur 2700 54920 20.341 2182 43103 19.754 1722 41840 24.297

Farukhabad 54518 1316937 24.156 29221 766876 26.244 31442 804947 25.601

Kannauj - - - 32479 807850 24.873 37507 676401 18.034

Etawah 8754 203968 23.300 5967 135008 22.626 10961 230477 21.027

Auraiya - - - 2857 64642 22.626 3810 91253 23.951

Kanpur N. 824 19657 23.856 10327 251617 24.365 6280 162853 25.932

Kanpur D. 8563 190030 22.192 1467 33192 22.626 2366 93263 39.418

Fatehpur 4237 84587 19.964 5734 81665 14.242 6145 118807 19.334

Allahabad 17029 342964 20.140 12396 253771 20.472 10554 209064 19.809

Kaushambi - - - 3570 50844 14.242 4882 91313 18.704

Pratapgarh 6741 83561 12.396 7200 102544 14.242 4620 87360 18.909

Jhansi 291 5844 20.082 275 5860 21.311 269 6034 22.432

Lalitpur 387 7772 20.083 330 7033 21.311 332 7448 22.432

Jalaun 265 5322 20.083 179 3815 21.311 176 3948 22.432

Banda 394 7913 20.084 97 2067 21.311 304 6819 22.432

Chitrakut - - - 267 5690 21.311 398 8928 22.432

Hamirpur 85 1707 20.082 30 640 21.311 39 875 22.432

Mahoba - - - 90 1918 21.311 234 5249 22.432

Varanasi 5689 102584 18.032 4163 94330 22.659 3347 72481 21.656

Chandauli - - - 966 21889 22.659 1141 24709 21.656

Jaunpur 10242 168624 16.464 11685 250421 21.431 8926 170924 19.149

Gazipur 9686 125376 12.944 9857 224523 22.778 4909 128689 26.215

Mirzapur 2330 41571 17.842 2160 46971 21.746 322 7223 22.432

Sonbhadra 658 11740 17.842 808 17571 21.746 1055 23666 22.432

Ravidash Nagar 2465 43979 17.841 1448 31488 21.746 1286 28847 22.432

Ballia 7175 141549 19.728 7388 137026 18.547 7386 222104 30.071

Azamgarh 5828 84786 14.548 5707 105849 18.547 5571 167526 30.071

Mau 2298 45335 19.728 1796 33311 18.547 1501 45137 30.071

Gorakhpur 4958 52246 10.538 4362 61713 14.148 4222 94708 22.432

Maharajganj 2881 30359 10.538 2886 40831 14.148 1871 41970 22.432

Deoria 2007 21149 10.538 2126 30079 14.148 2043 45829 22.432

Kushi Nagar 2679 28231 10.538 1870 26457 14.148 1394 31270 16.184

Basti 5467 57610 10.538 3684 46532 12.631 703 15770 22.432

Kabir Nagar - - - 1827 23077 12.631 3676 82460 22.432

Sid.nagar 3054 32182 10.538 3076 38853 12.631 2359 52917 22.432

Gonda 5121 88194 17.222 2742 53735 19.597 2942 65995 22.432

Balram Pur - - - 1904 37313 19.597 1545 34658 22.432

Baharaich 3596 61930 17.222 2077 40703 19.597 996 22342 22.432

Shravasti - - - 2000 39194 19.597 484 10857 22.432

Lucknow 6445 125048 19.402 5107 69423 13.594 3515 55312 15.736

Unnao 5611 108867 19.402 5491 74642 13.594 6574 135740 20.648

Raibarily 5271 102270 19.402 5900 80202 13.594 5560 99096 17.823

Sitapur 4468 86690 19.402 3847 52295 13.594 3329 58595 17.601

Hardoi 9497 164830 17.356 11334 155661 13.734 11432 186502 16.314

Lakhimpur Kheeri 1658 32169 19.402 1208 16421 13.594 1589 27969 17.601

Faizabad 4987 70117 14.060 4110 66905 16.279 2866 56128 19.584

Ambedker Nager 4820 67769 14.060 4685 76266 16.279 4482 87775 19.584

Sultanpur 6118 105364 17.222 6684 108806 16.279 7458 146058 19.584

Barabanki 14192 304617 21.464 14338 277827 19.377 14011 274391 19.584

Total Up 356828 7165468 20.081 394083 8398203 21.311 445197 9986781 22.432

Source:DirectorateofHorticulture,Govt.ofUttarPradesh,Lucknow.


2.2.4. Production Forecasts Recent collaborative research involving International Food Policy Research Institute (IFPRI),

Washington and International Potato Center (CIP) has included a detailed analysis of historical

trendsandfutureprojectionsforpotatoesindevelopingcountries.Estimatedgrowthratesinpotato

productionfortheperiod1993-2020are2.02%accordingtothebaselinescenariobasedmore

on past projections, and2.71% for the high demandandproduction scenariobasedmore on

historical trends. As these projections were done as part of a global model for the worlds major food

commodities, they also permit estimates of the future value of production. Similar projections are

carried out by CPRI with regard to production, yield and area in India.

