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Occasional Paper - 46
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ROLE OF COMMODITY EXCHANGES,
FUTURES & OPTIONS
(A CASE STUDY ON SOYA OIL)
.|||`|| |`|--||| .||- .|-|=|||-| |`|-|||
Department of Economic Analysis and Research
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National Bank for Agriculture and Rural Development
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Mumbai
2005
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NITESH RANJ AN
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efvelesMe jbpeve
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Aut hor
Nit es h Ra n ja n
Econ omis t , An dh r a Ba n k, Econ omic In t elligen ce Sect ion ,
Hea d Office, 5-9-11, Sa ifa ba d, Hyder a ba d 500 004.
r a n ja n n it es h @ya h oo.com, n r a n ja n @in dia .com
=| |`-||-| -| :|`--||`&|| || .||- ||| |`|||- -|&|| | ;, -|c|| || =|| |`-|( |`|--|.|- -|;| ;
Th e u s u a l dis cla imer a bou t t h e r es pon s ibilit y of t h e Na t ion a l Ba n k for Agr icu lt u r e
a n d Ru r a l Developmen t a s t o t h e fa ct s cit ed a n d views expr es s ed in t h e pa per is
implied.
-|c | | | |` | .|| - ||-|| | |` |||=| | |, .|||` | | |` |--| || .|| - .|-| =| ||-| |` |-|||, || || -| |` |-|, =|| |` ||, -|| c
-| =|| -24, || -|||, || .|| . -| 8121, ||-:|-| -|| || --| | =|, ||-:| (| | ), -| | - 400 051, ,|-| ||||` -||
Published by the National Bank for Agriculture & Rural Development, Depar tment of
Economi c Anal ysi s & Research, 4th Fl oor, ' C' Wi ng, Pl ot No. C-24, G-Bl ock,
PB No. 8121, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051.
|-||c| .|||`-||-| |=|, ||c, -|| - 400 001 ,|-| -||`:| 1
Printed at Karnatak Orion Press, Fort, Mumbai - 400 001.
iii
TABLE OF CONTENTS
Page No.
Pre fac e v
Exe c ut i ve Summary vi i
Lis t of Table s & Figure s x
Abbre vat ions xi
Ch a pt er 1 In t r odu ct ion 1
Ch a pt er 2 Object ives a n d Met h odology of t h e St u dy 13
Ch a pt er 3 Effect s of Fu t u r es Tr a din g on Sea s on a l Pr ice Va r ia t ion s 23
Ch a pt er 4 Lon g-t er m Rela t ion s h ip bet ween Fu t u r es & Spot Pr ices 29
Ch a pt er 5 Fu t u r es Tr a din g & Sh or t -t er m Pr ice Flu ct u a t ion s 35
Ch a pt er 6 Opt ion s a s a n Efficien t Tool for Hedgin g Pr ice Ris ks 39
Ch a pt er 7 In flu en ce of Fu t u r es Tr a din g on Sowin g Decis ion s & 45
Cr oppin g Pa t t er n
Ch a pt er 8 Su pply Res pon s es of Fu t u r es Pr ices on Tech n ology 49
Adopt ion & Yield Au gmen t a t ion
Ch a pt er 9 Non -t r a n s pa r en cy in Pr ices & Pr odu ct St a n da r dis a t ion 53
in In dia n Commodit y Exch a n ges
Ch a pt er 10 Na t u r e & Volu me of Commodit y Tr a din g Pa t t er n 55
Ch a pt er 11 Con clu s ion s a n d Recommen da t ion s 59
Not es 65
Bibliogr a ph y 66
v
PREFACE
One fine Sat u rday aft ernoon in 2004, I was glad t o receive a let t er
fr om t h e NABARD. It wa s a n in vit a t ion for wr it in g a n occa s ion a l
p a p er on a n y of t h e lis t ed t op ics , a ll of t h em r ela t ed t o va r iou s
fa cet s of a gr icu lt u r e in In dia . I did n ot h a ve a s econ d t h ou gh t on
t h is a n d immedia t ely decided t o a ccept t h e offer a n d s elect ed t h e
deman din g s u bject of Price St abilis at ion in Agricu lt u re Commodit ies
Role of Commodit y Exchanges , Fu t u res and Opt ions . Aft er variou s
s t a ges comp r is in g NABARD a ccep t in g my Br ief Ap p r oa ch Not e,
s elect ion of commodit y a n d collect ion of da t a , s u bmis s ion of dr a ft
pa per a n d it s r eview by in depen den t r efer ee(s ), t h e book in pr es en t
for m is n ow in t h e h a n ds of t h e r ea der s .
A few wor ds n eed t o be s a id a bou t t h e con t en t s of t h e pa per .
Commodit y der iva t ives ma r ket s ize t oda y is r ou gh ly of Rs . 6000
cr or e wit h la r ge pa r t icipa t ion fr om t h e commodit y t r a der s (40-50%),
brokers (20-30%) an d remain in g from t h e h igh n et wort h in dividu als
(HNI) a n d cor por a t e s ect or . By 2010, ma r ket s ize is es t ima t ed t o be
of mor e t h a n Rs . 50000 cr or e wit h mor e t h a n Rs . 10000 cr or e of
t r a de ea ch in pr eciou s met a ls , en er gy, a gr icu lt u r e, oils & oils eeds ,
pu ls es et c. Th e r ela t ion s h ip bet ween s pot a n d fu t u r es ma r ket s in
p r ice d is cover y h a s b een a n imp or t a n t a r ea of r es ea r ch . In t h is
pa per , pr ice dis cover y in s oya bea n oil ma r ket in In dia is dis cu s s ed.
Soyabean is t h e s in gle lar ges t gr own oils eeds in t h e wor ld exceedin g
a ggr ega t e glob a l ou t p u t of fou r imp or t a n t oils eed s gr ou n d n u t ,
r a pes eed mu s t a r d, s u n flower a n d cot t on s eed. In dia n s cien t is t s h a ve
been a ble t o develop s oya bea n s eed va r iet ies s u it a ble for differ en t
a gr o c lima t ic c on d it ion s wh ic h h a s le d t o r a p id e xp a n s ion of
s oya b ea n cu lt iva t ion in In d ia . Th e p a p er a n a lys es t h e effect s of
fu t u r es t r a d in g in s oya b ea n oil on it s s p ot p r ices . It s eek s t o
delin eat e wh et h er fu t u res t radin g h as been h elpfu l in con t rollin g t h e
d a ily, week ly a n d s ea s on a l p r ice va r ia t ion s in s oya b ea n oil. Th e
effect s of fu t u res t rading on cropping pat t ern, produ ct ion, t echnology
a n d yield a r e a ls o pa r t of t h e pa per .
Commodit y der iva t ives pr ovide t h r ee econ omic fu n ct ion s r is k
ma n a gemen t , p r ice d is cover y a n d t r a n s a ct ion a l efficien cy. It is
imper a t ive t o n ot e t h a t t h e pr ima r y pu r pos e of r is k ma n a gemen t is
t o pr ot ect exis t in g pr ofit s a n d n ot t o cr ea t e n ew pr ofit s . Simila r ly
p r ice d is cover y mea n s a b ilit y t o a ch ieve a n d d is s emin a t e p r ice
informat ion. Derivat ives also facilit at e efficiency in t ransact ions which
is t h e pr odu ct of liqu idit y. High er t h e liqu idit y lower is t h e t r a n s a c-
t ion cos t s .
vi
However, commodit y derivat ives in gen eral an d fu t u res t radin g in
s oya bea n oil in pa r t icu la r r equ ir e la r ger pa r t icipa t ion , liqu idit y a n d
efficien t t r a din g pla t for m. Dept h of t h e In dia n commodit y ma r ket s
n eed t o be br oa den ed by a llowin g pa r t icipa t ion of ba n ks , mu t u a l
fu n ds , pr imar y dealer s et c. An efficien t mar ket s lead t o h igh er volu -
mes of t r a din g, gr ea t er ma r ket liqu idit y a n d t igh t er bid-a s k s pr ea d.
In a liqu id a n d efficien t ma r ket , cos t of ca pit a l is a ls o r edu ced.
I wi s h t o t h a n k t h e NABARD for i n vi t i n g me t o wr i t e t h i s
Occa s ion a l Pa per wit h t h e gr a n t a s s is t a n ce fr om R&D Fu n d of t h e
Nat ional Bank (NABARD). I am also grat efu l t o CMIE, FMC and SOPA
for t h eir va lu a ble h elp on da t a . A pa r t of t h is pa per wa s pr es en t ed
a t Con fer en ce on Exch a n ge Tr a ded Commodit ies Ou t look 2005-06
h eld a t Hya t t Regen cy, Mu mba i. I a m gr a t efu l t o t h e dis t in gu is h ed
pa r t icipa n t s for t h eir va lu a ble commen t s on pr es en t a t ion . I wou ld
like t o ext en d my deep a ppr ecia t ion t o ma n y of my collea gu es a n d
fr ien ds wh o h elped me dir ect ly or in dir ect ly in t h e pr epa r a t ion of
t h is paper . My s in cer e t h an ks t o all of t h em. Th e au t h or is par t icu -
la r ly gr a t efu l t o t h e An dh r a Ba n k Ma n a gemen t for it s con t in u ou s
en cou r a gemen t a n d s u ppor t a t differ en t levels .
La s t bu t n ot t h e lea s t , I wou ld like t o expr es s my pr ofou n d a n d
h ea r t felt r es pect t o my beloved pa r en t s a n d fa mily member s wh o
have always been a s ou rce of ins pirat ion and encou ragement for me.
Wit h ou t t h eir bles s in gs a n d love, t h is wor k cou ld n ot h a ve been
pos s ible.
Hyder a ba d Nit es h Ra n ja n
04 Apr il 2005
vii
EXECUTIVE SUMMARY
1. Th e h is t or y of commod it y fu t u r es in In d ia is mor e t h a n a
cent u ry old. The firs t organis ed exchange of t he cou nt ry, Cot t on
Exch a n ge of Bomb a y, wa s es t a b lis h ed in 1 9 2 1 . Ap a r t fr om
fu t u r es t h es e exch a n ges t r a ded in opt ion s a s well. However ,
op t ion s t r a d e wa s b a n n ed in 1 9 3 9 . Th e p u b lic p olicy wit h
res pect t o commodit y fu t u res has u ndergone a s ea change from
t he res t rict ed (& banned) t rading t o Mu lt i commodit y exchanges
of r ecen t or igin . Th e n eed of t h e h ou r is t h a t a s ign ifica n t
s ect or of t h e In dia n econ omy-Agr icu lt u r e-be s t r en gt h en ed by
wa y of b u ild in g t h e e ffic ie n t p r ic e d is c ove r y a n d h e d gin g
me c h a n is ms , wh ic h a r e gr e a t ly fa c ilit a t e d b y t h e fu t u r e s
ma r k e t . Move a wa y fr om p r ic e u n c e r t a in t y a n d r e s u lt a n t
fin a n cia l in s ecu r it y t o s ome degr ee of fin a n cia l s t a bilit y by a
r eliable an d r elevan t pr ice dis cover y an d h edgin g mech an is m is
s in e qu a n on for developmen t of a gr icu lt u r e a n d a gr i-commo-
dit ies ma r ket in In dia .
2. Expos u r e of In dia n en t it ies t o commodit y pr ice r is ks h a s been
h igh ligh t ed by t h e gr owin g in t egr a t ion of t h e In dia n econ omy
wit h t h e r es t of t h e wor ld a n d in cr ea s in g cr os s bor der t r a de.
Economic agent s associat ed wit h commodit y t rade are in great er
n eed t o h edge a ga in s t pr ice r is ks t h a n t h eir cou n t er pa r t s in
ot h er ma r ket s s u ch a s bon d or cu r r en cy ma r ket s . Th is is du e
t o in h e r e n t ly u n s t a b le p r ic e s it u a t ion s in t h e c ommod it y
ma r ket s .
3. Th e Ka br a Commit t ee a ppoin t ed by t h e Gover n men t of In dia
r ecommen ded in Sept ember 1994 t h e in t r odu ct ion of fu t u r es
cont ract s in many commercial crops and produ ct s , inclu ding oil
s eeds , oils a n d oil ca kes . Th e ba s ic object ive of a n oil s eed
pr oces s or (or a n y pr odu cer ) wou ld be t o ga in lon g-t er m gr owt h
a n d n ot t h e vol a t i l e s h or t - t e r m p r ofi t a n d l os s . An ot h e r
impor t a n t object ive is t o h a ve t h e a bilit y t o a ccu r a t ely pr oject
pr ofit s a n d mor e r elia ble ca s h flow. Bot h t h es e object ives a r e
a ch ieved t h r ou gh commodit ies fu t u r es . By r edu cin g t h e r is k
elemen t a n d en h a n cin g s t a bilit y, t h e fu t u r es s ys t em pr ovides
t h e oils eed proces s ors t h e n eces s ary con fiden ce in makin g large
in ves t men t s in oils eeds pr oces s in g in du s t r y t o r ea p econ omies
of s ca le, wh ich even t u a lly will ben efit t h e edible oil con s u mer .
4. Th e object ive of t h e paper is t o t es t wh et h er an y relat ion exis t s
bet ween s pot pr ices a n d fu t u r es pr ices of a commodit y a n d
viii
wh e t h e r fu t u r e s t r a d i n g l e a d t o p r i c e s t a b i l i s a t i on of a n
a gr icu lt u r a l commodit y. Th e s t u dy u n der t a kes t o delin ea t e t h e
va r iou s a s pect s of fu t u r es t r a din g in a s in gle commodit y a n d
t h e ch os en commodit y is Refin ed Soyabean Oil or Soy Oil. It is
t h e s econ d mos t con s u med edible oil in In dia a ft er gr ou n dn u t
oil.
5. Th e mos t impor t a n t fa ct or for a fa r mer s in clin a t ion t owa r ds
soyabean cu lt ivat ion has been t he very good price realizat ion for
h is pr odu ct , wh ich is well a bove t h e Min imu m Su ppor t Pr ice.
Th e s oya bea n cu lt iva t ion h a s been in cr ea s in g in In dia beca u s e
it is s hort du rat ion (90 days t o 110 days ), s t u rdy crop t hat can
gr ow even if t h er e is moder a t e r a in fa ll. Fa r mer s a ls o pr efer t o
grow s oyabean becau s e it is a cas h crop. Soyabean oil cons u m-
pt ion s t art ed at Madhya Prades h and now it is popu lar in Ut t ar
Pr a des h , Wes t Ben ga l, Nor t h -ea s t er n s t a t es a n d ot h er pa r t s of
n or t h In dia .
6. Th e p a p er comp r is es eleven ch a p t er s on va r iou s a s p ect s of
fu t u r es t r a din g in a gr icu lt u r a l commodit ies . Da t a r ela t ed t o
Refin ed Soya Oil h as been u s ed for empir ical an alys is . Ch apt er
1 sket ches t he import ance of agricu lt u re in Indian economy and
t herefore need for fu t u res t rading in agricu lt u ral commodit ies . It
dis cu s s es t h e s h ape of t radit ion al commodit y market as well as
s t r u ct u r e of commodit y exch a n ges a lon g wit h ch a r a ct er is t ics of
fu t u r es t r a din g.
