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The Rediff Business Special/R Ramakumar

Time for a rethink on futures trading in coconut products

Part I

This shifts the focus to the emergence and possible impact of futures trading on the coconut oil markets. In India, futures trading in coconut oil was regulated from the fifties and was completely banned by 1971 as it was considered "detrimental to trade and public interest".

Notice the contradiction between what is expected out of futures trading and what is actually required. It is argued by the coconut oil milling industry that futures trading will reduce speculation and stabilise coconut prices.

Whether this would actually happen is debatable. Granting it does, would futures trading help solve the current problems? No, because the root cause is fall in demand and futures does not address this at all.

Even if futures trading would stabilise the output prices, there is no reason to believe that this would lead to an increased demand for coconut oil from both the industrial and the household sectors.

Unless this demand improves, the producer cannot be assured of a sustained and remunerative price. And until this happens, a solution to the existing issues would be elusive.

One may even argue that futures trading can lead to heightened speculation, causing further price fluctuations. Whether futures actually ends up furthering the cause of speculative activities, remains to be seen.

It is said the so-called benefits of futures accruing to oil millers and traders would percolate down to the marketing channel and ultimately the actual producer, the farmer. Well, there is no evidence to support this theory.

How else can the producers be assured of a better price? The answer is elimination of the exploitative middlemen in the form of copra-makers, oil millers and commission agents who at present rule over the coconut trade. The latter snatch abnormally high margins while processing and transporting the produce.

These middlemen are now able to successfully influence the prices at different stages of marketing of coconut, copra and coconut oil, thus depriving the farmers of their due share in the final price.

This system continues in Kerala due to the absence of properly organised co-operative marketing societies at the producer's level.

In one of my studies, it was found that wherever co-operative marketing societies for coconut were properly organised and functioning, the farmers received an extra price of 75 paisa to one rupee for one coconut.

It is such a collective effort from the farmers and the government which is necessary to overcome the present crisis.

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