Thesecalculationsshowthatthepotatowillmostlikelymaintain,ifnotincrease,itsrelativeeconomic

importanceinthefoodbasketfordevelopingcountriesinthedecadesahead.Thehighgrowthrate

ofpotatoproductioninIndiaislikelytocontinue,primarilyasamarketedcashcropmorethanasa

ruralstaple.AspertheCPRIprojectionsgivenintable2.9productionofpotatoisexpectedtotouch

30milliontonneby2009-10andtocross40milliontonneby2020.Althoughverylittleofthepotato

cropisprocessedonalargerindustrialscale,homesandsmallbusinesseswhichsellsnackfoods

will sustain the demand for increased production.

Table 2.9: Potato Projection up to 2020

Area (000 ha) Production (million t) Yield (q/ha) Based on 2003-04

2009-10 1554.0 29.255 188.25 2014-15 1730.1 34.544 199.67 2019-20 1926.2 40.791 211.76

Based on average of 2000-01 to 2002-03 2009-10 1465.4 29.317 200.06 2014-15 1631.4 34.619 212.20 2019-20 1816.3 40.878 225.06

Source: Potato Statistics, Central Potato Research Institute, Shimla

2.2.5. Demand for Potato AccordingtoFAOSTAT(1998)potatoconsumptionindevelopingcountrieshasincreasedsignificantly

overaperiodoftimefrom9kg/capitain1961-63to14kg/capitain1995-97.Theseaveragesare

stillbutafractionofpercapitaconsumptionlevelsof86kg/yearinEuropeor63kg/yearinNorth

America,suggestingthatampleroomexistsforcontinuedconsumptionincreases.Recentstatistics

suggest that this trend is already underway in parts of the developing world. Potato is a rich source

ofstarchanditisconsumedmainlyforitscalorificvalue.Potatoalsocontainssignificantamounts

ofvitaminsandminerals.InAsia,percapitapotatoconsumptionjumpedfrom12kg/capitain1991-

92 to 14 kg/capita in 1994-96 (InternationalPotatoCenter, Lima,Peru).Theannual per capita

consumptioninIndiaisestimatedtobeabout23.5kgin2003.Thecurrenttrendisbeingdriven


in part by a shift in food habits, as demand for potatoes increases with greater absolute numbers

of people with relatively high incomes. The potato in India is not primarily a rural staple, but as in

muchofAsia,acashcropwhichprovidessignificantincometoruralfarmers.Indiaspopulation

is approximately 28percent urban, a proportionwhichhas remained fairly stableover thepast

decade, but urban Indians with higher incomes are providing much of the growing demand for

potatoes (FAOSTAT, 998). The potato processing industry is still undeveloped, but has strong

potentialtogrowinresponsetodomesticandinternationalmarkets.

It is estimated that about 25 % of the potatoes, which are spoiled due to several reasons, may be saved by processing and preservation of various types of processed products.

Potatoes can be processed for preservation and value addition in the form of wafers/ chips, powder,flakes,granules,cannedslices

Apotatocrispisathinsliceofpotato,flatorwavy,friedinvegetableoilandsaltedorseasoned to taste.

Potatogranulesareusedforthepreparationofvariousrecipes,toaddtovegetableandnon- vegetable recipes and to enhance the quantity as well as to enrich the food value

Thereisahugepotentialforprocessedpotatoproductssuchaspotatoflakes,potatopowder, frozen potatoes, frozen french fries

Potatochips/wafersareoneofthemostpopularsnackitemsconsumedthroughoutworld.Itis byfarthelargestproductcategorywithinsnacks,with85%ofthetotalmarketrevenue

IndiaisoneofthelargestsnackmarketsintheAsia-Pacificregioncontributingthreepercentto thetotalAsia-Pacificsnackmarketrevenue.

There is an increased opportunity for the players in Potato chips to act as contract manufacturers fortheleadingglobalbrandsenteringtheIndianmarket

The range of potato chip production includes high technology lines having a production capacity from80upto2,000kg/hoffinishedproduct.

The range of French Fry production includes high technology lines having a production capacity from300upto6,000kg/hoffinishedproduct.

2.3. The Profile of Mentha Oil Market

Mentha(mint) isaseasonalcashcropgrowninentiretaraiandwesterndistrictsofU.P.mainly

Nanital, Rampur, Moradabad, Badaun, Bareilly and recently extended to eastern districts viz.

Barabanki,Lucknowandsitapurdistricts.UPistheleadingproducerofmenthainIndiawith80per

cent share and the rest 20 per cent is grown in Punjab and Haryana. It is usually sown in February

andharvestedfrommid-Mayonwards.Itisawater-intensivecropandrequiresabout20irrigations

during the crop cycle. Mentha oil is obtained by steam distillation of mentha arvensis leaves. The oil

is a natural source of menthol which is one of the most actively traded commodities in the chemical

marketsinIndia.