7. A br ief r eview of lit er a t u r e on r ole of fu t u r es t r a din g h a s been
given in Ch a pt er 2, a ft er wh ich br oa d object ives a n d s cope of
t h e s t u dy a r e ou t lin ed. Met h odology u s ed for t h e s t u dy a n d
n a t u r e & s ou r ce of d a t a a ls o fin d a men t ion in t h e s a me
ch a p t er . It fu r t h er gives a b r ief a b ou t Soy oil, in clu d in g it s
pr odu ct ion a n d con s u mpt ion pa t t er n .
8. In Ch a p t e r 3 , e ffe c t of fu t u r e s t r a d in g on s e a s on a l p r ic e
var iat ion s in Soy oil is as s es s ed. It is obs er ved t h at du r in g t h e
yea r s wh en fu t u r es t r a d in g t ook p la ce in Soy oil, a ver a ge
va r ia t ion s in pr ices of Soy oil over va r iou s s ea s on s n a r r owed
d own a s comp a r ed t o p er iod wh en fu t u r es t r a d in g wa s n ot
a llowed. In lon g-t er m fu t u r es pr ices h a ve a pos it ive effect on
s pot prices , i.e. variat ions in s pot prices is gent le in pres ence of
fu t u r es t r a din g t h a n in it s a bs en ce wh en s t eep u pwa r d a n d
downward t rend in ready prices were obs erved. This is analys ed
in Ch a pt er 4. It a ls o t h r ows ligh t on pr ice s t a bilis a t ion is s u e.
ix
9. Like seasonal price variat ions, effect of fu t u res t rading on short -
t erm (daily & weekly) price variat ions is discu ssed in Chapt er 5.
As we k n ow t h a t op t ion s t r a d in g is n ot a llowed in In d ia n
commod it y exch a n ges , s ign ifica n ce of op t ion s a s a h ed gin g
device is ou t lin ed in a t h eor et ica l fr a mewor k wit h exa mple in
Ch a pt er 6. Th en , in Ch a pt er 7 in flu en ce of fu t u r es t r a din g on
s owi n g d e c i s i on s of t h e fa r me r s a n d c r op p i n g p a t t e r n i s
examin ed.
10. Th ou gh cr op a r ea , pr odu ct ion a n d yield h a ve s h own pos it ive
movemen t s du r in g fu t u r es t r a din g yea r s , it cou ld n ot be fa ir ly
es t a blis h ed t h a t t h e pos it ive in flu en ce is beca u s e of fu t u r es
t r a din g on ly.
11. Ch a p t er 8 d is cu s s es s u p p ly r es p on s es of fu t u r es p r ices on
t ech n ology a dopt ion a n d yield a u gmen t a t ion . Th e pr oblems of
non-t ransparency of price and produ ct st andardisat ion in Indian
commodit y exch a n ges a r e exa min ed in Ch a pt er 9 of t h e pa per .
Ou r exch a n ges s t ill h a ve t o go a lon g wa y t owa r ds complet e
pr ice t r a n s pa r en cy a mon g t r a der s ir r es pect ive of fa ct or s like
geogr a p h ica l d is t a n ce. In p en u lt ima t e ch a p t er of t h e b ook
nat u re and volu me of commodit ies t rading pat t ern is dis cu s s ed.
Ch a pt er 11 s u mma r is es t h e en t ir e a s pect s of t h e s t u dy a n d
r a is es s ome p olicy is s u es for s t r en gt h en in g t h e commod it y
fu t u r es ma r ket in In dia .
12. Th e commodit y der iva t ives ma r ket in In dia a r e cu r r en t ly a fa r
way off from well-fu n ct ion in g in t ern at ion al exch an ges dealin g in
commodit ies . Th e fr a ct ion of commodit ies ma r ket s cover ed by
commodit y fu t u r es is ver y s ma ll lea ve a s ide opt ion s t r a din g
which is st ill prohibit ed in t he cou nt ry. The government of India
h a s been t a kin g s t eps t o impr ove t h e bu s in es s pot en t ia l for
commodit y der iva t ives exch a n ges by per mit t in g der iva t ives on
more commodit ies and liberalis ing policies . In t he days t o come,
i t wou l d n ot b e a s u r p r i s e wh e n vol u me s i n c ommod i t y
exch a n ges s u r pa s s t h os e in equ it y ma r ket s .
x
LIST OF TABLES & FIGURES
Page
No.
Ta ble 2.1 Ar ea , Pr odu ct ion & Yield of Soya bea n 19
Ta ble 2.2 An Exa mple of Soya Oil Con t r a ct a t Nmce, 20
Ah meda ba d
Ta ble 3.1 Per iod of Fu t u r es Tr a din g in Soy Oil 24
Ta ble 3.2 Mon t h ly Pr ices of Refin ed Soy Oil (Mu mba i) 24
Ta ble 3.3 Defla t ed Mon t h ly Pr ices of Soy Oil 25
Ta ble 4.1 Fu t u r es Ba s is Du r in g Con t r a ct Mon t h 32
Ta ble 5.1 Weekly Ra n ge a s % of Avg Weekly Pr ices 36
Ta ble 7.1 Ma jor Soya bea n Pr odu cin g St a t es 45
Ta ble 8.1 Cor r ela t ion n Fa ct or In flu en ce of Fu t u r es 49
Tr a din g
Ta ble 10.1 Tu r n over of In dia n Commodit y Exch a n ges 57
Figu r e 1.1 Foodgr a in s Pr odu ct ion & Declin g Sh a r e of 1
Agr icu lt u r e In GDP
Figu r e 1.2 St r u ct u r e of Der iva t ives Ma r ket in In dia 6
Figu r e 3.1 Defla t ed Mon t h ly Pr ices 25
Figu r e 3.2 Ra n ge of Mon t h ly Pr ice Va r ia t ion 27
Figu r e 4.1 Da ily Spot & Fu t u r es Pr ices 30
Figu r e 4.2 Fu t u r es Ba s is for Soy Oil 31
Figu r e 5.1 Da ily Pr ice Va r ia t ion 36
Figu r e 5.2 Weekly Pr ice Ra n ge 37
Figu r e 7.1 Ar ea Un der Soya bea n In In dia 46
Figu r e 8.1 Pr odu ct ion & Yield of Soya bea n 50
Appen dix I Lis t of Commodit y Exch a n ges & Commodit ies 67
Tr aded
Appen dix II Yea r ly Cr u s h in g, Pr odu ct ion of Mea l & 69
Oil in In dia
Appen dix III Sh a r e of St a t es in Pr odu ct ion of Soya bea n 69
Appen dix IV A Typica l Con t r a ct Cycle for a Fu t u r es Con t r a ct 70
xi
Abbre viat ions
CBOT : Ch ica go Boa r d of Tr a de
CMIE : Cen t r e for Mon it or in g In dia n Econ omy
FCRA : For wa r d Con t r a ct s (Regu la t ion ) Act , 1952
FMC : For wa r d Ma r ket s Commis s ion (Mu mba i)
HNI : High Net Wor t h In dividu a ls
IGIDR : In dir a Ga n dh i In s t it u t e of Developmen t Res ea r ch
IPSTA : In dia n Pepper & Spice Tr a de As s ocia t ion (Koch i)
MCX : Mu lt i-commodit y Exch a n ge of In dia (Mu mba i)
MSP : Min imu m Su ppor t Pr ice
NBOT : Na t ion a l Boa r d Of Tr a de (In dor e)
NCDEX : Na t i on a l Commod i t i e s & De r i va t i ve s Exc h a n ge of
In dia (Mu mba i)
NMCE : Na t i on a l Mu l t i - c om m od i t y E xc h a n ge of In d i a
(Ah meda ba d)
OLS : Or din a r y Lea s t Squ a r e Regr es s ion An lys is
SAMB : St a t e Agr icu lt u r a l Ma r ket in g Boa r d
SEA : Solven t Ext r a ct or s As s ocia t ion of In dia
SEBI : Secu r it ies & Exch a n ge Boa r d of In dia
SOPA : Soya bea n Pr oces or s As s ocia t ion of In dia (In dor e)
SMS : Sh or t Mes s a gin g Ser vice
WPI : Wh oles a le Pr ice In dex
1
CHAPTER 1
INTRODUCTION
1 . 1 BACKGROUND
1.1.1 In dia is pr edomin a n t ly a n a gr a r ia n econ omy wit h ver y h igh
popu la t ion depen den ce on a gr icu lt u r e a n d a llied a ct ivit ies .
Mor e t h a n 90% of r u r a l popu la t ion a n d a bou t 65% of t ot a l
popu la t ion der ive t h eir livelih ood fr om a gr icu lt u r e, dir ect ly or
in dir ect ly. Hen ce, t h e pr ice det er min a t ion a n d s t a bilis a t ion in
pr ices of a gr icu lt u r e commodit ies become ver y s ign ifica n t for
s u s t a in a ble gr owt h in a gr icu lt u r e. It wa s in t h is per s pect ive
t hat t he Long-t erm grain policy of t he Govt . of India
1
emphasi-
s ed t h at t h e r ole of pu blic in t er ven t ion s h ou ld pr imar ily be t o
s t a b ilis e p r ices a n d t h a t a n y s ys t em of p r ice s t a b ilis a t ion
mu s t be n a t ion a l in s cope. Th e open in g u p of a gr icu lt u r a l
t r a d e h a s for c e d fa r me r s t o c op e wit h t h e va ga r ie s a n d
vola t ilit y of in t er n a t ion a l ma r ket pr ices .
1.1.2 Apart from t he role of pu blic int ervent ion t hrou gh MSPs (mini-
mu m s u ppor t pr ices ) a n d Pr ocu r emen t Pr ice in pr ice s t a bili-
s at ion of agr icu lt u r e commodit ies , commodit y exch an ges h ave
been a n effect ive t ool in pr ice det er min a t ion a n d s t a bilis a t ion
of s u ch commodit ies . Wh ile pu blic in t er ven t ion br in gs a bou t
dis t or t ion s in efficien t pr ice dis cover y, cr oppin g pa t t er n a n d
ma r ket mech a n is m, t h e r ole of commodit y exch a n ges is t o
evolve an efficien t pr ice dis cover y s ys t em alon g wit h en s u r in g
h edgin g of pr ice r is ks .
1.1.3 Th e High -level Commit t ee on lon g-t er m gr a in policy n ot ed:
2
Pr ice in s t abilit y is n ot mer ely a mat t er of con cer n fr om t h e
poin t of view of t h e welfa r e of pr odu cer s a n d con s u mer s a n d
t h eir in comes . Th er e is ver y s t r on g eviden ce fr om a cr os s t h e
wor ld a n d fr om In d ia s own exp er ien ce in t h e p a s t t h a t
a gr icu lt u r a l in ves t men t a n d gr owt h is a dver s ely a ffect ed if
pr ice in s t a bilit y is h igh a n d, in pa r t icu la r , if fa r mer s ca n n ot
be reas onably s u re t hat prices will remain above t heir cos t s of
pr odu ct ion .
1 . 2 AGRICULTURE PRICE POLICY
1.2.1 Alt hou gh Indias past record in food price st abilisat ion is good,
pr in cipa lly beca u s e of gover n men t s in t er ven t ion , in s t a bilit y
h a s in cr ea s ed ver y ma r kedly in r ecen t yea r s . In r ea l t er ms
(i.e. in t erms of t he rat io of t he wholesale price index (WPI) for
cer ea ls t o t h e a ll-commodit y WPI), cer ea ls pr ices in cr ea s ed
17. 4 per cen t bet ween 1997-98 a n d 1999-00 followed by a n
a lmos t equ a lly s h a r p declin e of 13.3 per cen t bet ween 1999-
00 a n d 2001-02. High MSPs h a ve dis t or t ed in t er -cr op pr ice
pa r it ies , pa r t icu la r ly in fa vou r of wh ea t , lea din g t o s h ift of
a r ea fr om oils eeds a n d pu ls es a n d t o h igh impor t of t h es e
commodit ies .
1.2.2 Agr icu lt u r a l pr ice policy, a s it exis t s in In dia cu r r en t ly, wa s
con ceived of on t h e p r emis e of a clos ed econ omy wh er e
domes t ic pr odu ct ion h a s t o meet domes t ic dema n d in a lmos t
every commodit y. MSP serves t he requ irement of price st abilit y
b y en s u r in g t h a t yea r s of glu t a r e n ot followed b y la r ge
pr odu ct ion declin es lea din g t o h igh pr ices in t h e s u bs equ en t
year. The procedu re as s u mes t hat long-ru n domes t ic cos t s are
good indicat ors of long-ru n prices and t hat st ocks accu mu lat ed
wh en pr odu ct ion exceeds dema n d in t h e s h or t -r u n , pu s h in g
p r ices b elow MSP, ca n in n or ma l cou r s e b e d is p os ed off
wit h ou t u n du e down wa r d pr es s u r e on ma r ket pr ices a t ot h er
t imes wh en pr odu ct ion fa lls below dema n d.
1. 2. 3 In a n open econ omy, h owever , lon g-r u n domes t ic pr ices will
in cr ea s in gly b e a ffect ed b y t r en d s in in t er n a t ion a l p r ices
alt hou gh domest ic produ ct ion cost s wou ld st ill be t he dominant
det er min a n t in a la r ge econ omy s u ch a s In dia s . As s es s men t
of how Indias cos t s of produ ct ion are moving relat ive t o world
prices will, t herefore, become progres s ively more import ant not
on ly for t h e des ign of domes t ic pr ice policy bu t a ls o in a r ea s
s u ch a s t ech n ology d evelop men t a n d t r a d e p olicy. Mor e
3
impor t a n t ly for pr ice s t a bilit y, s in ce wor ld pr ices flu ct u a t e
con s ider a bly a r ou n d t h eir lon g-r u n t r en ds , it wou ld a ls o be
n eces s a r y t o en s u r e a mech a n is m t o pr even t in t er n a t ion a l
price flu ct u at ions from influ encing domest ic prices so mu ch as
t o n u llify t h e domes t ic pr ice policy.
1.2.4 Tr a dit ion a l s ys t em of pr ice s t a bilit y t h r ou gh MSP mech a n is m
h a s in cr ea s ed Gover n men t s food - s u b s id y b u r d en a n d is ,
t h er efor e, u n via ble. Hen ce, it is a ls o n eces s a r y t o con s ider
ver y s er iou s ly a lt er n a t ive mech a n is ms of r is k ma n a gemen t .
On e of t h es e is t h e idea of ext en din g in s u r a n ce t o cover n ot
on ly t h e r is ks of cr op fa ilu r e a n d yield los s bu t a ls o los s es
s t emmin g fr om u n for es een pr ice flu ct u at ion s . Fu t u r es t r adin g
in gr a in s ca n s ign ifica n t ly r edu ce t h e r is ks of pr ice flu ct u a -
t ions . Fu t u res t rading lead t o more efficient price dis covery by
a llowin g mor e a gen t s wit h r eleva n t in for ma t ion t o pa r t icipa t e
in pr ice for ma t ion t h a n wou ld be pos s ible if a ll t h es e a gen t s
h a d t o b ea r t h e fixed cos t s of p h ys ica l t r a d in g. Secon d ly,
s in ce r is ks in ph ys ical t r adin g can be r edu ced t h r ou gh h edge
op t ion s , exis t en ce of fu t u r es ma r k et s ca n r ed u ce cos t s of
in s u rin g again s t price ris ks and encou rage more t rade in s pot
ph ys ica ls .
