ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Electronic Agricultural Spot Markets

Status, Impact, and Architecture

The electronic spot market has introduced technological innovations to agricultural commodity market trading through the electronic National Agriculture Market. To assess the role of the electronic spot market in price discovery, this paper explores the price efficiency test between select commodities’ spot and futures markets. While we find that the spot plays an instrumental role in price formation and transmission in selected markets, eNAM is yet to augment price-setting for farmers. We propose improvisations in the spot market design that align institutional structures, governance mechanisms and incentives and strengthen spot market infrastructure to enhance farmer participation.

A shorter version of this paper appeared in the Commodity Insights Yearbook (2019) brought out by the Multi Commodity Exchange and National Institute of Securities Market. The authors are thankful to the anonymous reviewer for insightful comments that helped them revise the paper significantly. They are solely responsible for any error or omission of data or information in the published paper. The usual disclaimers apply.
 

Electronic spot markets are said to play an important role in agricultural market development. It can be argued that it helps derive a theoretical price for the futures/options contract, especially in the exchange-traded derivatives market (OHara 1995). In other words, if price discovery is found to be opaque or insufficiently transparent in the spot market, the pricing of derivative contracts may be affected, which can be detrimental to agricultural market transparency and development. In India, the organised futures market was introduced in 200203, whereas the national-level private spot exchanges were set up in 200708. Post 201112, information and communication technology (ICT)-enabled large-scale electronic screen-based agricultural spot trading was initiated, following the introduction of the Karnataka model and electronic National Agriculture Market (eNAM). This development is attributed to digitalisation, technological innovations, the orchestrated roles of market institutions, and development policies (Chand 2016; Dey 2016; Aggarwal et al 2017; Reddy 2018). In the agricultural commodities market landscape, the enactment of the Model Agriculture Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017 paved the way for electronic (secondary) spot market development to integrate local mandis (large markets) or agricultural produce marketing committees (APMCs) to improve price-setting and remove intra-state trade barriers. However, the lack of a competitive environment and adequate support infrastructure has arrested the growth of the electronic spot market and hindered its potentially instrumental role in price discovery and market development (Department of Economic Affairs 2018).

Our paper contributes to discussions on the status and design issues of the electronic spot in the agriculture market setting and its role in price discovery and market integration. It has gained ground against the backdrop of the union finance ministers deliberations on the adoption of an eNAM (integrated 1,000 APMCs in 18 states and three union territories) over archaic APMCs, where collusive trade practices are prevalent and beleaguered marketing systems often force smallholders to restrain from voluntary exchange. While reviewing the literature on the impact of the electronic spot market on price-setting and market arrival, Aggarwal et al (2017) and Reddy (2018) must be acknowledged; their work explored the impact of electronic spot auctions on price realisation and stakeholders participation concerning the Karnataka model named Rashtriya e-Market Services (ReMS). Nevertheless, their analyses fall short in terms of investigating how the electronic spot market can be a potential avenue to alleviate distress sales and farm poverty. Does it score higher than the futures market in price discovery or has it registered a low entry barrier to participation?

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Published On : 20th Jan, 2024

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