In India there are four main species of mentha. They are mentha arvensis also called mentha

ShivalikwhichisthesourceofJapanesemintoil;menthaperperitawhichprovidespeppermintoil;

menthaspicataasrawmaterialforspearmintoilandmenthacitrateforextractingbergamontoil.

Menthaoilyieldsanaverageof40-50%mentholand50-60%dementholisedoilwhichareusedin

confectionery, cosmetics and medicines.

India is the largest producer and exporter ofmentha oil in theworld followed byChina, Brazil

andtheUS.Indiahasanapproximateshareof70-75%oftheglobalmintoilproduction.Withthe

growingdemandinthedomesticaswellasinternationalmarkets,theproductionofmenthaoilhas

increased manifold. The area under mentha cultivation has touched as much as 70,000 hectare

andproductionofoiltotheextentof14,000MTduring2004.IndiaexportsmenthaoiltoArgentina,

Brazil,EuropeanUnion,JapanandtheUS.Theexportfigurehascrossed3000MTworthmore

than Rs. 00 crore.

Table 2.10: Area under Mentha Cultivation and Mentha Oil Production in India

Year Area Hectare Production of Mentha Oil (in MT) 965 65-70 2 970 600-650 46 975 4000-4500 260 980 8000 500 98 0000 800 985 8000 400 988 25000 2200 990 35000 5000 992 38000 5400 995 45000 7000 996 35000 5500 997 55000 000 999 62000 2000 200 65000 3000 2003 72000 5000 2004 70000 4000

Source:FICCI,NewDelhi.

Table 2.11: Indias Export of Metha Oil

Year Quantity (MT) Value (Rs. Crore) 1992-93 50 26.06 1993-94 40 30.6 1994-95 583 43.57 1995-96 352 47.50 1996-97 237 34.50 1997-98 306 95.94 1998-99 2825 70.54 1999-2K 2734 96.73


2000-01 2725 93.75 2001-02 2945 96.97 2002-03 Data not available 2003-04 5.32 2004-05 .22 2005-06 3.60 Source:IndianAgriculture-2003,IndianEconomicDataResearchCentre,Delhi.

Director-GeneralofForeignTrade,MinistryCommerce,GoI

Table 2.12: District-wise Production of Mentha Oil in Uttar Pradesh

(area in hectare, production in MT)

Districts 2000-01 2004-2005 2006-2007(PROJ.) Area Prod.(Oil) Pvty. Area Prod.(Oil) Pvty. Area Pvty.

Barabanki 18250 1825 0.100 29500 2950 0.100 29595 2959 0.100

Moradabad 16150 1615 0.100 19000 1900 0.100 19061 1906 0.100

Rampur 8250 825 0.100 12000 1200 0.100 12039 1204 0.100

Badaun 4632 463 0.100 6000 600 0.100 6019 602 0.100

Sitapur 2400 240 0.100 3000 300 0.100 3010 301 0.100

Bareilly 1810 181 0.100 2500 250 0.100 2508 251 0.100

Faizabad 2210 221 0.100 3000 300 0.100 3010 301 0.100

Pilibhit 230 23 0.100 500 50 0.100 502 50 0.100

Other Distts. 508 51 0.100 2200 220 0.100 2206 221 0.100

Total 54440 5444 0.100 77700 7770 0.100 77950 7795 0.100

Source:DirectorateofHorticulture,GovernmentofUP,Lucknow.


District-wise Share in Mentha Oil Production in UP

100%

80%

60%

40%

20%

0%2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Year

Sha

re (

%) Rest of UP

Sitapur

Badaun

Rampur

Moradabad

Barabanki

TheleadingproductioncentresinIndiaareFatehpur(Barabanki),Sambhal(Moradabad),Sadar

(Rampur),Chandausi(Moradabad),Badaun,Bareilly inUP.Almost80%ofannualproduction in

IndiaoriginatesfromUPalone.

Barabanki is the leadingmenthaoilproductioncentre inUP.Fatehpur,RamnagarandMassauli

areas in the district have high concentration of mentha farms. As per the data received from District

HorticultureOffice,Barabankithetotalproductionofmenthaoilfromthedistrictistothetuneof

34.20lakhlitreswithanareaof40,236hectareundermenthacultivationinthedistrictin2005-06

(table 2.3).

Table 2.13: Production of Mentha oil and Area under Mentha Cultivation in Barabanki

Year Area (in hectare) Production(inlakhlitre)2001-02 27,495 29.7 2002-03 28,000 29.8 2003-04 30,500 3.6 2004-05 3,000 33.7 2005-06 40,236 34.20

Source:DistrictHorticultureOffice,VikasBhawan,Barabanki

2.4. Conclusion

PotatoandmenthaplayaverysignificantroleintheagriculturaleconomyofUttarPradesh.They

areeconomicallysignificantnotonlyfortheircontributiontothelivelihoodofthousandsoffarmers

and for theirdominance in theagricultural consumptionbasketofhouseholdsbutalso for their

growing linkages to fastgrowingpotatoprocessing industryandhighlydiversified industrialuse

ofmenthaoilforconfectionary,cosmeticsandpharmasectors.Thesecharacteristicsmakethem

very high potential candidates for futures trading. The relevance of introducing futures in these

commoditiesinthelightoftheirsupplychainwillbedealtindetailinthenextchapter.Menthaoil


andpotatofulfillthefollowingconditionswhichmakethemsuitableforintroducingfuturestrade.