1 . 3 COMMODITY MARKETS
1. 3. 1 As a r es u lt , commodit y ma r ket s , bot h fu t u r es a n d s pot , a r e
expect ed t o be bet t er a ble t o dis cou n t likely fu t u r e develop-
men t s a n d ca u s e pr ices t o be les s s u bject t o u n a n t icipa t ed
s h ocks . Alt h ou gh it is ver y u n likely t h at man y far mer s wou ld
be a ble t o pa r t icipa t e in fu t u r es ma r ket s t h ems elves , t h ey
cou ld s t ill ben efit fr om s ign a ls r ega r din g likely fu t u r e pr ices .
Mor e impor t a n t ly, t h er e cou ld be ben efit s of compet it ion if
exis t in g t r ader s t ook lon ger pos it ion s becau s e of r edu ced r is k
an d t h is als o en cou r aged n ew en t r an t s in t o ph ys ical mar ket s .
1.3.2 Th e fa r mer s wou ld ga in dir ect ly if t h is en a bled bet t er lin ka ge
bet ween s t or a ge a n d cr edit a n d in du ced ba n ks t o offer mor e
pledge loan s . A n u mber of fact or s h ave s o far kept t r adin g in
exis t in g In dian exch an ges ext r emely t h in du e t o r elu ct an ce of
many relevant and import ant players t o part icipat e becau s e of
t h e i r d i ffe r e n c e s wi t h p r omot e r s r e ga r d i n g t r a d i n g a n d
s et t lemen t pr ocedu r es . Some of t h es e h a ve, h owever , been
over come wit h t h e a dopt ion of on -lin e t r a din g.
4
1. 3. 3 It s h ou ld be r ea lis ed fr om t h e a ct u a l fu n ct ion in g of exis t in g
fu t u r es ma r k et s in t h e Un it ed St a t es a n d els ewh er e t h a t
fu t u r es pr ices a r e a lwa ys h igh ly cor r ela t ed wit h t h e cor r es -
pon din g s pot prices an d do n ot dis play an y s ign ifican t ly lower
degr ee of vola t ilit y. Exis t en ce of s u ch ma r ket s h a s a llowed
r is ks t o be h edged, in du ced mor e fin a n ce in t o s t or a ge, a n d
ma y a ls o h a ve r edu ced s pot pr ice vola t ilit y fr om wh a t t h ey
wou ld ot h er wis e h a ve b een . Bu t fu n d a men t a ls ca u s e h igh
u ncert aint y in world commodit y market s , and fu t u res market s
h a ve n ot pr even t ed pr ice vola t ilit y fr om bein g s o h igh t h a t if
r eflect ed in domes t ic pr ices wou ld be u n bea r a ble for In dia n
fa r mer s wit h t h eir limit ed fin a n cia l r es ou r ces .
1.3.4 Th e High level Commit t ee on lon g-t er m gr a in policy viewed
wh ile in s u r a n ce a n d fu t u r es t r a din g a r e impor t a n t for r is k
ma n a gemen t , t h es e s h ou ld n ot be viewed a s a lt er n a t ives t o
price s t abilis at ion t hrou gh MSP and t hrou gh policies regarding
t a r iffs on impor t s a n d expor t s . Th es e s h ou ld n ot be pu blicly
fu nded bu t allowed t o develop t hrou gh commercial init iat ive. If
gover n men t s u ppor t s t h es e a t a ll, t h is s h ou ld be limit ed t o
s u bs idies on int eres t and ins u rance premiu m paid by farmers .
1.3.5 For b ot h i n s u r a n c e a n d fu t u r e s t r a d i n g, t h e ma i n p r e -
con dit ion is cr edible in for ma t ion a bou t ph ys ica l s pot t r a din g
and t he exis t ence of a good market infras t ru ct u re, inclu ding a
r eliable in for mat ion s ys t em. Fu r t h er , for far mer s t o u s e t h es e
t h er e is n eed for s t or a ge fa cilit ies , wh ich ca n be lin ked t o
bot h cr edit a n d t h es e r is k in s t r u men t s . For t h is , t h e mos t
impor t a n t in it ia t ive wou ld be a s ys t em of cer t ified wa r eh ou s e
r eceipt s s o t h a t t h e qu a n t it y a n d qu a lit y of pr odu ce s t or ed
ca n become a ccept a ble colla t er a l, a n d even t u a lly n egot ia ble.
1 . 4 TRADITIONAL COMMODITY MARKETS IN INDIA
Spot t radin g t akes place mos t ly in region al man dis & u n orga-
n is ed mar ket s . Mar ket s ar e fr agmen t ed an d is olat ed. Redu ced
Gover n men t pr ocu r emen t a ct ivit y, mos t ly in cer ea ls t h r ou gh
MSP dis t or t s ma r ket s in fa vou r of food gr a in s . Ma n di t r a din g
in In d ia is d on e in 1 4 0 cr op s t h r ou gh over 7 5 0 0 Ma n d is
a mon gs t t r a d in g Fa r mer s , licen s ed Tr a d er s , Br ok er s a n d
Wh oles a le Dea ler s . Ma n di In s pect or s is s u e t ype & qu a n t it y
cer t ifica t e by levyin g Tr a n s a ct ion fee a n d Ta xes t h a t va r ies
bet ween 4% a n d 12%. St a t e Agr icu lt u r a l Ma r ket in g Boa r ds
(SAMBs ) a n d Ma n di Boa r d (Fa r mer s , Tr a der s , St a t e) gover n
Ma n dis .
5
1 . 5 EVOLUTION OF COMMODITY TRADING IN INDIA
1.5.1 Th e firs t derivat ive in t h e world s t art ed wit h t h e commodit ies .
Or ga n is ed fu t u r es t r a din g s t a r t ed in 1865 a t t h e Boa r d of
Tr a de of Ch ica go, followed by ot h er t r a din g cen t r es s u ch a s
Ka n s a s , Min n ea polis , New Yor k. Fu t u r es t r a din g in commo-
dit ies like r u bber , s oya bea n , bla ck pepper et c. wa s s t a r t ed in
t h e U. S. A a ft er 1920. Apa r t fr om US a n d UK, In dia is t h e
only cou nt ry t hat had act ive fu t u res market over a long period
of t ime. A good dea l of fu t u r es t r a din g in cot t on wa s don e a t
Bombay. Ot her market s soon developed for oilseeds (Gu jarat &
Pu n ja b ), wh ea t (Ha p u r , 1 9 1 3 ), r a w ju t e (Ca lcu t t a , 1 9 1 2 ).
Du r in g WW II, fu t u r es t r a d in g in ma n y commod it ies wer e
ba n n ed u n der Defen ce of In dia Ru les .
1.5.2 Tu r n a r ou n d c a me in 1 9 5 2 wit h t h e p a s s in g of For wa r d
Con t r a ct s (Regu la t ion ) Act (FCRA, 1 9 5 2 ), wh ich led t o t h e
es t a b lis h men t of For wa r d Ma r k et s Commis s ion (FMC) in
Sept ember 1953. FMC, headqu art ered at Mu mbai, is a regu la-
t or y au t h or it y wh ich is over s een by t h e Min is t r y of Con s u mer
Affa ir s a n d Pu blic Dis t r ibu t ion , Govt . of In dia . Th er e a r e 24
c ommod it y e xc h a n ge s in t h e c ou n t r y in c lu d in g r e c e n t ly
es t a blis h ed 4 n a t ion a l-level mu lt i-commodit ies exch a n ges .
1.5.3 Der iva t ives ma r ket ca n be divided in t o t wo br oa d s egmen t s :
1. Fin a n cia l Der iva t ive
2. Commodit y Der iva t ive
Two s e p a r a t e r e gu la t or s , s e t u p u n d e r d iffe r e n t Ac t s of
Parliament , govern financial and commodit y derivat ive market s
i n In d i a . Th e y a r e a l s o u n d e r t h e c on t r ol of d i ffe r e n t
min is t r ies . (See Figu r e 1.2)
Fu t u r es t r a din g h a s been la r gely r egion a lized & ba s ed on pit
t radin g. Th ere is an overwh elmin g n eed t o develop commodit y
fu t u r es ma r k et s a s a s t a b ilizin g in flu en ce. Tr a d in g is t h e
pr oces s wh er eby a commodit y is s imu lt a n eou s ly bou gh t a n d
s old in t wo s ep a r a t e ma r k et s t o t a k e a d va n t a ge of p r ice
dis cr epa n cy bet ween t h e t wo ma r ket s .
6
FIGURE 1 . 2 :
STRUCTURE OF DERIVATIVES MARKETS IN INDIA
Derivatives in India
Ministry of Finance Ministry of Consumer Affairs
Securities & Exchange Board of India Forward Markets Commission
Stock Exchanges Commodity Exchanges
Financial Derivatives Commodity Derivatives
Futures Options Futures
Precious Metals Other Metals
Agriculture Energy
A commodit y exch a n ge a ct s a s a ma r ket pla ce for per s on s
in t er es t ed in t r a d in g. Th e fa ct or s d r ivin g t r a d in g a r e t h e
differ en ces a n d per cept ion of differ en ces of t h e equ ilibr iu m
pr ice det er min ed by s u pply an d deman d at var iou s locat ion s .
For in s t a n ce, s u ppos e t h er e is a s h or t a ge of gu a r in An dh r a
Pr a des h t o feed lives t ock. If on e believes t h a t h e ca n pr ofit
fr om bu yin g gu a r in Ra ja s t h a n , pa yin g t r a n s por t a t ion cos t s ,
and s elling gu ar in Andhra Prades h, he will cont inu e t o do s o
u n t il t h e s u pply a n d dema n d for gu a r a r e equ a l in An dh r a
Pr a d es h , t h u s t h e Ra ja s t h a n gu a r p r ice p lu s t h e fr eigh t
ch a r ges equ a l t h e gu a r pr ice in An dh r a Pr a des h .
1 . 6 OBJECTIVES OF FUTURES TRADING
l Lea ds t o pr ice dis cover y
l Pr ovides h edgin g opt ion
l A s ma r t in ves t men t ch oice
l In t egr a t es pla yer s a n d ma r ket s
l Impr oves cr oppin g pa t t er n (in ca s e of commodit y fu t u r es )
1 . 7 HISTORY OF FUTURES TRADING IN COMMODITIES
1.7.1 Organized fu t u res market evolved in India by t he set t ing u p of
Bomba y Cot t on Tr a de As s ocia t ion Lt d. in 1875. In 1893,
followin g wides pr ea d dis con t en t a mon gs t lea din g cot t on mill
7
own er s a n d mer ch a n t s over t h e fu n ct ion in g of t h e Bomba y
Cot t on Tr ade As s ociat ion , a s epar at e as s ociat ion by t h e n ame
Bomb a y Cot t on Exch a n ge Lt d . wa s con s t it u t ed . Fu t u r es
t r a din g in oils eeds wa s or ga n ized in In dia for t h e fir s t t ime
wit h t h e s et t in g u p of Gu ja r a t i Vya p a r i Ma n d a li in 1 9 0 0 ,
which carried on fu t u res t rading in grou ndnu t , cas t ors eed and
cot t on . Befor e t h e Secon d Wor ld Wa r b r ok e ou t in 1 9 3 9
s everal fu t u res market s in oils eeds were fu nct ioning in Gu jarat
a n d Pu n ja b.
1.7.2 Fu t u res t rading in Raw J u t e and J u t e Goods began in Calcu t t a
wit h t he es t ablis hment of t he Calcu t t a Hes s ian Exchange Lt d.,
in 1919. La t er Ea s t In dia n J u t e As s ocia t ion Lt d., wa s s et u p
in 1927 for organ izin g fu t u res t radin g in Raw J u t e. Th es e t wo
a s s ocia t ion s a ma lga ma t ed in 1945 t o for m t h e pr es en t Ea s t
In dia J u t e & Hes s ia n Lt d. , t o con du ct or ga n ized t r a din g in
b ot h Ra w J u t e a n d J u t e good s . In ca s e of wh ea t , fu t u r es
ma r ket s wer e in exis t en ce a t s ever a l cen t r es a t Pu n ja b a n d
U. P. Th e mos t n ot a ble a mon gs t t h em wa s t h e Ch a mber of
Commer ce a t Ha pu r , wh ich wa s es t a blis h ed in 1913. Ot h er
market s were locat ed at Amrit s ar, Moga, Lu dh ian a, J alan dh ar,
Fa zi l k a , Dh u r i , Ba r n a l a a n d Bh a t i n d a i n Pu n j a b a n d
Mu za ffa r n a ga r , Ch a n d a u s i, Meer u t , Sa h a r a n p u r , Ha t h r a s ,
Ga zia ba d, Siken der a ba d a n d Ba r ielly in U.P.
1.7.3 Fu t u res market in Bu llion began at Mu mbai in 1920 and lat er
similar market s came u p at Rajkot , J aipu r, J amnagar, Kanpu r,
Delh i a n d Ca lcu t t a . In du e cou r s e s ever a l ot h er exch a n ges
wer e a ls o cr ea t ed in t h e cou n t r y t o t r a d e in s u ch d iver s e
commod it ies a s p ep p er , t u r mer ic, p ot a t o, s u ga r a n d gu r
(ja gger y).
1.7.4 Aft er in d ep en d en ce, t h e Con s t it u t ion of In d ia b r ou gh t t h e
s u b ject of St ock Exch a n ges a n d fu t u r es ma r k et s in t h e
Un ion lis t . As a r es u lt , t h e r es pon s ibilit y for r egu la t ion of
commodit y fu t u r es ma r ket s devolved on Govt . of In dia . A Bill
on for wa r d con t r a ct s wa s r efer r ed t o a n exp er t commit t ee
h ea ded by Pr of. A. D. Sh r off a n d Select Commit t ees of t wo
s u cces s ive Parliamen t s an d fin ally in December 1952 Forward
Con t r a c t s (Re gu la t ion ) Ac t , 1 9 5 2 , wa s e n a c t e d . Th e Ac t
pr ovided for 3-t ier r egu la t or y s ys t em;
(a ) An a s s ocia t ion r ecogn ized by t h e Gover n men t of In dia on
t h e r ecommen da t ion of For wa r d Ma r ket s Commis s ion ,
8
(b) Th e For wa r d Ma r k e t s Commis s ion (it wa s s e t u p in
Sept ember 1953) a n d
(c) Th e Cen t r a l Gover n men t .
1.7.5 For wa r d Con t r a ct s (Regu la t ion ) Ru les wer e n ot ified by t h e
Cent ral Government in J u ly 1954. The Act divides t he commo-
dit ies in t o 3 ca t egor ies wit h r efer en ce t o ext en t of r egu la t ion ,
viz:
A. The commodit ies in which fu t u res t rading can be organized
u n der t h e a u s pices of r ecogn ized a s s ocia t ion .
