The agri sector has witnessed changes in the recent past on account of tech-enabled interventions, and it is on course to receive more support through forward contracts and other financial options. Forward contracts offer a three-way benefit to commodity stakeholders – trade, hedge and finance.
Forward contracts allow you to hedge cost of purchase across an array of commodities not only for the standardized contract available through futures contracts. Hedging through Forward contracts allows buyers to fix their commodity cost at the time of entering into forward contract and settlement for the contract can be as long as one year. This allows buyers to hedge their commodity cost for a longer period than the 60-90 days offered by futures contracts.
Through Origo’s Forward contract, buyers of the contract can also trade on commodities by purchasing contract today and sell the contract through Origo to other buyers when the price of commodity is higher. Through this solution, buyers can trade in commodities with only 20-25% margin, making it easy for buyers to participate in commodity trade.
Forward contracts also allow for off-balance sheet financing and buyers in addition to upfront margin only need to pay the carrying cost for the commodities. Origo also provides confirmation of the commodity purchase along with location of warehouse and quality and price of commodities.
Several banks have partnered with the company providing structural debt financing options, paving the way for higher commodity purchases, investments in tech-backed warehouse management systems, and trade finance.
In the next three years, Origo expects to reach Rs 1,500 crores worth of commodity purchases through Forward contracts per year. The Forward contracts commodities done by Origo includes paddy, wheat, soybean, mustard, cotton, maize and pulses. Lenders and investors view forward contracts as a means to achieving assured returns, considering that the physical commodity’s storage methods and supply chain processes have improved significantly.
Origo has securitized debt instruments and pass-through certificates for institutional investors, who find the option appealing. These are some of the very few investment options available within the segment. The forward contracts’ 12-month long validity, the coupon of 10% return on investment, capital protection through commodity collateral, quality assurance of the commodity, and its utility as a hedge against inflation and uncertain markets made it a suitable option for several institutional investors.
Even during the pandemic, the demand for agri commodities remained high and the series of lockdowns further accentuated the situation. With agri fin-tech firms like Origo sourcing crops through financing from banks and storing them, such developments have broadened the scope for institutional investors to invest in agriculture at an uncertain time like the COVID-19 pandemic.
In a statement, Sunoor Kaul, Co-Founder of Origo Commodities, said “We now have our eyes set on larger goals for the coming years, and the direction of the growth of the agri sector has remained positive. Liquidity has been a major challenge within agriculture, and this collaborative effort to offer more forward contracts has the potential to resolve the same.”
Having received an A1 rating by ICRA for the securitized commodities transaction, Origo is going to rely on financing as well as future purchases through credibility and reliability. Going forward, it will be instrumental in resolving the liquidity concerns of the sector for the long term.