The supply and demand for these commodities are large enough to attract many potential futuresmarketsplayers.

As India is a leading producer of both the commodities they have the potential to attract internationaltradinginterestsinthefuturesmarkets.

These commodities are well standardized and storable. While mentha oil is high value and low volume commodity which is storable without any special and expensive infrastructure

requirements,a largechainof coldstoragesnetwork inUP is takingcareof thestorageof

potatoes.

Privateandfreemarketsforcesoperateinbothcommoditieswithoutmonopolisticorgovernment control.

The most important among other conditions is their seasonal supply and large price variation betweencropseasonandoffseasoncreating largepriceriskstoproducersandconsumers

alike.


CHAPTER3

THE SUPPLY CHAIN AND MARKET STRUCTURE

3.1. Introduction

Thepresent chapterhas four-foldobjectives.First, it seeks to investigate themarket structure,

supplychainandmarketingpracticesinpotatoandmenthabasedonthedataandobservations

obtained through sample survey. Secondly, it tries to evaluate the utility of futures to various

constituentsintheentiresupplychain.Thelongsupplychaininbothpotatoandmenthamarkets

inUPisidentifiedasthepotentialsourceofexploitationoffarmers.Thirdly,itpresentsthesurvey

resultsonidentifyingthesubjectiveinfluencesonthedecisionofphysicalmarketplayerstotake

positions inpotatoandmenthaoil futuresmarkets.Finally, itproposesamarketingapproachto

theexchangeinthelightoftheprevailingmarketperceptionsamongprospectiveplayersandthe

structure of supply chain in both potato and mentha.

Asexplainedinchapter1,samplesarechosenfromthreemajorpotatomarketsoneeachfrom

Farrukhabad,Moradabad and Lucknow districts of UP.Cold storage houses aremajormarket

intermediarieswhichprovideintegratedpre-harvestandpost-harvestsupporttoespecially large

scalefarmersinUP.Theyareoperatingaswhole-salemarketplacesinalltheproductionareas.

Inordertounderstandthemarketingpracticesandsupplychainasmallsampleofcoldstorages

fromeachoftheseareasarechosenbasedonthecriteriaexplainedearlier.Thesethreesample

locationsareFatehgarh,SambhalandBakshi-ta-Talab.Similarly,threemajorlocationsofmentha

farmingviz.,SambhalinMoradabad,SadarinRampurandFatehpurinBarabankiarechosenfor

collection of samples.


3.2. Potato Marketing Practices

In UP, potato is a rabi crop which is planted during October-November and harvested during

January-February.Freshpotatoarrivaltomarketsstartsfromend-February.Itisaseasonalmarket

with wild fluctuations in prices. Bymid-January 2006, prices plummeted to as low asRs. 280

perquintaland increased toRs.375byend-Marchand toRs.675asatend-September2006.

Thereisnogovernmentinterventioninpotatomarkets.Marketingofpotatoisessentiallyaprivate

activityinalmostallstateswiththeexceptionthatcoldstorageratesfortheseasonarefixedby

thegovernment.LargenumberofAPMCmarketshoweveraresetupinUPtopromoteorganized

marketing.

3.2.1. The Risk-Return Profile Potatofarmingisaprofitableactivitytofarmers.However,majorityoffarmersarenotabletorealize

benefits that themarket offers due to lack of properly organizedmarketing activities.The cost

estimates collected from a progressive large scale potato farmer are provided in table 3.. The

estimates indicate that the storage has ensured a phenomenal margin of more than 00 per cent

during2006.Theprofitmarginisstillhigherforthosewhohaveownland,seedandotherrequisite

infrastructure including own funds.

Table 3.1: Estimated Average Expenses Per Acre PotatoParticulars Expenses(Rs.)Seed(boughtfrommarket) 2,000.00 Fertilizers 4,000.00 Irrigation([email protected]/-foreach) 9,000.00 Insecticides and pesticides ,800.00 Labour,tillinganddiggingcharges 3,000.00 Leasecharges(@1500/bigah;1acre=6.4bigah) 9,600.00 Otherincidentalexpenses(approximate) 7,000.00 Total 46,400.00 Production (tonne) .50 Storagecost(@90/-perquintal) 3,500.00 Value(atthebestprice@650/-perquintal 97,500.00 during October 2006)

Source: Field visits

However, this shows only the brighter side of the picture. In reality, the marginal, small and medium

scale farmers who constitute the majority do not have the wherewithal to wait for good prices. They

often resort to distress sale immediately after the harvest. Some of them store part of their produce

in cold storages and sell the remaining at a rather low price tomeet their immediate financial

commitments. The only way to protect them from price disadvantage is to ensure them access to

warehouses and collateral credit from formal sources. Commodity futures have an active role in

promotingwarehousereceiptfinancingsystem.Thisissueisdiscussedinchapter4.