B. Th e Commodit ies in wh ich fu t u r es t r a din g is pr oh ibit ed.
C. Th os e commodit ies wh ich h a ve n eit h er been r egu la t ed for
bein g t r a ded u n der t h e r ecogn ized a s s ocia t ion n or pr oh i-
bit ed are referred as Free Commodit ies an d t h e as s ociat ion
or ga n ized in s u ch fr ee commodit ies is r equ ir ed t o obt a in
t h e Cer t ifica t e of Regis t r a t ion fr om t h e For wa r d Ma r ket s
Commis s ion .
1. 7. 6 In t h e s even t ies , mos t of t h e r egis t er ed a s s ocia t ion s beca me
in act ive, as fu t u r es as well as for war d t r adin g in t h e commo-
d it ie s for wh ic h t h e y we r e r e gis t e r e d c a me t o b e e it h e r
s u s pen ded or pr oh ibit ed a lt oget h er . Th e Kh u s r o Commit t ee
(J u n e 1 9 8 0 ) h a d r ecommen d ed r ein t r od u ct ion of fu t u r es
t r a din g in mos t of t h e ma jor commodit ies , in clu din g cot t on ,
kapas , raw ju t e an d ju t e goods an d s u gges t ed t h at s t eps may
be t a ken for in t r odu cin g fu t u r es t r a din g in commodit ies , like
pot a t oes , on ion s , et c. a t a ppr opr ia t e t ime. Th e gover n men t ,
accordingly init iat ed fu t u res t rading in Pot at o du ring t he lat t er
h a lf of 1 9 8 0 in qu it e a few ma r k et s in Pu n ja b a n d Ut t a r
Pr a des h .
1.7.7 Aft er t h e in t r odu ct ion of econ omic r efor ms s in ce J u n e 1991
a n d t h e con s equ en t gr a du a l t r a de a n d in du s t r y liber a liza t ion
in bot h t h e domes t ic a n d ext er n a l s ect or s , t h e Govt . of In dia
a p p oin t ed in J u n e 1 9 9 3 on e mor e commit t ee on For wa r d
Ma r k e t s u n d e r Ch a i r ma n s h i p of Pr of. K. N. Ka b r a . Th e
Commit t ee s u b mit t ed it s r ep or t in Sep t emb er 1 9 9 4 . Th e
ma jor it y r epor t of t h e Commit t ee r ecommen ded t h a t fu t u r es
t r a din g be in t r odu ced in Ba s ma t i Rice, Cot t on a n d Ka pa s ,
Ra w J u t e a n d J u t e Good s , Gr ou n d n u t , r a p es eed / mu s t a r d
9
s eed, cot t on s eed, s es ame s eed, s u n flower s eed, s afflower s eed,
copra an d s oybean , an d oils an d oilcakes of all of t h em, Rice
b r a n oil, Ca s t or oil a n d it s oilca k e, Lin s eed , Silver a n d
On ion s . Th e commit t ee a ls o r ecommen ded t h a t s ome of t h e
exis t in g commodit y exch an ges par t icu lar ly t h e on es in pepper
a n d ca s t or s eed, ma y be u pgr a ded t o t h e level of in t er n a t ion a l
fu t u r es ma r ket s .
1.7.8 Th e liber a lis ed policy bein g followed by t h e Gover n men t of
In dia a n d t h e gr a du a l wit h dr a wa l of t h e pr ocu r emen t a n d
dis t r ibu t ion ch a n n el n eces s it a t ed s et t in g in pla ce a ma r ket
me c h a n i s m t o p e r for m t h e e c on omi c fu n c t i on s of p r i c e
dis cover y a n d r is k ma n a gemen t .
1.7.9 Th e Na t ion a l Agr icu lt u r e Policy a n n ou n ced in J u ly 2000 a n d
t he annou ncement s of Honble Finance Minis t er in t he Bu dget
Sp eech for 2 0 0 2 -2 0 0 3 wer e in d ica t ive of t h e Gover n men t s
r es olve t o pu t in place a mech an is m of fu t u r es t r ade/ mar ket .
As a fol l ow u p t h e Gove r n me n t i s s u e d n ot i fi c a t i on s on
1.4.2003 per mit t in g fu t u r es t r a din g in t h e commodit ies . Wit h
t h e i s s u e of t h e s e n ot i fi c a t i on s fu t u r e s t r a d i n g i s n ot
pr oh ibit ed in a n y commodit y. Opt ion s t r a din g in commodit y
is , h owever pr es en t ly pr oh ibit ed.
Fou r n a t ion a l mu lt i-commodit y exch a n ges h a ve been s et u p,
n a mely,
(1) Na t ion a l Commodit y & Der iva t ives Exch a n ge of In dia ,
Mu mba i (December 2003)
(2) Mu l t i - Com m od i t y Exc h a n ge of In d i a Lt d . , Mu m b a i
(Oct ober 2003)
(3) Na t i on a l Mu l t i - Commod i t y Exc h a n ge of In d i a Lt d . ,
Ah meda ba d (November 2002)
(4) Na t ion a l Boa r d of Tr a de (NBOT), In dor e
1 . 8 CHARACTERISTICS OF FUTURES TRADING
2
1.8.1 A Fu t u r es Con t r a ct is a h igh ly s t a n da r dized con t r a ct wit h
cert ain dist inct feat u res. Some of t he import ant feat u res are as
u n der :
10
a. Fu t u res t rading is necessarily organized u nder t he au spices
of a market as s ociat ion s o t hat s u ch t rading is confined t o
or condu ct ed t hrou gh members of t he as s ociat ion in accor-
da n ce wit h t h e pr ocedu r e la id down in t h e Ru les & Bye-
la ws of t h e a s s ocia t ion .
b. It is in va r ia bly en t er ed in t o for a s t a n da r d va r iet y kn own
a s t h e b a s is va r iet y wit h p er mis s ion t o d eliver ot h er
iden t ified va r iet ies kn own a s t en der a ble va r iet ies .
c. Th e u n it s of pr ice qu ot at ion an d t r adin g ar e fixed in t h es e
con t r a ct s , pa r t ies t o t h e con t r a ct s n ot bein g ca pa ble of
a lt er in g t h es e u n it s .
d. Th e deliver y per iods a r e s pecified.
e. Th e s eller in a fu t u r es ma r ket h a s t h e ch oice t o decide
whet her t o deliver goods against ou t st anding sale cont ract s.
In cas e h e decides t o deliver goods , h e can do s o n ot on ly
at t h e locat ion of t h e As s ociat ion t h rou gh wh ich t radin g is
or ga n ized b u t a ls o a t a n u mb er of ot h er p r e- s p ecified
deliver y cen t r es .
f. In fu t u res market act u al delivery of goods t akes place only
in a ver y few ca s es . Tr a n s a ct ion s a r e mos t ly s qu a r ed u p
b efor e t h e d u e d a t e of t h e con t r a ct a n d con t r a ct s a r e
s et t led b y p a ymen t of d iffer en ces wit h ou t a n y p h ys ica l
deliver y of goods t a kin g pla ce.
g. Th e opt ion s mar ket is s omet imes r efer r ed t o as in s u r an ce.
By h ed gin g t h r ou gh t h e op t ion s ma r k et a n in d ivid u a l/
t r a der locks in t h e cos t s of h edgin g a n d t h en ca n los e a t
mos t on ly t h e cos t of t h e opt ion pr emiu m wh ile h a vin g
u n limit ed pr ofit pot en t ia l. Alt er n a t ively, h oldin g a fu t u r es
pos it ion limit s pr ofit s a n d los s es by t h e h edged pr ice.
1.8.2 Commodit y fu t u r es exch a n ge ma r ket s pr ovide a mech a n is m
for pr ice dis cover y on a n a ggr ega t e level t h r ou gh a r bit r a ge
bet ween mu lt iple bu yer s an d s eller s . However , pr ice dis cover y
a t a given loca t ion is n ot n ea r ly a s clea r ly defin ed beca u s e
local s u pply and demand relat ions hips are not as well known.
However, his t orical bas is provides a linkage bet ween t hes e t wo
ma r ket s . Th er efor e, a s imple, low cos t , a n d r ela t ively good
pr edict or of t h e loca l ca s h pr ice is t h e fu t u r es con t r a ct pr ice
11
of in t er es t a dju s t ed for a mu lt iple yea r a ver a ge ba s is for t h a t
t ime. An expect ed pr ice, wh er e E den ot es an expect at ion , can
be fou n d u s in g :
E [Ca s h Pr ice] = [Fu t u r es Pr ice] + E [Ba s is ],
Commodit y fu t u res prices can s erve as a mechanis m for price
d is cover y eit h er for t h e p r es en t p r ice or for d et er min in g
expect ed fu t u r e pr ices .
13
CHAPTER 2
OBJECTIVES AND METHODOLOGY OF THE STUDY
2 . 1 INTRODUCTION
2.1.1 A s t a ble a n d efficien t commodit y ma r ket is t h e es s en t ia l pa r t
of a developin g econ omy like In dia . It dr a ws it s impor t a n ce
fr om t h e fa ct t h a t la r ge n u mber of popu la t ion is en ga ged in
t h e pr oces s r igh t fr om s owin g decis ion s level t o ma r ket in g of
t h e fin al pr odu ce. Far mer s s h ou ld get r emu n er at ive pr ices for
t h eir pr odu ct s s o t h a t t h ey ca n con t in u e t o gr ow t h e cr op
wit h ou t a n y a ppr eh en s ion s of los s es . Th es e los s es ma y a r is e
d u e t o u n cer t a in n a t u r e of clima t ic con d it ion s , exces s ive
pr odu ct ion , ch a n ges in t a s t es , ma r ket imper fect ion s et a l. It
was in t h is backgr ou n d t h at t h e s ys t em of MSP an d Pr ocu r e-
m e n t p r i c e s we r e i n t r od u c e d i n In d i a , u n d e r wh i c h
gover n men t a s s u r ed r emu n er a t ive pr ices t o fa r mer s for t h eir
cr ops .
2. 1. 2 Th e u n der lyin g pr oblem of t h e r u r a l a gr icu lt u r e ma r ket wa s
lack of t r adin g plat for m wh er e lar ge n u mber of far mer s cou ld
meet a n d a s cer t a in pr ice dis cover y. Few big t r a der s la r gely
in flu en ced t r a d it ion a l ma r k et s lik e ma n d is a n d p r ice wa s
det er min ed in con n iva n ce wit h s elect ed pa r t ies . Evolu t ion of
Commodit y exch a n ges in In dia h a s h elped in developmen t of
an efficient market for agricu lt u re commodit ies where not only
p r ice d et er min a t ion t a k es p la ce u n d er t h e u mb r ella of a
common t r a din g pla t for m bu t a ls o fa r mer s a n d t r a der s ca n
h edge t h eir r is ks . It a ls o h elps fa r mer s in s owin g decis ion s
a n d cr oppin g pa t t er n .
2.1.3 It is n eces s a r y t o fin d effect s of fu t u r es t r a din g on pr ices by
a n en qu ir y a s t o wh y fu t u r es t r a din g in flu en ce pr ices . Un t il
s u ch a ca u s a l r ela t ion s h ip bet ween t h e t wo is es t a blis h ed a
pr ior i, it wou ld be poin t les s t o exa min e eit h er t h e qu a lit a t ive
n a t u r e or t h e qu a n t it a t ive ext en t of t h e in flu en ces of fu t u r es
t r a din g on pr ices .
2.1.4 The price of any commodit y, for immediat e or forward delivery,
is a lwa ys d et er min ed a ft er d elib er a t ion s a n d n egot ia t ion s
bet ween t h e bu yer a n d t h e s eller . In t h es e n egot ia t ion s , t h e
bu yer s a n d t h e s eller s a r e gen er a lly in flu en ced by t h eir own
14
ju dgement s of t he cu rrent and ant icipat ed demand and su pply
of t h e commodit y. If, t h er efor e, fu t u r es t r adin g is t o h ave an y
impa ct on pr ices , it mu s t a ffect t h e ju dgemen t s of eit h er t h e
bu yer or s eller or t h e bot h . It ca n in flu en ce t h eir ju dgemen t s
i n t wo wa ys . Fi r s t l y, t h e k n owl e d ge of p r i c e c u r r e n t l y
pr eva ilin g in t h e fu t u r es ma r ket wou ld in evit a bly in flu en ce,
t h ou gh in dir ect ly, t h e pr ice decis ion s of bu yer s a n d s eller s of
t h e act u al commodit y. Bot h in t h e organ is ed an d u n organ is ed
ma r k et s , ma n y b u yer s a n d s eller s t r a n s a ct b u s in es s for
immediat e as well as deferred delivery. As a res u lt , t heir ideas
of pr ices a r e in flu en ced con s ider a bly by t h e pr ices pr eva ilin g
n ot on ly in t h e s p ot ma r k et s b u t a ls o in t h e ma r k et s for
defer r ed deliver y t r a n s a ct ion s .
2.1.5 Thou gh fu t u res cont ract s are normally int ended for hedge and
s pecu lat ive pu rpos es , t h ey are als o u s efu l for makin g gen u in e
pu rchases or sales when t he bu yers and sellers receive or give
deliver y du r in g t h e deliver y mon t h . Th u s , for a pr os pect ive
bu yer or s eller of a gr icu lt u r a l commodit ies , t h er e is a ch oice
wh et h er h e s h ou ld en t er in t o a fu t u r es con t r act or a defer r ed
deliver y con t r a ct . In t h is wa y, t h e t r a n s a ct ion s in t h e fu t u r es
an d in t h e defer r ed deliver y con t r act s can become s u bs t it u t es
for ea ch ot h er . Sin ce t h e fu t u r es con t r a ct is mor e a ct ive, t h e
fu t u r es p r ices s u b s t a n t ia lly in flu en ce t h e d ecis ion s of t h e
bu yer s a n d t h e s eller s in t h e defer r ed deliver y con t r a ct s . A
s imila r in flu en ce of fu t u r es t r a din g on s pot t r a n s a ct ion s ca n
t ake place t owards t h e clos in g s t ages of t h e delivery mon t h of
t h e fu t u r es con t r a ct , wh en a ct u a l deliver ies ca n h a ppen a n d
t h u s t r a n s a ct ion s in fu t u r e ca n compet e for a ct u a l bu s in es s
wit h t h e ready t ran s act ion , part icu larly if t h e ready prices are
ou t of a lign men t wit h t h e fu t u r es pr ices . In t h is wa y fu t u r es
pr ices ma y dir ect ly in flu en ce t h e s pot pr ices .
2.1.6 Bot h hedging and specu lat ion on commodit y exchanges redu ce
t he t ot al market ing margin, i.e. cos t of market ing s ervices and
con s equ en t ly pr odu cer s r eceive a h igh er pr ice an d con s u mer s
p a y a lower p r ice t h a n wh a t t h ey wou ld ot h er wis e h a ve
received or paid. The t radit ional t heory affirms t hat t he fu t u res
t r adin g as s is t s in r edu cin g t h e pr ice var iat ion s r es u lt in g fr om
t h e ch a n ges in s u pply & dema n d con dit ion s .
Befor e s et t in g u p object ives of t h e s t u dy, a br ief s u r vey on
a va ila ble lit er a t u r e on t h e s u bject becomes in evit a ble.
