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The Rediff Business Special/R Ramakumar

Futures trading won't help crisis-hit coconut sector

Ever since the Union government okayed futures trading in eight edible products including coconut oil, there has been jubilation in the crisis-ridden coconut oil industry.

So much so that three cities -- Cochin in Kerala, Kangayam in Tamil Nadu and Bombay in Maharashtra -- are vying to get the futures trading centres located on home turf.

Is futures trading panacea for the ills plaguing the industry? No.

As a research scholar, I had studied marketing and price behaviour of coconut and its products in Kerala, the largest coconut and coconut oil producing state in India.

As of 1995-96, Kerala produced 5.335 billion nuts of coconut out of the all India production of 13.299 billion nuts.

The sector in Kerala has been passing through a crisis of production and marketing of late.

The major issue is the stagnant productivity. Data show that the production had started to decline after 1974-75, but rose steadily after the late eighties.

The nineties have seen Kerala registering impressive growth rates in both coconut and rubber production, which have been sustaining a large percentage of growth of the state's economy. However, there are two major distressing factors.

First, the increase in production has resulted mainly from an increase in area cultivated, thus consuming a large part of the area under food crops like rice, and not from a rise in productivity levels.

Second, other states in India, like Tamil Nadu, have been showing better productivity levels and thus rapid production increases, posing a severe threat to the monopoly that Kerala has had in this sector.

The emergence of Kangeyam in Tamil Nadu as a major coconut trading centre in recent years, competing with the age-old glory of the Kochi market, is proof of this.

Two reasons have been cited for the decline in the productivity levels in the state. One is the lack of proper crop management practices among the farmers. The important among them is lack of proper irrigation facilities. Another reason is the prevalence of certain lethal diseases affecting the coconut palm, like the root wilt disease, for which the research sector has not yet come out with any effective cure.

While some scholars dispute the relevance of the second reason, it could be reasonably postulated that the declining productivity levels are caused by a combination of the above two reasons.

The issues in the marketing front are much more complex. The wild annual and seasonal fluctuations of coconut prices are cited as the prime issue. The movements of the prices of coconut and coconut oil in the state have been in close tandem.

This arises from the peculiar method of price fixation of coconut, where the price of 1000 coconuts is equated to the price of one quintal of coconut oil in the market. The demand for coconut is a derived demand from the demand for coconut oil: nearly half of the total demand for coconuts in the state comes from the coconut oil milling sector.

So, big-time traders of copra and coconut oil in the major trading centres like Kochi and Bombay, under the cover of traders' associations, were able to effectively manipulate the prices of coconut oil to their advantage. In this process, the farmer did not have any say in price determination.

This kind of market manipulation by the traders caused price fluctuations.

These had adverse effects on the consumption pattern. In the industrial sector, where a major part of the demand for coconut oil comes from the soap industry, the fluctuations caused rapid substitution of coconut oil as an important ingredient with other cheaper vegetable oils.

Studies show that the demand for coconut oil in the industrial sector is inelastic in the price range of Rs 2,500 to 3,000 per quintal and at prices above that, it is increasingly substituted. This situation coincided with the import of large quantities of cheaper vegetable oils into the country in line with the liberalised import policies.

Thus, the demand for coconut oil in the soap industry came down from 15 per cent to about three per cent in a span of three to four years. Similar substitutions took place simultaneously in other industrial segments, leading a sharp fall in the demand for coconut oil.

The consumption pattern of coconut oil in the household sector also changed drastically. Among the high-income families, the anonymous campaign that the use of coconut oil would raise the susceptibility to heart diseases, led to a drastic fall in consumption. Among the low-income families, data do not show any significant consumption of coconut oil after the advent of violent price movements. Thus the demand for coconut oil in the household sector also came down.

These changed consumption patterns show that the root of major problems in the coconut sector is the lack of adequate demand. This demand has to emanate mainly from Kerala itself, as the demand from other states is mainly for edible copra and tender coconuts.

Within Kerala, the two per cent growth rate in population and the stagnating per capita income levels are insufficient in sustaining the four to five per cent growth rate in production levels. Thus it should be in the context of this demand constraint that any problem concerning the prices of coconut oil be discussed.

Time for a rethink on futures trading in coconut products

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