3.2.2. The Supply Chain TherearemanycriticalissueswithregardtosupplyanddemandforpotatoandmenthainUP.On

the supply side, fragmentation of land and the resulting diseconomies are nevertheless a general

issue in Indian agriculture. Indian agriculture sector is predominantly occupied by marginal (less

than1hectare),small(1to2hectare)andmedium(2to10hectare) farmers.Lackofsufficient

institutionalcreditflowintofarmsectorhasbeenamajorthreattoitsgrowth.TheRuralFinancial

AccessSurvey(2003)conductedjointlybyWorldBankandNationalCouncilforAppliedEconomic

Research inAndhraPradesh andUP revealed that 44 per cent rural households had informal

borrowing at interest rates as high as 48 per cent per annum. Only 2 per cent of rural households

have access to formal credit. The most critical issue is the price distortions due to long supply chain

inagriculturalmarkets.Theintermediariesoperatinginthesupplychainextractthepricebenefits

whichotherwisewouldhavemadefarmingprofitabletofarmers.

Duetolackofanintegratedandregulatedsystemformarketingagriculturalproduce,farmersare

disadvantagedbyverypoorpricerealization.Theexistingmarketingchannelisnotperfectenough

totakecareofsmoothandeconomicaltransferofpotatotothefinalconsumerthroughouttheyear.

Microlevelstudiesindicatethatsmallfarmerscontributeabout54percentofmarketablesurplus

anddistresssalebythesefarmersaccountforabout50percentofthemarketablesurplus.They

oftensell theirproduce tosquareoffdebtssoonafterharvesting.Largepricespreadsand low

pricerealizationduetoimperfectionandweaklinkagesinsupplychainhavedisadvantagedsmall

farmers(ReportoftheWorkingGrouponWarehouseReceiptsandCommodityFutures,Reserve

BankofIndia,2005).TheseimperfectionsareclearlyvisibleinpotatomarketsinUP.

Thesupplychainconsistsoffarmers,storagehouses,whole-saledealers/exportersandprocessors.

Thecoldstoragesformvitallinkinthesupplychainbynotonlyofferingstorageservicesbutalso

facilitating sale of potatoes.

FARMERSCOLDSTORAGES

DEALERS/EXPORTERS

PROCESSORS/CONSUMERS

Figure 3.1: The Potato Supply Chain

3.2.3. Cold Storages Amongtheintermediarieslinkingthefarmertotheconsumer,coldstoragesarecrucialtofarmersin

the supply chain of potato. They ensure continuous supply of potato during the entire year staring

fromApril to October-November.At the end of crop season in March storages complete their

procurementfortheoff-seasoni.e.,April-November.However,thestoragecapacityisnotenough

toabsorbtheentireproductioninUP.Aspertheofficialestimatesprovidedintable3.2,45to60per


cent of production goes to storages while they have the capacity to store around 84 per cent of total

potatoproductioninUPby2005-06(DirectorateofHorticulture,Govt.ofUP,Lucknow).Therefore,

40to55percentoftheproductionarrivesatthespotmarketsjustaftertheharvestduringFebruary-

March.Thiscreatesamajorpricecrashinthemarket.

The Storage Season for Potato in UP

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Main Harvest

Rabi Storage Early Harvest

Rabi

Thepricerisk fromstorage ishighwhichservesasadisincentive forprivatesector to invest in

storages.Futurescontractsinpotatothroughitsefficientrisktransfercanbeapotentialavenue

tothestoragehousesformitigatingthemarketrisk.Theabsenceofsufficientinter-yearstorage

facilitiesmakesthepriceshighlyvolatilebetweentheseasons.Sinceaccurateforecastoffuture

prices are not available there is always storage premiumor discount.The rise inmarket price

betweenseasonsi.e.,thestoragepricemargin,isthegrossbenefitearnedbyfarmersoneachunit

ofpotatostored.Inorderforstoragetobeprofitable,thestoragepricemarginmustbesufficiently

high to compensate farmers for all of the costs incurred for storage, including labour and materials,

interest on foregone income from delaying the sale immediately after the harvest and the storage

losses. If the storage margin is lower than the cost of storage, then farmers suffer a net loss and

havelittleincentivetostore.Ifthestoragemarginisabovethecostofstoragethennetbenefits

from storage are positive.

The sample survey reveals that majority of big farmers (holding more than 0 hectare) resort to

storage houses. The summary results are presented in table 3.8 through 3.0. The sample survey

of storage houses in three districts reveals that none of them operates in full capacity. There are two

mainreasonsforthedistressandimmediatepost-harvestsalebysmallandmediumfarmers.First,

duetotheirurgencytogetmoneytopaybackdebttheyarecompelledtosellwithoutwaitingfor

better price later and secondly and more importantly, storage houses compete for bringing medium

andbigfarmerstotheirfoldtofilltheirstoragecapacity.