15
2 . 2 REVIEW OF LITERATURE
2.2.1 Commod it y t r a d in g is p r eva ilin g in In d ia s in ce mid - 1 9
t h
cen t u r y. Th e s h ape an d s t r u ct u r e of t r adin g h as u n der gon e a
s ea ch an ge in t er ms of n at u r e of commodit ies t r aded, volu me
of t rade, clearing, set t lement & gu arant ee syst em, t ransparency
in t r ade, gover n an ce an d r egu lat ion . Th e commodit ies t r adin g
t h r ou gh exch a n ges h a ve t r a dit ion a lly been limit ed t o s in gle
commodit y exch an ges u n t il t h e Un ion Gover n men t decided in
fa vou r of n a t ion a l-level mu lt i-commodit y exch a n ges . It h a s
b een ob s er ved a t glob a l level t h a t t h e commod it ies h a ve
wit n es s ed mu ch mor e volat ile pr ice s it u at ion s t h an t h e pr ices
in t h e ma r ket for fin a n cia l in s t r u men t s .
2.2.2 Th e r ela t ion s h ip bet ween s pot a n d fu t u r es ma r ket s in pr ice
dis covery h as been an import an t area of res earch . Garbade &
Silber in t h eir ar t icle Pr ice movemen t s an d pr ice dis cover y in
fu t u r es a n d ca s h ma r k et s (1 9 8 2 ) t es t ed wh et h er fu t u r es
prices lead spot prices. Correlat ion of basis (spot prices fu t u res
pr ices ) of t h e pr eviou s t ime per iod wit h s pot or fu t u r es pr ices
of t h e cu r r en t t ime p er iod wa s emp ir ica lly t es t ed . If b a s is
in n ova t ion s for eca s t fu t u r es r et u r n s , t h en t h e s pot ma r ket
lea ds t h e fu t u r es ma r ket . If ba s is in n ova t ion s for eca s t s pot
r et u r n s , t h en t h e fu t u r es ma r k et lea d s t h e s p ot ma r k et .
Su s a n Th oma s a n d Kir a n Ka r a n d e u s ed it for ca s t or s eed
ma r ket in In dia .
2.2.3 M. Th i r i p a l r a j u & T. P. Ma d h u s ood a n a n i n t h e i r p a p e r
Commodit y Fu t u r es pr ices in In dia : Eviden ce on For eca s t
Power, Price Format ion an d In t er-Market Feedback fou n d t h e
efficien cy of pr ice for ma t ion in t h e In dia n commodit y fu t u r es
mar ket s of Pepper an d Cas t or s eeds . Su s an Th omas of IGIDR,
Mu mbai has in her paper Agricu lt u ral Commodit y Market s in
In dia s h own s ome eviden ce of r ole pla yed by fu t u r es ma r ket
in pr ice s t a bilis a t ion . Her s t u dy is ba s ed on Mu a ffa r n a ga r
jaggery fu t u res market . In her paper wit h D Balas u ndaram on
cot t on fu t u res it has been conclu ded t hat t he fu t u res market
b en efit t h e cot t on econ omy b y in cr ea s in g t h e efficien cy of
pr ice dis cover y, in a ddit ion t o en a blin g t h e r edu ct ion of pr ice
r is k.
2.2.4 Fu t u r es a n d opt ion s ma r ket lea d t o des t a bilis in g s pecu la t ion
an d malpract ice if n ot properly regu lat ed. Th e Gu pt a Commit -
t ee (1 9 9 7 ) on Hed gin g t h r ou gh in t er n a t ion a l commod it y
exch a n ges n ot ed:
16
Th e n eed for r egu la t ion of t h e ma r ket s a r is es wh en s u ch
r egu la t ion s in cr ea s e t h e a lloca t ive efficien cy of t h es e ma r ket s
fr om wh at wou ld pr evail u n der n o r egu lat ion at all. Allocat ive
efficiency of t he fu t u res and opt ions market is reflect ed by t he
a bilit y of t h es e ma r ket s t o per for m t h eir pr ice dis cover y a n d
r is k s h ift in g fu n ct ion s efficien t ly.
2 . 3 OBJECTIVES & SCOPE OF THE STUDY
2.3.1 Th e ma in a im of t h is pa per is t o s eek wh et h er commodit y
exch a n ges a n d t h eir t win t ools of Fu t u r es a n d Opt ion s ca n
bring abou t price s t abilis at ion in agricu lt u re commodit ies . It is
gen er a lly a r gu ed t h a t fu t u r es t r a din g, a mon g ot h er t h in gs ,
r edu ces t h e s eas on al pr ice var iat ion s in agr icu lt u r e commodi-
t ies a n d a ls o h elps in dis cover y of s pot (r ea dy) pr ices . Th e
cr oppin g pa t t er n a n d s owin g decis ion s a r e a ls o s a id t o be
in flu en ced by fu t u r es t r a din g in commodit ies .
2.3.2 Wit h t h es e ob ject ives , t h e followin g h yp ot h es es h a ve b een
fr a med t o be t es t ed:
i. Seas onal variat ion in prices of agricu lt u ral commodit ies are
r edu ced by t r a din g a t t h e Commodit y exch a n ge
ii. S h or t - t e r m (we e k l y or d a i l y) p r i c e va r i a t i on s c a n b e
r edu ced by fu t u r es a n d opt ion s
iii. Th er e exis t s a defin it e r ela t ion s h ip bet ween fu t u r es pr ices
a n d a ct u a l commodit y pr ices (Spot or r ea dy pr ices )
iv. Fu t u r es t r a din g in flu en ce t h e lon g-t er m pr ice t r en d (pr ice
s t a bilis a t ion ) in a n y commodit y
v. Opt ion s a r e efficien t t ool for h edgin g pr ice r is ks
vi. Fu t u r e s t r a d i n g i n fl u e n c e t h e s owi n g d e c i s i on s a n d
cr oppin g pa t t er n
2.3.3 Apa r t fr om t es t in g of lis t ed h ypot h es es , t h e s t u dy a ls o t r a ces
t h e pr oblems of In dia n Commodit y exch a n ges wit h r es pect t o
n on -t r a n s pa r en cy of pr ices , pr odu ct s t a n da r diza t ion et c. It
fu r t h er at t empt s t o fin d t h e s u pply r es pon s e of fu t u r es pr ices
in s elect ed cr ops on t ech n ology adopt ion , yield au gmen t at ion ,
crop divers ificat ion an d in come gain s . Th e n at u re an d volu me
of t h e commodit y t r a din g pa t t er n in In dia is a ls o a s s es s ed.
17
2 . 4 METHODOLOGY OF THE STUDY
2.4.1 Th e p r ice d et er min a t ion of a n y commod it y is a comp lex
fu n ct ion of mu lt iple fa ct or s like it s domes t ic pr odu ct ion (or
s u pply) vis - -vis dema n d, in t er n a t ion a l dema n d a n d s u pply,
ma r ket for it s s u bs t it u t es , ch a n ges in in dividu a ls t a s t es a n d
pr efer en ces et c. Apa r t fr om t h is , in for ma t ion a s ymmet r y a n d
ot h er ma r k et imp er fect ion s a ls o p la y a k ey r ole in p r ice
d et er min a t ion . In s u ch a s cen a r io, a p a r t icu la r met h od of
qu a n t it a t ive mea s u r emen t does n ot fu lly expla in t h e ca u s a l
r ela t ion s h ip.
2.4.2 Th is paper s eeks t o es t ablis h s h or t -t er m as well as lon g-t er m
effect s of fu t u r es t r a din g in Soy oil on it s r ea dy (s pot ) pr ices .
By s h or t -t er m we mea n da ily a n d weekly per iod wh ile lon g-
t er m den ot es s ea s on a l va r ia t ion s . Ra n ge is a n impor t a n t t ool
t o a s s es s p r ice va r ia t ion s d u r in g s h or t p er iod of t ime lik e
da ily pr ices wit h in a week. Bu t it is a ls o fr a u gh t wit h s ome
deficiencies . Therefore, range as a percent age of average prices
of a pa r t icu la r per iod is a bet t er mea s u r e.
2.4.3 To es t ablis h a lon g-t erm t ren d in s pot prices an d s ee wh et h er
an y r elat ion s h ip exis t s bet ween fu t u r e pr ices an d s pot pr ices ,
or d in a r y lea s t s qu a r ed (OLS) r egr es s ion a n a lys is is u s ed .
St at is t ical meas u re of Correlat ion h elps in es t ablis h in g s u pply
r es pon s e of fu t u r es pr ices on cr oppin g pa t t er n , t ech n ology
a dopt ion a n d yield a u gmen t a t ion .
2 . 5 SELECTION OF COMMODITY
2.5.1 Th e s t u d y h a s b een d on e t o es t a b lis h r ole of commod it y
exch a n ges in p r ice s t a b ilis a t ion of Refin ed Soya b ea n Oil.
Her ein a ft er , a n y r efer en ce t o Soy oil or Soya bea n oil wou ld
mea n Refin ed Soya bea n oil.
2.5.2 Soya bea n Oil is t h e der iva t ive of Soya bea n (Glycin e s oja ) or
mir a cle bea n , t h e mos t econ omica lly impor t a n t bea n in t h e
wor ld . Fr om 1 0 0 k g of s oyb e a n s , t h e s oyb e a n - c r u s h in g
pr oces s pr odu ces 18 kg of s oybea n oil a n d 80 kg of s oybea n
mea l. Wh ile t h e oil is ma in ly u s ed for h u ma n con s u mpt ion ,
mea l s er ves a s t h e ma in s ou r ce of pr ot ein in a n ima l feeds .
Soya bea n Oil is t h e lea din g veget a ble oil t r a ded in t h e in t er -
n a t ion a l ma r ket s , n ext on ly t o Pa lm oil. Pa lm a n d Soya bea n
oil t oget h er con s t it u t e a r ou n d 68% of globa l edible oil t r a de
18
volu me, wit h s oya bea n oil con s t it u t in g 22. 85%. Du r in g t h e
las t decade, volu me of s oyabean oil export ed has grown at t he
r at e of 4.05%. It accou n t s for n ear ly 25% of t h e Wor lds t ot al
oils a n d fa t s pr odu ct ion .
2.5.3 Globa lly, pr odu ct ion of s oya bea n oil h a s gr own a t t h e r a t e of
5.8% du rin g t h e las t decade. In creas in g price compet it iven es s ,
a n d a ggr es s ive cu lt iva t ion a n d p r omot ion fr om t h e ma jor
p r od u cin g n a t ion s h a ve given wa y t o wid es p r ea d s oy oil
growt h bot h in t erms of produ ct ion as well as con s u mpt ion .
Ar gen t in a , Br a zil, Ch in a a n d In d ia a lon g wit h US a r e t h e
ma jor con t r ib u t or s for t h e gr owt h . Wh ile US h a s a s t r on g
domes t ic con s u mpt ion ba s e a n d mos t ly expor t s s oya bea n in
a ddit ion t o oil, Ar gen t in a a n d Br a zil expor t s mu ch of t h eir
pr odu ct ion , mos t ly in t h e for m of cr u de oil. Ch in a a n d In dia ,
t h ou gh b ein g p r od u cer s t h ems elves , imp or t s oya b ea n / it s
der iva t ives t o ca t er t o t h eir expa n din g con s u mer ba s e. Wh ile
Ch in a import s bot h bean an d oil, In dia allows on ly import s of
oil.
2.5.4 India is t he Worlds larges t import er of edible oils . Of t he t ot al
5.0-5.5 million t on s of veget able oils impor t ed, 1.3-1.5 million
t on s is s oya bea n oil, impor t ed mos t ly fr om Ar gen t in a , a n d
followed by Br a zil a n d US.
2.5.5 In addit ion t o impor t s , domes t ic pr odu ct ion of ar ou n d 0.7-0.8
million t ons t akes t he annu al soyabean oil consu mpt ion of t he
cou n t r y t o 2. 0-2. 2 million t on s , wit h a ma r ket va lu e of Rs
8000 cr or e. Cr u de (degu mmed) an d Refin ed s oyabean oils ar e
p er mit t ed t o b e imp or t ed in t o In d ia a t a n imp or t d u t y of
4 5 . 9 % (a d d it ion a l excis e d u t y wa ived off in Un ion Bu d get
2005-06). Impor t s of s oya bea n oil in t o In dia h a ve been on a
con t in u ou s r is e s in ce t h e pa s t 6-7 yea r s . It h a s wit n es s ed a
s h a r p r is e fr om a mer e 84, 000 t on s du r in g 1996-97 t o 1. 54
million t on s du r in g 2001-02.
2.5.6 In dia n edible oil ma r ket is h igh ly pr ice s en s it ive in n a t u r e.
Hen ce, t h e qu a n t it y of s oya bea n oil impor t s ma in ly depen ds
on t h e pr ice compet it iven es s of s oya bea n oil vis - -vis it s s ole
compet it or, palm oil. This also implies t hat soyabean oil prices
a r e h igh ly in flu en ced b y p a lm oil p r ices in Ma la ys ia , t h e
ma r ket lea der in pa lm oil pr odu ct ion a n d expor t s .
19
Table 2 . 1 : Area, Product ion & Yield of Soyabean
SOYABEAN SOY OIL
Yea r Ar ea Pr odu ct ion Yield Pr odu ct ion
(000 h ect ) (000 t on n es ) (kg/ h ect ) (000 t on n es )
1970-71 30 10 426 NA
1980-81 608 4224 728 NA
1990-91 2564 2601 1015 230
1995-96 5035 5096 1012 459
2000-01 6418 5280 823 474
2003-04 6221 5857 940 685
2004-05
E
NA NA NA 720
2.5.7 Soyabean oil is among t he mos t vibrant commodit ies in t erms
of pr ice vola t ilit y. It s pr omin en ce in t h e in t er n a t ion a l edible
t r a de s cen e (9-10 million t on s ), con cen t r a t ion of pr odu ct ion
ba s e in limit ed cou n t r ies a s a ga in s t it s wides pr ea d con s u mp-
t ion bas e, it s clos e lin k wit h s ever al of it s s u bs t it u t es an d it s
ba s e r a w ma t er ia l (s oya bea n ) in a ddit ion t o it s co-der iva t ive
(soya meal), t he nat u re of t he exist ing su pply and valu e chain,
et c t hrow t remendou s opport u nit y for t rade in t his commodit y.
Th e oppor t u n it y is fu r t h er en h a n ced by t h e expect ed r is e in
con s u mpt ion ba s e a n d t h e con s equ en t in cr ea s e in impor t s of
veget a ble oils in t h e yea r s t o come.
2.5.8 In In dia, ready (s pot ) market s of In dore an d Mu mbai s erve as
t he reference market for soyabean oil prices. While t he Indore
price reflect s t he domest ically cru shed soybean oil (refined and
solvent ext ract ed), Mu mbai price indicat es t he import ed soy oil
price. Fu t u res t rading in soyabean oil is also prevalent in many
fu t u r es exch a n ges in t h e cou n t r y, t h e p r ices of wh ich a r e
largely in flu en ced by t h e in t ern at ion al edible price movemen t s
(es pecia lly Ma la ys ia n pa lm oil a n d s oya bea n oil a t CBOT),
s oya bea n a va ila bilit y in domes t ic ma r ket s , dema n d for mea l
a n d ot h er a s s ocia t ed s u pply-dema n d fa ct or s of s oya bea n a n d
it s der iva t ives .
