Cumulative Rainfall in recent years

1
(No Transcript)
2
Cumulative Rainfall in recent years
Rainfall has displayed considerable variation
over the years
3
Link between Rainfall and Production
Indian crops are vulnerable due to strong
dependence on rainfall
4
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

5
Global Perspective
6
NCDEX approach
7
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

8
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

9
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

10
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

11
Mumbai Rainfall Index 2005
12
Rainfall Index for Maize at Karimnagar
13
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.

14
Trading of a Weather Index Example

• Suppose we consider a small rice farmer
• Acreage1.5 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

15
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

16
Rainfed Crops
17
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

18
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

19
Regulatory Facilitation
20
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

21
Thank You