Services of storages houses are not standardized in all respects. Although storage charges are

governed by the rules of state government, small and medium farmers are often discriminated

in many other counts. Storage services are tailor made services depending on the personal

relationshipbetween theownerand theclient.Themostpreferredclientasexplainedearlier is

largefarmers.Theyareofferedpre-harvestandpost-harvestinfrastructureandfinancialsupport

services.Theseincludefinancewhichcoversmajorportionofthemarketvalueofstoredpotatoat

lowerinterestrate,freetransportservicetopickuppotatofromthefield,bagsforstoringpotatoes

instorage,etc.Itisrevealedfromdiscussionswithofficials/ownersofstoragehousesthatsmaller

farmerclientsareofferedloansequivalenttocertainportionofthemarketvalueofstoredpotatoat

arelativelyhigherrates.Aswarehousereceiptsystemisnotdevelopedsmallfarmersdonotfind


significantadvantageingoingforstorage.Itseemsthattheirbenefitsfromhigherpricerealization

with considerable time lag even out the interest and storage costs.

Storagehousesarepractically theorganizedwhole-salemarkets forpotato.Theyprovideend-

to-endmarketing services to farmers.They attract dealerswho stuck deals in the presence of

farmers, release potato and receive payments from dealers. After deducting all pending dues

includingstoragecharges,interestandprincipalandloading/unloadingexpensestherestispaid

tofarmer.However,thereispriceriskinstoragewhenthestoragemargin(discussedinchapter4)

is negative which has made many farmers not turning up for claiming the crop stored. This in turn

posesseriousriskstostorageowneraswellandthesolvencyofstoragehouses.

Table 3.2: The Profile of Cold Storages in UP

Year No.ofColdStorages

Storage Capacity (inLakhtonne)

Potato Production (inlakhtonne)

Total Storage (inlakhtonne)

1999-2000 948 59.73 0.09 50.34 2000-01 005 60.3 83.98 36.9 2001-02 0 6.66 95.7 45.22 2002-03 040 65.5 02.2 62.48 2003-04 085 72.73 88.25 50.69 2004-05 55 78.89 98.2 58.43 2005-06 205 83.65 00.86 60.65

Source:DirectorateofHorticulture,Govt.ofUP,Lucknow

Table 3.3: District-wise Cold Storage CapacityDistrict UPTODec.2005 District UPTODec.2005

Sl.No. Number Capacity (tonne)

Sl.No. Number Capacity (tonne)

Saharanpur 8 8468 36 Banda 0 0

2 Muzaffarnagar 30 48203 37 Chitrakoot 0 0

3 Meerut 44 8424 38 Hamirpur 0 0

4 Bagpat 5 6089 39 Mahoba 0 0

5 Bulandsahar 39 37565 40 Varanasi 3 52768

6 Ghaziabad 23 47679 4 Chandauli 24

7 Gautambuddhnagar 450 42 Jaunpur 2 0237

8 Aligarh 26 284425 43 Ghazipur 23 2850

9 Hathras 4 34783 44 Mirzapur 8 8899

0 Mathura 27 82794 45 Sonebhadra 0 0

Agra 43 397 46 SantRavidasNagar 3 0386

2 Firozabad 63 637825 47 Balia 4 77850

3 Mainpuri 26 80945 48 Azamgarh 0 22954

4 Ettah 22 46932 49 Mau 2 2578

5 Bareilly 7 94800 50 Gorakhpur 7 360

6 Badayun 67 287042 5 Maharajganj 6 624

7 Shahjahanpur 20 92484 52 Deoria 2 23

8 Pilibhit 3 2990 53 Kushinagar 3 5602

9 Bijnore 0 33238 54 Basti 4 2848


20 Moradabad 36 255069 55 SantKabirNagar 4 2978

2 Jyotibafulenagar 22 07399 56 SiddharthNagar 0 0

22 Rampur 4 22859 57 Gonda 7 20532

23 Farrukhabad 60 526005 58 Balrampur 3872

24 Kannauj 73 732683 59 Behraich 9 4087

25 Etawah 28 283580 60 Shrawasti 0 0

26 Auraiya 3 2325 6 Lucknow 20 7288

27 Kanpurnagar 4 350779 62 Unnao 82779

28 Kanpurdehat 2 700 63 Raibereli 2 42208

29 Fathepur 7 62355 64 Sitapur 9 34275

30 Allahabad 39 2584 65 Hardoi 8 80506

3 Kaushambi 2 759 66 Lakhimpurkhiri 8598

32 Pratapgarh 6 36447 67 Faizabad 3 59683

33 Jhansi 4000 68 Ambedkarnagar 3 48334

34 Lalitpur 0 0 69 Sultanpur 2 846

35 Jalaun 80 70 Barabanki 9 78685

TOTAL 205 8365690

Source:DirectorateofHorticulture,Govt.ofUP,Lucknow.