2.5.9 The average flu ct u at ion in s pot prices of refined s oy oil t raded
a t Mu m b a i h a s b e e n a t ove r 6 % d u r i n g 2 0 0 1 - 0 3 , t h e
ma ximu m mon t h ly flu ct u a t ion bein g a s h igh a s 17% du r in g
t h e p er iod . His t or ica lly, s oy oil p r ices in t h e ma jor s p ot
market s across t he cou nt ry have been flu ct u at ing in t he range
20
of 4.5-8.5%. Th is offers immen s e opport u n it y for t h e in ves t ors
t o pr ofit a bly deploy t h eir fu n ds in t h is s ect or .
2.5.10 In t he main produ ct ion areas, soybeans are plant ed u su ally in
May. Th e r at e of gr owt h of t h e s oybean plan t depen ds on t h e
amou n t of s u n ligh t per day an d t emperat u res . By lat e Au gu s t
or ea r ly Sept ember h a r ves t in g is t a ken .
2.5.11 Soyabean oil is t he worlds larges t s ou rce of veget able oil. It is
grown ext ens ively in t he U.S.A., as well as Sou t h America and
Ch in a . Soya bea n is a ls o ext en s ively gr own in In dia . Ma dh ya
Pr a des h is kn own t o be t h e Soya bowl of t h e cou n t r y.
Table 2 . 2 : An Example of Soy Oil Cont rac t at
NMCE, Ahme dabad
As s e t Code SOYO
Produc t Code SOYOF
Se rie s Code SYOMMMYYYY
Trading Sys t e m NMCEs De ri v at i v e s Tradi n g an d Se t t l e me n t
Sys t e m
Trading Hours Monday t o Friday 1 0 :0 0 am t o 4 :0 0 pm
Sat urday 1 0 :0 0 am t o 2 :0 0 pm
Unit of Trading 1 MT
De live ry Unit 1 MT
Quot at ion/ Bas e Value 1 0 Kgs
Tic k Size 1 0 pais e
Pric e Band 5 % above and be low t he las t t rade d pric e .
1 0 % above and be low t he las t c los ing pric e .
Qualit y Spe c ific at ion Mois t u r e In s olu ble impu r it ies - 0.1% (Ma x)
Color on Lovibon d Sca le Expr es s ed As - Y + 5R in
cell
Refr a ct ive In dex @ 40
o
C
-
1.4650 t o 1.4710
Specific Gr a vit y @ 30
o
C @25/ 25

-

0.917 t o 0.921
Sa pon ifica t ion Va lu es - 189 t o 195
Iodin e Va lu e - 120 t o 141
Un s a pon ifia ble Ma t t er - 1.5% (Ma x)
FFA - 0.25% (Ma x)
Fla s h Poin t pen s ky Ma r t in Met h od
0
C - 250 min
Refr a ct o met er r ea din g @ 40
o
C - 58.5 t o 68.0
21
No. of de live ry Ma xi mu m 1 2 mon t h l y or mi n i mu m 2 mon t h l y
Cont rac t s in a ye ar con t r a ct s r u n n in g con cu r r en t ly.
De live ry Ce nt e rs In dor e
Ope ning of Cont rac t s Tr a d in g in a n y con t r a ct mon t h will op en on t h e
1 6 t h d a y of t h e mon t h , 1 2 mon t h s p r ior t o t h e
con t r a ct mon t h .
Due Dat e 15t h day of t he delivery mont hs if 15t h happens
t o be holiday t he n pre vious working day.
Clos ing of Cont rac t S qu a ri n g u p o f po s i t i o n s wi l l be pe rmi t t e d
be t we e n 1 0
t h
an d 1 5
t h
o f de l i v e ry mo n t h . No
fre s h pos i t i ons bui l di ng wi l l be al l owe d. From
1 0
t h
t o t he 1 5
t h
o f de l i ve ry mo nt h, s e l l e r c an
t e nde r Ware ho us e Re c e i pt fo r s e t t l e me nt and
Wa re h o u s e Re c e i p t wi l l be a c c e p t e d f o r
s e t t le me nt at c los ing pric e of t he pre vious day.
2.5.12 Soy oil con t a in s h igh er level of poly-u n s a t u r a t es , wh ich br ea k
down on bein g h ea t ed, t h a n ot h er s u ch a s Ra pes eed Oil or
Palm Oil. This gives t he oil it s s pecial charact eris t ic of healt hy
oil. It is part icu larly at t ract ive as a food in gredien t an d in t h e
pr odu ct ion of ma r ga r in es a n d s pr ea d. It pr ovides a h ea lt h y,
n u t r it iou s a n d deliciou s cookin g mediu m. Th e oil h a s s pecia l
advant age over ot her oils as it is low in calories du e t o higher
level of poly u n s a t u r a t es . It is a ls o a r ich s ou r ce of Vit a min
E. Du e it s s a fe u s e for h ea r t p a t ien t s it is b ein g u s ed b y
million s of h ou s ewives a n d cooks a ll over t h e wor ld.
2.5.13 It is deligh t fu l, odou r les s , h ea lt h y oil wh ich is a plea s u r e t o
t h e h ea lt h con s ciou s con s u mer . Soybea n oil is a ls o u s ed in
s u ch in du s t r ial pr odu ct s as pr in t in g in k, cos met ics , lin oleu m,
vin yl p la s t ics , p a in t s , p es t icid es , glu e, p r ot ect ive coa t in gs ,
s oa ps , s h a mpoos a n d det er gen t s .
2 . 6 NATURE & SOURCE OF DATA
2.6.1 Th e ba s ic da t a u s ed in t h e s t u dy is s econ da r y da t a . It wa s
c ol l e c t e d p r i n c i p a l l y fr om Ce n t r e for Mon i t or i n g In d i a n
Ec on omy (CMIE), For wa r d Ma r k e t s Commi s s i on (FMC),
Soya bea n Pr oces s or s As s ocia t ion of In dia (SOPA), Na t ion a l
Commodit ies & Der iva t ives Exch a n ge of In dia (NCDEX) Lt d.
a n d Na t ion a l Mu lt i-Commodit y Exch a n ge of In dia Lt d. et c.
Tr a de da t a on va r iou s ot h er commodit ies wer e a ls o collect ed
fr om t h e webs it e of Min is t r y of Con s u mer Affa ir s , Govt . of
In dia .
23
CHAPTER 3
EFFECTS OF FUTURES TRADING ON
SEASONAL PRICE VARIATIONS
3 . 1 INTRODUCTION
3.1.1 Vola t ile t r en d in t h e pr ice movemen t of oils eeds a n d t h eir
derivat ives oft en h as a t ellin g effect on t h e performan ce of t h e
p r oc e s s or s , gr owe r s a n d ot h e r i n t e r m e d i a r i e s . Fu t u r e s
Exch a n ge t en ds t o a ch ieve a r a t ion a l for pr ice dis cover y a n d
dat a dis s eminat ion on real-t ime bas is which improves hedging
by min imizin g s pecu la t ive r is k.
3.1.2 Fu t u r es t r a d in g r ed u ces t h os e ma jor va r ia t ion s in p r ices
wh ich a r e n ot iced in a n y commodit y fr om s ea s on t o s ea s on ,
a n d pa r t icu la r ly fr om mon t h t o mon t h wit h in a s ea s on . In
ot h er wor ds , t h e s t eady in flu en ce of fu t u r es mar ket is main ly
in r ega r d t o t h e s ea s on a l va r ia t ion s in pr ices , r es u lt in g fr om
t h e p a t t er n of p r od u ct ion a n d ma r k et in g of a gr icu lt u r a l
commodit ies . Th e pr odu ct ion of a gr icu lt u r a l commodit ies is
s eas on al wh er eas t h e con s u mpt ion is mor e even ly dis t r ibu t ed
t h r ou gh ou t t h e ye a r . Th e p r i c e s of s u c h a gr i c u l t u r a l
commodit ies are s u bject t o marked s eas onal variat ions in view
of t h e s e a s on a l n a t u r e of p r od u c t i on . Th e b u l k of t h e
a gr icu lt u r a l cr op moves t o t h e ma r k et immed ia t ely a ft er
h a r ves t , a n d, a s a r es u lt , pr ices a r e t h en u n du ly depr es s ed.
3. 1. 3 Fu t u r es Tr a din g in Soy oil s t a r t ed in In dia for t h e fir s t t ime
a t Na t ion a l Boa r d of Tr a d e (NBoT), In d or e. Th e fir s t s u ch
t r a din g t ook pla ce on 10 Febr u a r y 2000. In in it ia l mon t h s ,
t r a din g wa s low in t er ms of volu me a n d con t r a ct s . In t h is
chapt er object ive is t o analys e s eas onal variat ions in price. By
t h is we mean pr ice var iat ion s in Soy oil over var iou s mon t h s ,
lea n s ea s on t o pea k s ea s on .
3 . 2 METHODOLOGY
3.2.1 As t he fu t u res t rading in Soy oil was s t art ed only in Febru ary
2 0 0 0 , h en ce u p t o t h is p er iod s p ot p r ices a r e t r ea t ed a s
h a vin g n o imp a ct of fu t u r es t r a d in g wh er ea s Ma r ch 2 0 0 0
onwards , s pot prices were det ermined when fu t u res t rading in
24
Soy oil wa s ver y mu ch a ct ive. For t h e s a k e of con ven ien t
compa r is on we h a ve divided t h e da t a s et in t o t wo pa r t s a s
s h own in t h e t a ble below.
Table 3 . 1 : Pe riod of Fut ure s Trading in Soy Oil
No Fu t u r es Tr a din g in Act ive fu t u r es t r a din g in
SOY OIL SOY OIL
Yea r Nov 1997 - Febr u a r y 2000 Ma r ch 2000 on wa r ds
3.2.2 S p ot p r i c e of S oy oi l h a s b e e n a r r a n ge d i n Ta b l e fr om
Nove mb e r 1 9 9 7 t o Se p t e mb e r 2 0 0 4 . Th e s e a r e mon t h l y
average prices an d relat e t o s pot price at Mu mbai, a prin cipal
ma r ket wh er e Soy oil is t r a ded.
Table 3 . 2 : Mont hly Prices of Refined Soy Oil :
Mumbai (Rs . / 1 0 kg)
Mon t h s Yea r s (November Oct ober )
1997-98 1998-98 1999-00 2000-01 2001-02 2002-03 2003-04
Nov 272.06 363.22 235.64 235.86 292.19 412.44 417.47
Dec 290.10 346.38 240.07 243.00 299.57 417.95 438.38
J a n 310.37 329.79 242.22 236.33 305.50 405.61 433.52
Feb 317.24 305.81 223.00 237.27 292.00 409.94 455.89
Ma r 340.33 292.50 232.44 268.15 292.82 410.76 456.86
Apr 382.25 306.38 238.25 259.62 303.59 415.72 435.17
May 395.41 282.81 230.17 254.24 325.65 406.81 441.24
J u n e 397.80 255.29 230.00 259.08 363.17 395.29 436.68
J u ly 399.00 234.00 230.00 301.82 349.44 396.41 434.33
Au g. 378.11 262.00 230.00 300.71 378.33 378.83 452.59
Sept 386.25 262.64 230.00 278.53 374.74 385.05 429.33
Oct 396.78 250.25 230.00 262.57 369.05 409.90
3.2.3 The price variat ions in any commodit y may be du e t o int rinsic
fact or s of s u pply an d deman d as well as ext r in s ic fact or s like
impact of mon et ary an d fis cal meas u res . In order t o min imize
effect s of ext er n a l fa ct or s on pr ices of Soy oil, a ll mon t h ly
pr ices h a ve been defla t ed wit h cor r es pon din g mon t h ly WPI
(wh oles a le pr ice in dex) for All Commodit ies .
25
TABLE 3 . 3 : Mont hly Prices of Soyabean Oil :
Mumbai (Rs . / 1 0 kg)
(Deflat ed wit h WPI for All Commodit ies of corres ponding mont h)
Mon t h Yea r s (November Oct ober )
1 9 9 7-9 8 1 9 9 8 -9 8 1 9 9 9 -0 0 2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4
Nov 82.04 101.29 63.91 149.09 82.04 101.29 63.91
Dec 86.75 97.43 65.70 153.80 86.75 97.43 65.70
J a n 91.77 93.19 66.38 149.67 91.77 93.19 66.38
Feb 94.08 86.36 61.36 152.10 94.08 86.36 61.36
Ma r 101.05 82.70 155.48 174.12 101.05 82.70 155.48
Apr 112.26 86.26 157.05 171.14 112.26 86.26 157.05
May 115.01 79.26 151.63 167.48 115.01 79.26 151.63
J u n e 114.47 71.25 150.62 169.78 114.47 71.25 150.62
J u ly 113.55 65.07 150.23 197.14 113.55 65.07 150.23
Au g 107.05 72.56 149.93 196.03 107.05 72.56 149.93
Sept 108.28 71.70 148.67 180.05 108.28 71.70 148.67
Oct 110.55 67.74 145.66 166.29 110.55 67.74 145.66
An n u a l 103.07 81.23 122.22 168.89 200.50 236.43 241.95
Aver a ge
3.2.4 Her e we h a ve u s ed t wo differ en t s er ies of WPI du e t o pau cit y
of da t a . Fr om November 1997 t o Febr u a r y 2000, pr ices h a ve
been defla t ed wit h r es pect t o WPI wit h old ba s e yea r (1981-
82=100) wh ereas n ew s eries of WPI (1993-94=100) is u s ed for
Mar ch 2000 on war ds . It wou ld n ot give an y aber r at ion t o ou r
s t u dy, a s Febr u a r y 2000, u p t o wh ich old s er ies h a s been
u s ed, is t h e mon t h wh en fu t u r e t r a din g s t a r t ed in Soy oil.
Figure 3 . 1 : De flat e d Mont hly Pric e s (as % of Ave rage Annual Pric e )
26
3 . 3 INFERENCES
3.3.1 The Figu re 3.1 is plot t ed wit h mont hly-deflat ed ready prices of
Soyabean oil as percen t of average an n u al price. It depict s by
h ow mu ch pr ices va r y du r in g va r iou s mon t h s . If we look a t
t h e fir s t t wo s et s of colu mn ba r s (for 1997-98 & 1998-99),
wide var iat ion s in mon t h ly pr ices is dis cer n ible. It is ch ecked
du r in g t h e ver y n ext yea r , i. e. 1999-2000, wh er e a ft er fir s t
fou r s u b - b a r s , r ema in in g 8 s u b - b a r s d o n ot s h ow mu ch
variat ion. It s hou ld be remembered t hat t he fu t u res t rading in
Refin ed Soy oil s t a r t ed du r in g t h is per iod on ly in Febr u a r y
2000. Fir s t fou r s u b-ba r s cor r es pon d t o November 1999 t o
Febr u a r y 2000, a ft er wh ich we fin d low vola t ilit y in pr ices .
