How an exchange can make a difference for farmers

It is often thought that electronic commodity exchanges are sophisticated and costly, and have little to offer to small agricultural markets. However, technology costs have fallen, and if the conditions are right such exchanges can be cost-effective even in small markets. The case of potatoes in Bhutan illustrates this.

In 2015, I was asked to come to Bhutan to assess the possibilities to use modern, online marketing and financing mechanisms to improve the functioning of the country’s agricultural sector. Bhutan is a small, landlocked country in the Himalayas, where farmers (60% of the population of 800,000) eke out a meager living on steep terrain, often hours away from the nearest market. Agricultural financing, both pre- and post-harvest, was poor, and transaction costs high. In my recommendations, I focused on the country’s potato and cardamom sectors – the country’s major agricultural exports.

My main recommendation for the potato sector was to bring the traditional potato auction in Phuentsholing, a major market town on the border with India, online (this would require the standardization of potato lots, i.e., better sorting). This recommendation was accepted by the Royal Securities Exchange of Bhutan (RSEB), which together with the Food Corporation of Bhutan (FCB) started the electronic auction project in 2016. RSEB already had an electronic securities trading system that could be adapted to commodities at a relatively low cost, and FCB was ready to change the lossmaking way it operated the potato auction.

The electronic auction system was rolled out in the 2017 campaign (September-December), and the fourth campaign (September-December 2020) has finished. In 2018, sellers still had to bring their potatoes to the auction yard at the border with India, but in 2019 two upcountry warehouses were added. Sorting and grading machines were added, giving buyers greater confidence in the quality of the produce and leading to higher prices.

Once an upcountry delivery location is approved, farmers can store their products in these warehouses and no longer need to travel to the auction yard. Registered buyers can bid online and no longer need to be physically present in the auction yard. Online trading still takes place alongside conventional auctioning, largely because the process of standardization/grading is still incomplete and awareness-raising among farmers takes time. But machines are being installed to make potato grading more reliable, and this will raise online volumes. And among farmers, news of the benefits is spreading word-to-mouth.

Bhutan Potato Farmers Reap the Benefits from Commodity Exchange

In the first season, farmers realized about 3 dollar cents more per kg (an 8% improvement in comparison to prices with conventional auctioning), with 1,024 tons sold. In the second season, 1,592 tons were sold electronically, with similar price gains. The total gains for farmers – USD 48,000 in 2018 – may seem small, but for the farmers themselves this was significant.

Other benefits were that waiting times for farmers were reduced (before, they often had to spend 4-7 days in Phuentsholing waiting for their potatoes to be sold and receive their payment); and Brand Bhutan has been strengthened among Indian potato consumers. Furthermore, women were empowered to sell their potatoes themselves. Given the low costs of the project, these were very satisfactory results.

COVID-19 Disruption on Bhutan Potato Market

The project is still in its growth phase. In 2018, online volume was only 6.5 per cent of the total potato auction volume in Phuentsholing. In mid-November 2019, in the middle of the year’s campaign, online volume had already bypassed the total volume for the 2018 campaign, but in 2020, the Covid-19 pandemic disrupted the export market. Improving grading takes time, and it is also taking time to familiarize farmers with the mechanism.

According to one farmer, on the online auction his potatoes fetched as much as 30% more than what he received through conventional auctioning. “It’s easy and fast too. I have informed my friends here to sell through online auction from next year.”[1] Prices had further improved.

When exports to India were disrupted in 2020 due to the Covid-19 pandemic, FCB was able to quickly adapt the online marketing system for a much broader range of agricultural commodities, allowing domestic sellers and buyers to connect directly online, and giving FCB a platform to buy agri-products for price support purposes. This allowed markets to continue operating in the face of the closure of auction yards and widespread movement controls.

The reach of the electronic potato auction in Bhutan will continue expanding, and online trading in cardamom is expected to be added; further commodities are planned. As the electronic auction itself piggybacks on the RSEB’s electronic stock trading platform, the whole project, up to the start of implementation, cost only some USD 80,000, so despite the project still being in its infancy, the gains for farmers in the first two years almost added up to this investment costs. With operating costs low, the initiative of modernizing Bhutan’s agriculture through a modern exchange mechanism has clearly paid off.

Now at the Indonesia Commodity & Derivatives Exchange (ICDX), I am very much aware of how much farmers can stand to gain from the kind of trading and financing technology that we can offer. Whether by extending our financial platform skills to physical markets, by bringing warehouse receipt finance to farmers, or by introducing new tools for price transparency and risk management, ICDX will strive to make its operations as inclusive as it can.

[1] Business Bhutan, Potato sale through e-auction gaining momentum, 1 December 2018