3.2.4. Potato Futures Markets Potatohedgecontractswereearliertradedintworegionalexchangesviz.,ChamberofCommerce,

HapurandBhatindaOmandOilExchangeLtd.,Bhatinda.Theyinitiatedtradinginanopen-outcry

systemwithlittlesuccess.TheavailablestatisticsindicatethatevenHapurexchangewhichhas

theadvantageofbeinglocatedinaleadingpototoproducingbeltinUPhasfailedtoattractenough

tradinginterest.Theturnoverduring2000-01wasaslowasRs.13.56crorewithvolumeoflessthan

onelakhtones.Therelevantdataareprovidedintable3.4.WhileBhatindaexchangeremainedas

non-starterinpotatocontractsHapurexchangesreportedlyterminatedthecontractsin2002dueto

lackofenoughtradinginterestsinit.

Table 3.4: Potato Futures Trade in Chamber of Commerce, Hapur

(VolumeinLakhtonne,valueinRs.crore)July Contract Oct. Contract March. Contract Total

Volume Value Volume Value Volume Value Volume

1996-97 0.37 4.40 0.8 7.33 0.22 6.64 0.77 1997-98 .06 28.63 0.23 5.73 0.90 35.75 2.9 1998-99 0.09 5.95 0.00 0.8 0.00 0.00 0.09 1999-2K 0. 3.03 0.03 0.68 0.2 2.62 0.26 2000-01 0.35 8.07 0. 2.35 0. 3.4 0.57

Source:TheChamberofCommerce,Hapur,UP.

Tradinginpotatofuturesstartedinon-lineplatformoftwonational-levelmulticommodityexchanges

viz.,MultiCommodityExchange of India (MCX) Ltd., andNationalCommodity andDerivatives

Exchange (NCDEX) in2006.Themarket haswitnessedamajor recoverywith the introduction

of online trading. As per the data made available by MCX it has generated volume to the tune of


.98 million tones (MnT) (including both sides of the contract) with an equivalent value of Rs.

7314.34croreduringMarch-October,2006.Thetotalpotatoproductionhoweveristothetuneof

29.19milliontonesduring2004-05andhascrossed30MnTduring2005-06.Internationally,futures

marketsgeneratesturnover2-3timesthesizeoftheunderlyingphysicalmarket.Thisshowsthat

potatofuturesmarketsinIndiaarestilltogoalongway.Ithashoweverthepotentialtotakecareof

hedging requirements. The volume generated within a few months of the launch of futures trading

isanindicationofitssignificance.

3.3. Mentha Oil Marketing Practices

The consumption pattern of mentha in India has made it an important crop. Mentha in India has

reached out to all most all the households and has made a major impact because of the qualities

present in it. In fact, India is the leading consumer of mentha and mentha oil. Sauces are made from

mentha leaves. Increasing rate of production of mentha oil has made India the largest producer

andexporterintheworld.ThemajortradingcentersinIndiaarelocatedinUPwhichareSambhal,

Barabanki,Rampur,Chandausi,BareillyandBadaun.

Marketingofmenthaoilisaprivateactivity.Mostofthementhafarmershavetheirowndistillation

facilities installed in their field. Oil extraction takes place during May-June. The market is

characterizedbywildfluctuationsinpricesduetostrongseasonalnatureofitsdemand.Itsdemand

in pharma sector goes up at the beginning of winter season in view of high demand for cough syrup,

allergyandcoldrelatedmedicinalpreparationswhichcontainmenthol.Itsreadymarketpricevaried

fromRs.350duringJune-JulytoalmostRs.650perkilogramduringOctober2006.

Thereisnogovernmentinterventioninmenthaoilmarket.Thereisdemandfromvariousquarters

for introducing minimum support price (MSP) for mentha oil. It is learnt that farmers organizations

likeBharatiyaKisanUnionunderMahendraSinghTikayathasbeenorganizingfarmersinFatehpur,

Ramnagar,MassauliareasinBarabankidistrictforpressurizinggovernmentforMSP.

3.3.1. The Risk-Return Profile Production of mentha oil is a high value adding activity for mentha farmers. They are able to realize

a fairlyhighmargin for theoil.However,majorityof farmersarenotable to realizebenefits the

marketoffersduetolackofproperlyorganizedmarketingactivities.Thecostestimatesformentha

cultivationcollectedfromsomeoftheprogressivefarmersandtheprevailingreadymarketprice

mentha oil are provided in table 3.5. The estimates indicate that a productive farmer with value

addition is able to realize a fairly high margin during 2006.

Table 3.5: Estimated Average Expenses Per Acre Mentha


Particulars Expenses (Rs.) Seed(boughtfrommarket) ,000.00

Fertilizers 700.00

Irrigation([email protected]/-foreach) 6720.00

Insecticides and pesticides 500.00

CostofLabour,tillingandsowing 3,000.00

Particulars Expenses

Labourforweeding 500.00

Distillation(@Rs.35/-perkgoil 575.00

(assumingrecoveryof45kgoilperacre)

Miscellaneousexpenses 000.00

Total 5,995.00

Productionofmenthaoil(kg) 45

Storage cost 0.00

Value(atthebestprice@675/-perkgduring 30,375.00

end-October2006)

Source: Field Visits

However, therearemanybottleneckswhichprevent the farmers from realizing themargin that

themarketoffers.First,asagainsttheorganizedsaleofpotatoesundercoldstorages,menthaoil

marketisdevoidofanyorganizedmarkets.Itisprimarilyalocalmiddlemensmarket.Largenumber

of localdealersandcommissionagentsoperates inmarkets likeSambhal,Rampur,Barabanki,

MassauliandRamnagarareaswhointerfacebetweenfarmersandcommercialdistilleries/exporters.