3.3.2 The colu mn bars for 2000-01, 2001-02, 2002-03 and 2003-04
shows decline in price volat ilit y. This is t he period when act ive
fu t u r es t r a din g in Soy oil a r e s een a t commodit y exch a n ges ,
ma in ly NBoT, In dor e a n d NCDEX, Mu mba i. Th er efor e, it is
es t a blis h ed t h a t t h e fu t u r es t r a din g r edu ces s ea s on a l pr ice
va r ia t ion s in a gr icu lt u r e commodit ies .
3.3.3 Alt er n a t ively, r a n ge of mon t h ly p r ice va r ia t ion h a s b een
calcu lat ed and t hen range as per cent of average annu al price
of t h e corres pon din g year h as been s h own in t h e Figu re 3.2.
Range = Maxi mum mo nt hl y val ue Mi ni mum mo nt hl y
value
3.3.4 Du r in g 1999-2000, r a n ge is ca lcu la t ed exclu din g va lu es of
Nove mb e r 1 9 9 9 Fe b r u a r y 2 0 0 0 on t wo gr ou n d s . On e ,
Febr u a r y 2000 is t h e dividin g lin e a s fu t u r es t r a din g in Soy
oil a t NBOT, In dor e s t a r t ed du r in g t h is mon t h . Secon d, r ea l
mon t h ly pr ices u p t o Febr u a r y 2000 h a ve been defla t ed by
mon t h ly WPI wit h ba s e yea r 1981-82 du e t o pa u cit y of da t a
a n d, h en ce ba r for 1999-2000 is r eflect in g s omewh a t a bn or -
ma l pict u r e.
3.3.5 Th e c ol u mn b a r s r e p r e s e n t t h e r a n ge of mon t h l y p r i c e
variat ion s du rin g variou s years . It is givin g a dis t ort ed pict u re
b e c a u s e t h e r e m a y b e ge n e r a l r i s e i n p r i c e s d u r i n g a
pa r t icu la r yea r du e t o fa ct or s like dema n d & s u pply. If we
plot t h e r a n ge va lu e of va r iou s yea r s pr ices a s per cen t of
cor r es p on d in g yea r s a ver a ge a n n u a l p r ice, it wou ld give a
bet t er pict u r e of pr ice va r ia t ion s du r in g t h e yea r . It is s h own
27
a s s moot h dot t ed lin es , wh ich clea r ly depict s fa ll in mon t h ly
p r ice va r ia t ion d u r in g t h e yea r s wit h fu t u r es t r a d in g a s
compa r ed t o yea r s wit h n o fu t u r es t r a din g in Soy oil.
Figure 3 . 2 : Range of Mont hly Pric e Variat ion
3.3.6 Simila r ly, t h e d a r k u n d ot t ed lin e r ep r es en t s t h e t r en d of
s t a n da r d devia t ion in mon t h ly pr ices wit h r es pect t o mea n of
annu al prices. It also shows t hat t he ready (spot ) prices varied
les s s harply du ring years wit h fu t u res t rading t han du ring t he
years wh en fu t u res t radin g in Soy oil were n ot t h ere. It h as a
clea r down wa r d s lope in dica t in g low va r ia t ion s in pr ices of
Refin ed Soya bea n Oil wit h a ct ive fu t u r es t r a din g in t h e s a me
commodit y.
3.3.7 St a t is t ica l compa r is on s bet ween yea r s wit h fu t u r es t r a din g
a n d t h os e wit h n o s u ch t r a d in g s h ow t h a t a mp lit u d e of
s eas on al price variat ion s was s maller du rin g t h e former grou p
t h a n i n t h e l a t t e r gr ou p of ye a r s . Wh e n t h e s t a t i s t i c a l
comparis on s are checked wit h available market informat ion, it
is d is cover ed t h a t ot h er p os s ib le p r ice in flu en ces a r e b y
28
t h e ms e l ve s i n a d e qu a t e t o e xp l a i n t h e s ma l l e r s e a s on a l
va r ia t ion s in Soy oil pr ices du r in g yea r s of fu t u r es t r a din g.
Th e h yp ot h es is t h a t fu t u r es t r a d in g r ed u ces t h e s ea s on a l
r a n ge of pr ice flu ct u a t ion s is fa vou r ed by t h e ou t come of t h e
a n a lys is .
3.3.8 Th er efor e, by logic, it s eems t h a t fu t u r es t r a din g ca n h a ve
in flu en ce on redu cin g t h e s eas on al flu ct u at ion s of agricu lt u ral
commodit ies prices . By how mu ch change in fu t u res prices is
con t r ibu t in g t o va r ia t ion s in s pot pr ices of t h e commodit y
s h a ll be t es t ed in t h e n ext ch a pt er .
29
CHAPTER 4
LONG-TERM RELATIONSHIP BETWEEN
FUTURES AND SPOT PRICES
4 . 1 INTRODUCTION
4.1.1 In t h is Ch a pt er we pr opos e t o t es t ou r h ypot h es is t h a t t h er e
exis t s a defin it e relat ion s h ip bet ween fu t u res prices an d ready
pr ices of s oya bea n oil. In ot h er wor ds , fu t u r es pr ices lea d
r ea dy (s pot ) pr ices of Soy oil. We s h a ll a ls o t r y t o fin d ou t
wh et h er pr ice s t a bilis a t ion is pos s ible by fu t u r es t r a din g, i.e.
gen er a l u pwa r d or down wa r d t r en d in pr ices over a per iod of
t ime is a ls o a n ou t come of fu t u r es t r a din g.
4.1.2 Wh en we plot t ed a ch ar t for t h e daily s pot (r eady) pr ices an d
fu t u res prices of Soy oil it was obs erved t hat no definit e lead/
la g r ela t ion s h ip exis t s bet ween t h e fu t u r es a n d s pot pr ices .
Fu t u r es p r ices of n ea r mon t h con t r a ct a r e s omet imes in
backwardat ion t hrou ghou t t he mont h, i.e. s pot prices s hown a
lea d over t h e fu t u r es pr ices of r efin ed s oya bea n oil.
4.1.3 As s a id ea r lier , t h e fu t u r es t r a d in g in r efin ed Soy oil is a
r ecen t ph en omen on , wh ich s t a r t ed on ly in Febr u a r y 2000.
Na t ion a l Boa r d of Tr a d e (NBoT), In d or e is t h e mos t a ct ive
derivat ives market as far as refined s oyabean oil is concerned.
Hence, fu t u res prices of NBoT has been t aken from April 2000
on wa r d s . On s ome d a ys , t h er e h a s n ot b een a n y fu t u r es
t rading or very less t rading in Soy oil fu t u res at t his exchange.
Th er efor e, all s u ch days h ave been delet ed fr om t h e s t u dy for
t he s ake of u nbias ed analys is . Ready prices for t his part icu lar
a n a lys is on lon g-t er m r ela t ion s h ip bet ween fu t u r es a n d s pot
pr ices h a ve been t a ken t h a t of In dor e ma r ket . For s ea s on a l
variat ions in prices , Mu mbai s pot prices were t aken which are
mor e r epr es en t a t ive of impor t ed Soy oil pr ice.
4 . 2 METHODOLOGY
Here, bot h t he prices are of Indore market . When t wo market s
are at same geographical place it is t hou ght t hat development s
in u n der lyin g mar ket wou ld affect it s der ivat ives mar ket mor e
effect ively t h an t h e mar ket s wh ich ar e at t wo differ en t places ,
even if t h ey a r e in t h e s a me t ime zon e. Th is is p er h a p s
30
becau s e of t ime lag in s pr ead of mar ket in for mat ion fr om on e
pla ce t o a n ot h er owin g t o fa ct or s like in for ma t ion a s ymmet r y
a mon g t h e ma r ket s .
Figure 4 . 1 : Daily Spot & Fut ure s Pric e s
4 . 3 INFERENCES
4.3.1 Backwardat ion in fu t u res prices was observed du ring beginning
of s ever a l mon t h s . It a p p ea r s t o b e b eca u s e of low op en
int eres t du ring init ial mont hs of fu t u res t rading on accou nt of
lower ma r k et p a r t icip a t ion (i. e. n u mb er of con t r a ct s ) a n d
volu me of t r a de.
4.3.2 Du r in g t h e per iod begin n in g fr om Apr il 2000 t o Sept ember
2004, ba s is
3
for Soy oil va r ied in t h e r a n ge of 0 t o 30. It is
CHART: DAILY SPOT & FUTURES PRICES
200.00
250.00
300.00
350.00
400.00
450.00
500.00
PERIOD (Apr 2000 -Sep 2004)
R
s
.
/
1
0

k
g
200.00
250.00
300.00
350.00
400.00
450.00
500.00
Ready Prices
Futures Prices
31
s een t h a t a s t h e da t e of expir a t ion of fu t u r es con t a ct comes
n ear , t h e bas is r edu ces an d on t h e day of expir at ion it t en ds
t o zer o. Th is mea n s t h a t t h er e is con ver gen ce of t h e fu t u r es
pr ice t o t h e r ea dy pr ice of Soy oil (u n der lyin g a s s et ). High er
b a s is n ea r exp ir a t ion is a ls o ob s er ved in s ever a l mon t h s
du r in g 2000-02 a n d s ome mon t h s in 2002-04, t oo.
It r eflect s a n a r bit r a ge oppor t u n it y. Ar bit r a ge ca n a r is e wh en
t h e b a s is or t h e s p r ea d s (d iffer en ce b et ween p r ices of t wo
fu t u r es con t r a ct du r in g t h e life of a con t a ct a r e in cor r ect . In
s u ch cas es , t h e t r ader can s h or t h is fu t u r es con t act , bu y t h e
commodit y fr om t h e s pot ma r ket a n d ma ke t h e deliver y.
4.3.3 In Fi gu r e 4 . 2 , d a r k l i n e s r e p r e s e n t b a s i s a s p e r c e n t of
cor r es pon din g r ea dy (s pot ) pr ice. Colu mn s r epr es en t ba s is in
n u mbers . Wh en bas is is pos it ive (colu mn bars above 0-lin e) it
r eflect s lea d of s pot pr ices over fu t u r es pr ices , i. e. fu t u r es
pr ices in ba ckwa r da t ion . On t h e con t r a r y, a n ega t ive ba s is
r epr es en t s fu t u r es pr emiu m, i. e. con t a n go or lea d of fu t u r es
pr ices over s pot pr ices . It is obs er ved fr om t h e a n a lys is t h a t

FIGURE 4.2: FUTURES BASIS FOR SOYA OIL
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
PERIOD (APR 2000 - SEP 2004)
B
A
S
I
S

IN

RS.
B
A
S
I
S
(%)
Basis % of Ready Prices
32
ba s is con ver ges t o zer o n ea r da t e of expir y of fu t u r e con t a ct
in mos t of t h e ca s es . Some mon t h s begin wit h pos it ive ba s is
a n d t h en go t o n ega t ive t er r it or y befor e con ver gin g t o zer o.
4.3.4 On t h e b a s is of ob s er va t ion s in t h e s t u d y, t h e followin g
ou t comes a r is e :
1. Th e d a t a for 5 3 c on t r a c t mon t h s fr om Ap r il 2 0 0 0 t o
Sept ember 2004 for fu t u r es a s well a s r ea dy pr ices wer e
a n a lys ed t o ch eck t h e lea d & la g r ela t ion s h ip b et ween
fu t u r es pr ices for Soy oil a n d it s r ea dy ma r ket pr ice.
2. For s ake of compar at ive an alys is , each mon t h was divided
in t o t h r ee pa r t s con s is t in g of 7-8 t r a din g da ys ea ch , viz.
Begin n in g, Middle a n d En d of Mon t h . In ea ch pa r t , ba s is
wit h maximu m fr equ en cy h as been t aken as t h e r epr es en -
t a t ive. For exa mp le, if b a s is wa s p os it ive on 2 d a ys ,
n ega t ive on 4 d a ys a n d n ea r zer o on 2 d a ys ou t of 8
t r a din g da ys , t h is pa r t of t h e con t r a ct mon t h is s a id t o
h a ve n ega t ive ba s is . In s imila r fa s h ion , a s s es s men t wa s
ma de for t h r ee pa r t s of ea ch con t a ct mon t h .
3. It wa s ob s er ved t h a t d u r in g b egin n in g of t h e mon t h ,
n ega t ive ba s is pr eva iled in 29 obs er va t ion s wh ile pos it ive
bas is was s een in 17 and near zero bas is in 7 obs ervat ions .
4. Du r in g middle of t h e con t r a ct mon t h , t oo, n ega t ive ba s is
wa s h igh er t h a n t h e ot h er t wo.
5. At t h e en d of t h e mon t h b a s is s h own t h e t en d en cy of
r ea ch in g zer o.
Table 4 . 1 : Fut ure s Bas is During Cont rac t Mont h
Beginning Middle End
+ ve Ba s is 17 15 3
- ve Ba s is 2 9 2 8 4
Nea r Zer o 7 10 4 6
6. Thu s, in more t han 50% of t he observat ions, fu t u res prices
of Soy oil lea d it s s pot pr ices .
4.3.5 Th ou gh fr om t h e a bove obs er va t ion s it ca n n ot be es t a blis h ed
t h a t t h e fu t u r es pr ices lea d s pot pr ices , it ca n defin it ely be
33
dedu ced t h at fu t u res prices in flu en ce daily market prices t o a
gr ea t er level. It h elps in da ily s pot pr ice det er min a t ion .
4.3.6 Wh at is more import an t t o n ot e is t h at s ize of bas is (abs olu t e
va lu e of differ en ce in s pot & fu t u r es pr ices ) h a s n a r r owed
down pr ogr es s ively fr om 2000-01 on wa r ds . Th a t is t o s a y,
fu t u r es a n d s pot pr ices of Soy oil move in t a n dem.
4.4 LONG-TERM PRICE TREND (PRICE STABILISATION)
4.4.1 We h a ve s e e n i n t h e p r e vi ou s c h a p t e r t h a t t r a d i n g i n
commodit y exch a n ges r edu ces t h e s ea s on a l pr ice va r ia t ion s .
However , it d oes n ot es t a b lis h t h a t t h e fu t u r es t r a d in g in
s oya bea n oil h a s r ea lly given s ome lon g-t er m pr ice t r en d. By
t r en d we mea n t h e ba s ic t en den cy on t h e pa r t of a va r ia ble
eit her t o increas e or t o decreas e over a s u fficient ly long period
of t ime. It is d et er min ed b y for ces wh ich move s lowly b u t
giving a definit e direct ion t o t he changes in variable. Monet ary
a n d s h or t -t er m for ces ma y ca u s e ch a n ges in t h a t dir ect ion ,
yet t h e ba s ic dir ect ion is dis cer n ible.
