Promotion of Forward Sales
A Forward Sale Contract (FSC) is a legally binding agreement between a buyer and a seller. By this agreement, the seller agrees to sell (and the buyer to buy) a given quantity of agricultural produce of a specified quality on a given future date at a predetermined price. Such contracts amount to advance marketing arrangements, which would secure a confirmed order to the seller, on the one hand, and an assured supply to the buyer, on the other. A system of that nature was promoted by the CBSL in 1999 under the promotional title of 'Govi Sahanaya' (relief to the farmer). Although Sri Lanka has had such forward marketing arrangements for selected perennial crops on an informal basis for a long time, the Govi Sahanaya was the first attempt to introduce a forward contract system on a formal basis. The forward contracts derive their legal status from the Sale of Goods Ordinance, enacted in 1896. In the system introduced in Sri Lanka, in addition to the buyer and the seller, provision has been made for a bank to participate as a facilitator of the contract. Hence, it can be called a tripartite arrangement among the farmer, the buyer and the bank. A forward sale contract is purely voluntary. The three parties involved would enter into the contract of their own accord. It is a system of stabilizing prices through the market.
The contract helps the farmer by assuring a stable price for his produce. The price can be fixed by a markup over the cost of production, thereby giving an assured net profit to the farmer, depending on market conditions. At the same time, it assures a guaranteed supply to the buyer at a given price, thereby helping him to pre-plan his procurement process and cash flow effectively. The role of the banker in the contract is simply to disseminate information on the cost of production and the time of availability of products, and bring together potential buyers and sellers. For these services, the banker is entitled to charge a commission from both the buyer and the seller. In addition, the process could also be financed by the bank by extending a direct loan or providing an indirect facility. In the former case, a direct loan could be extended to the farmer to finance cultivation. Once the goods are delivered, the same process could be financed further by extending a loan to the buyer.
Loan Facilities Available under Promotion of Forward Sales
Purchasing loan/pledge facilities are available for buyers who have entered into FSCs with farmers to purchase their produce at a reasonable price.