Secondly,farmerstendtosellmenthaoilimmediatelyaftercroppinganddistillationwhenthemarket

rateislow.Thisisduetolackofformalcreditflowintheformofcollateralfinancingavailableto

farmers.Finally,themarketisdominatedbybigplayerswhereassmallfarmersaredisadvantaged

bytheirinsignificantsmallsize.Thesesmallfarmersselltheiroutputtolocaldealerswhointurn

dealwithlargescaledistilleriesandexporters.

3.3.2. The Supply Chain MenthaoilmarketinUPisahighlyexploitativemarketforlackofaformallyorganizedmarketing

channel.Duetolackofanintegratedandregulatedsystemformarketingfarmersaredisadvantaged

byverypoorpricerealization.Theexistingmarketingchannelisnotperfectenoughtoensurefair

price to farmers. Farmers often resorts to distress sale of oil to local dealers due to compulsions

tosquareoffdebtssoonafteroil isextracted.Largepricespreadsandlowpricerealizationdue

to imperfectionandweaklinkagesinsupplychainhavedisadvantagedsmall farmers ingeneral

(ReportoftheWorkingGrouponWarehouseReceiptsandCommodityFutures,ReserveBankof

India, 2005).

Thesupplychainconsistsoffarmers,localdealers,bigcommercialoildistilleriesandexporters.


FARMERSLOCAL DEALERS

OIL DISTILLERIESEXPORTERS

PHARMA,COSMETICS,CONFECTIONERY PRODUCERS

Figure 3.2: The Mentha Oil Supply Chain

Distilleriesarethevitallinkbetweenthefarmersandtheenduserofmenthaoilanditsderivatives.

These distilleries are not only meeting the domestic industry requirements but also cater to the

growingexportmarketsinvariouspartsoftheworld(alistofleadingmenthaoil/mentholdistilleries/

exporters isgiven inAppendix-4).Astheydeal inbulk(normally theirminimumdealsize isone

tonne)farmersdonothavedirectaccesstothem.Thisgivesanopportunitytolocalmarketdealers

to interface between the distilleries and farmers.

Thelocaldealersmakelargepoolofoilpurchasefromfarmersandsellittodistilleries.Someof

them,overaperiodoftime,havebecomeleadingexportersinsomepocketsandmanyofthem

establishedlinkageswithpharma,cosmeticsandconfectionarycompanieslocatedindifferentparts

ofthecountry.Theyareabletorealizehugeprofitmargin.Effortsweremadeduringthesurveyto

locate some of them especially in Rampur, Sambhal, Ramnagar and Massauli areas. Many of them

aredisguisedtraderswhodonotwanttobeidentifiedasmenthaoildealersortheyarereluctantto

divulge any information about the transactions they carry out. Some of them even disappeared from

their shops as soon as the research team arrived. It is learnt that they didnt want to be trapped

bysalestaxauthorities.

Someofthefarmerssharedtheviewthattheyarenotabletorealizetheprevailinghighermarket

price due to unethical practices resorted to by the local dealers. The dealers buy oil from farmers

athugediscounttotheprevailingmarketprice.Asthereisnostandardizedqualitycheckfarmers

are often misguided by dealers and forced to sell at a huge discount. During the current season the

markethasbeenridingveryhighwitharecordpriceofmenthaoilhoveringaroundRs.675perkg

inOctober2006asagainstRs.350-400prevailedduringMay-June2006.Similarly,theaverage

exportpriceofmenthaoilhasgoneupfromRs.382in2003-04toRs.418in2004-05andtouched

ashighapriceasRs.532in2005-06(DGCIS,MinistryofCommerce,GoI).Thoughthedealers

arenotpassingthefullbenefitofhigherpricestofarmers,indicationsarethatfarmerswereableto

get better prices during the last two seasons. A substantial increase in area under cultivation and

productionduring2005-06asseenintable2.12and2.13inchapter2isanindicationofincreases

prices of mentha oil.

3.3.3. Mentha Oil Futures Currently,threenationalmulticommodityexchangesofferfuturesinmenthaoil.WhileMCXand

NCDEXoffer futures inmenthaoil,NationalMultiCommodityExchangeof IndiaLtd (NMCEIL)

trades in menthol futures. The MCX trading platform has recorded huge volume in mentha oil

38 Supply Chain and Futures Trading A study of Potato and

study potato men tha

Documents

potato advantages

growth of potato

mentha oil futures

world production of

menth oil futures

online trading

conclusion chapter

report chapter