4.4.2 Wh en we r a n r egr es s ion a n a lys is on t h e d a ily s p ot a n d
fu t u res prices of Soy oil, it did n ot give a delin eat in g t ren d s o
a s t o a r r ive a t a defin it e lon g-t er m t r en d. However , t h e va lu e
of R
2
wa s 0.289, wh ich s u gges t s t h a t a bou t 29% va r ia t ion in
s p ot p r ices of Soy oil is exp la in ed b y va r ia t ion in fu t u r es
t r a din g of t h e commodit y. t -s t a t wa s a ls o a s ign ifica n t va lu e
(3 . 3 5 7 ) a t 1 0 p er cen t level of s ign ifica n ce. It wa s fu r t h er
in fer r ed t h a t t h e s lope of t h e t r en d lin e of Soy oil pr ices wa s
r edu ced in t h e pr es en ce of fu t u r es t r a din g. Aver a ge a n n u a l
s t eepnes s wit h which s loped u pwards was checked du ring t he
years wh en fu t u res t radin g was act ive. In ot h er words , du rin g
fu t u r es t r a din g pr ices s loped u pwa r ds r a t h er gen t ly t h a n in
a bs en ce of it .
4.4.3 We h ave alr eady s een t h at over a per iod of t ime daily, weekly
a n d mon t h ly p r ice va r ia t ion in Soy oil h a s b een ch eck ed
r ema r ka bly a ft er in t r odu ct ion of fu t u r es t r a din g in t h is com-
modit y. By h ow mu ch pr ice s t abilis at ion is affect ed r emain s
t o b e a n s wer ed . Th e d a ily p r ices h a ve d is p la yed t r en d of
s t a b ilit y fr om Sep t emb er 2 0 0 2 wh ile mon t h ly p r ices h a ve
s t a b ilis ed la t er . Wh a t is common t h ou gh is t h e fa ct t h a t
prices have s t abilis ed and wide flu ct u at ions in prices cou ld be
ch ecked a ft er fu t u r es t r a din g.
35
CHAPTER 5
FUTURES TRADING AND
SHORT-TERM PRICE FLUCTUATION
5 . 1 INTRODUCTION
We h a ve a lr ea dy s een t h a t fu t u r es t r a din g r edu ces s ea s on a l
pr ice va r ia t ion s . It wa s obs er ved t h a t t h e pr ices of s oya bea n
oil in r ea dy ma r ket va r ied les s s h a r ply du r in g t h e yea r s wit h
fu t u r es t r a din g t h a n du r in g t h e per iod wh en t h er e wa s n o
fu t u r es t r a d in g in Soy oil. Th e d ir ect ion a n d s t eep n es s of
mon t h ly pr ice va r ia t ion s wa s u s ed t o es t a blis h t h e r es u lt . In
s imilar fas h ion , by u s in g daily an d weekly pr ices of s oyabean
oil it s h a ll be es t a blis h ed wh et h er fu t u r es t r a din g h a s a n y
s ign ifican t impact on s h ort -t erm price flu ct u at ion s an d, if yes ,
t h en t o wh a t ext en t .
5 . 2 DAILY PRICE VARIATIONS
5.2.1 We h a ve d a ily s p ot p r ices of s oya b ea n oil s in ce Novemb er
1997 t o Sept ember 2004, i. e. a bou t 7 yea r s . Fu t u r es pr ices
ar e available s in ce Apr il 2000 t o Sept ember 2004. Daily pr ice
va r ia t ion in t h e a bs en ce of fu t u r es t r a din g wa s h igh er t h a n
du r in g yea r s in wh ich fu t u r es t r a din g exis t ed. Wh en da ily
va r ia t ion in s p ot p r ices (p
t
- p
t - 1
) wa s ob s er ved over a lon g
per iod of t ime, it wa s obs er ved t h a t pr ice va r ia t ion h a s been
gen t le aft er 2001 t h an befor e. Alt er n at ively, weekly aver age of
daily price variat ion in Soy oil was s hown as a rat io of weekly
average price for t h e corres pon din g week. It als o s h ows arres t
in da ily pr ice va r ia t ion in t er ms of ma gn it u de a ft er fu t u r es
t r a d in g. Du r in g t h e p er iod 1 9 9 7 -2 0 0 0 , d a ily a ver a ge p r ice
va r ia t ion wa s n ea r 1. 0%. On ma n y da ys it exceeded 1. 5%,
t oo. Th e ma gn it u de of va r ia t ion wa s ch ecked t o s ome ext en t
du r in g 2000 t o ea r ly 2002 wh en fu t u r es t r a din g t ook pla ce
bu t t h e volu me & con t r a ct level wa s lower . As t h e ma r ket
pa r t icipa t ion in Soy oil fu t u r es in cr ea s ed a ft er 2002 it cou ld
a ls o h elp ch eck flu ct u a t ion in d a ily p r ices . Ma gn it u d e of
variat ion came down s harply and remained in t he comfort able
ran ge of +0.5% t o -0.5% compared t o +1.0% t o -1.0% prior t o
t h is per iod. In t h e pr eviou s per iod (1997-2002), t h er e wer e
s ome u n u s u a l va r ia t ion s du r in g s ome da ys (s ee lon g lin es in
Figu r e 5.1).
Figure 5 . 1 : Daily Pric e Variat ion
Hen ce it is obs erved t h at fu t u res t radin g in s oyabean oil h ave
r edu ced va r ia t ion in it s da ily r ea dy pr ices . Now, let s s ee t h e
i mp a c t of fu t u r e s t r a d i n g on we e k l y p r i c e va r i a t i on s of
s oya bea n oil.
5 . 3 WEEKLY PRICE VARIATION
5.3.1 For t es t in g wh et h er week ly p r ices a r e in flu en ced b y t h e
fu t u r es t r a din g, we h a ve ca lcu la t ed weekly pr ice r a n ge fr om
1997 t o Sept ember 2004 (i.e. maximu m minu s minimu m price
of t h e week). Th en , r a n ge s o ca lcu la t ed wa s r epr es en t ed a s
percen t age of average price of t h e corres pon din g week. Th is is
s h own below as a fr equ en cy t able wh er e it is dis cer n ible t h at
t h e p r ice va r ia t ion s d u r in g 1 9 9 7 - 2 0 0 2 is mor e in h igh er
fr equ en cy, i. e. mor e t h a n 4, wh ich h a s come down in la t er
yea r s . Pr ice va r ia t ion in 2000, 2001 & 2002 h a s been h igh er
des pit e exis t en ce of fu t u r es t r a din g.
TABLE 5 . 1 : Weekly Range as % of Average Weekly Price
YEAR 0-2 2-4 4-6 6-8 Above 8
1997 1 1 1 1 1
1998 8 11 3 3 3
1999 1 7 7 3 3
2000 13 4 1 1 2
2001 4 7 6 4 4
2002 5 7 9 5 3
2003 22 11 1 0 0
2004 9 13 3 3 0
37
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
YEAR
(
%
)
Range as % of Avg Weekly Price
Linear (Range as % of Avg Weekly Price)
5. 3. 2 Wh en r epr es en t ed by a gr a ph r a n ge a s per cen t a ge of weekly
a ver a ge p r ice a p p ea r s t o h a ve fa llen . Sk ys cr a p er s d u r in g
1997-2000 s pea k of h igh pr ice vola t ilit y in t h e a bs en ce of
fu t u r es t r adin g. Th e h igh in t r a-week pr ice volat ilit y con t in u ed
even a ft er fu t u r es t r a din g wer e s t a r t ed in Soy oil. However ,
volat ilit y in prices was ch ecked more effect ively 2003 on wards
when act ivit y in t he Soy oil fu t u res market was good in t erms
of n u mber of con t r a ct s a n d open in t er es t pos it ion s .
Figure 5 . 2 : Weekly Price Range
5.3.3 Th e t r e n d lin e p lot t e d in t h e gr a p h fa lls s t e e p ly d u r in g
Sept ember 2002 t o Sept ember 2004 t h a n befor e. Tr en d lin e
in dicat es fall in weekly ran ge over t h e years , part icu larly aft er
commen cemen t of fu t u r es t r a din g in Soy oil.
5.3.4 Soy oil, a s s t a t ed ea r lier is n ext on ly t o gr ou n d n u t oil in
domes t ic dema n d. It is in flu en ced by va r ia t ion s in pr ices of
Ma la ys ia n Pa lm oil a n d a ls o it s impor t in t h e cou n t r y. Th e
38
fa ct or s t h a t imp a ct t h e p r ice of s oy oil h a ve in cr ea s ed in
n u mb er in r ecen t yea r s d u e t o op en in g of t h e econ omy.
Ch an ges in produ ct ion an d deman d in on e cou n t ry in flu en ces
prices in anot her. So, it can be eas ily dedu ced t hat t he s hort -
t erm price volat ilit y will be more in s u ch a con dit ion . Bu t t h e
empir ical eviden ce comes again s t t h is . It is pr oved empir ically
t h a t t h e va r ia t ion s h a ve been ch ecked du r in g t h e yea r s of
fu t u r es t r a din g.
5.3.5 Th er efor e, it comes t o ligh t t h a t t h e fu t u r es t r a din g h a s a
pos it ive effect on s h ort -t erm price flu ct u at ion s . By s h ort -t erm,
we mea n h er e pr ice va r ia t ion s du r in g a week a n d wit h in a
mon t h , i. e. in t r a -week a n d in t r a -mon t h . At t empt s s h ou ld be
m a d e b y t h e e xc h a n ge s a n d t h e r e gu l a t or t o p r om ot e
volu min ou s t r a d in g in p r in cip a l commod it ies wh er e la r ge
n u mbers of farmers an d t raders cou ld part icipat e an d h elp in
efficien t pr ice dis cover y s ys t em.
39
CHAPTER 6
OPTIONS AS AN EFFICIENT TOOL
FOR HEDGING PRICE RISKS
6 . 1 INTRODUCTION
6.1.1 Opt ion s a r e pr oh ibit ed in In dia n commodit y exch a n ges . Th e
r egu lat or , For war d Mar ket s Commis s ion is s t ill examin in g t h e
is s u e of a llowin g t r a din g of commodit y opt ion s . We s h a ll, in
t h is ch a pt er , ou t lin e a t h eor et ica l fr a mewor k a bou t opt ion s
a n d s ee h ow opt ion s ca n be u s efu l in h edgin g pr ice r is ks .
6.1.2 An op t i on gi ve s t h e p u r c h a s e r t h e r i gh t t o b u y or s e l l
s omet h in g (e. g. a commodit y) a t s ome t ime in fu t u r e. Wh ile
fu t u r e s , for wa r d s or s wa p s n e c e s s it a t e a n ob liga t ion t o
per for m, t h e h older of a n opt ion h a s r igh t t o exer cis e a s well
a s n ot t o exer cis e h is r igh t . Th e opt ion -bu yer pu r ch a s es t h is
r igh t b y p a yin g a p r emiu m t o t h e op t ion -s eller wh er ea s it
cos t s n ot h in g (except mar gin r equ ir emen t s ) t o en t er a fu t u r es
con t r a ct . Opt ion t r a din g is fr a u gh t wit h h igh r is k if pr oper
r is k ma n a gemen t a n d in t er n a l con t r ol s ys t ems a r e n ot in
place. Du e t o it s in h eren t ris ks opt ion t radin g in commodit ies
wa s ba n n ed in 1939.
6.1.3 Opt ion a s a h edgin g device is widely u s ed in in t er n a t ion a l
commodit y exch a n ges . Ch ica go Boa r d of Tr a de (CBoT), Mid
Amer ica Commodit y Exch a n ge, Lon don In t er n a t ion a l Fu t u r es
& Opt ion s Exch a n ge, Ka n s a s Cit y Boa r d of Tr a de a r e a mon g
t h e p r omin en t in t er n a t ion a l exch a n ges wh er e op t ion s in
a gr icu lt u r a l commod it ies a r e wid ely t r a d ed . Th e p r ima r y
object ive of h edgin g is n ot t o ma ke mon ey bu t t o min imize
r is ks a n d t h is in clu des u s in g h edgin g t o min imize los s es .
6.1.4 Produ cers of agricu lt u ral commodit ies are faced wit h price and
p r od u ct ion r is k over t ime a n d wit h in a ma r k et in g yea r .
Fu r t h er , in cr ea s ed globa l fr ee t r a de a n d ch a n ges in domes t ic
a gr icu lt u r a l policy h a ve in cr ea s ed t h e pr ice a n d pr odu ct ion
r is k s of a gr icu lt u r a l p r od u cer s . As p r ice a n d p r od u ct ion
vola t ilit y in cr ea s e r even u e va r ia bilit y, t h e impor t a n ce of r is k
ma n a gemen t get s s ign ifica n ce. On e mea n s of r edu cin g t h es e
r is ks is t h r ou gh t h e u s e of t h e commodit y fu t u r es exch a n ge
ma r k et s . Lik e t h e u s e of veh icle in s u r a n ce t o h ed ge t h e
40
pot en t ial cos t s of an acciden t , agr icu lt u r al pr odu cer s can u s e
t he commodit y opt ions market s t o hedge t he pot ent ial cos t s of
commodit y pr ice vola t ilit y. However , like veh icle in s u r a n ce
pa ymen t s fr om a s ma ll in s u r a n ce cla im ma y n ot exceed t h e
c os t of t h e p r e m i u m s p a i d , t h e ga i n s fr om h e d gi n g
a gr icu lt u r a l commodit ies ma y n ot cover t h e cos t s of h edgin g.
6.1.5 Th e opt ion s ma r ket is s omet imes r efer r ed t o a s in s u r a n ce.
Becau s e by h edgin g t h rou gh t h e opt ion s market an in dividu al
locks in t h e cos t s of h edgin g a n d t h en ca n los e a t mos t on ly
t h e cos t of t h e opt ion pr emiu m wh ile h a vin g u n limit ed pr ofit
pot ent ial. Alt ernat ively, holding a fu t u res pos it ion limit s profit s
a n d los s es by t h e h edged pr ice.
6.1.6 For t h e opt ion s ma r ket , t h e Tr a din g a ct ivit ies a r e ca r r ied ou t
t hrou gh t he exchange of paper promissory not es t o sell or bu y
a commodit y a t a n a gr eed u pon pr ice a t a la t er da t e. Th is
promis s ory n ot e gives t h e in dividu al t h e righ t t o eit h er bu y or
s ell a t a la t er da t e a n d n ot t h e obliga t ion t o bu y or s ell a s
wit h fu t u r es h edgin g. As n ew in for ma t ion en t er s t h e ma r ket
(exch a n ge), peoples per cept ion s ch a n ge a n d t h e pr oces s of
a r bit r a gin g begin s a ga in . Opt ion s ch a n ge in va lu e du e t o t h e
p er cep t ion of t r a d er s of wh er e t h e ma r k et will go in t h e
fu t u r e.
6 . 2 TYPES OF OPTION CONTRACTS
Opt ion con t a ct s a r e br oa dly of t wo kin ds Ca ll opt ion a n d
Pu t opt ion. A pu t opt ion gives t he individu al t he right bu t not
t h e obligat ion t o s ell a fu t u r es con t r act at a lat er dat e. A call
opt ion gives t h e in dividu a l t h e r igh t bu t n ot t h e obliga t ion t o
bu y a fu t u res con t ract at a lat er dat e. Th e price at wh ich t h e
fu t u res market can be ent ered at a lat er dat e is referred t o as
t h e s t r ike pr ice. Th e pr emiu m paid is in r elat ion t o t h e s t r ike
price. The s t rike price is a predet ermined range of valu es t hat
is differ en t for ea ch commodit y. A pu t (ca ll) opt ion is s a id t o
b e in t h e mon ey if t h e s t r ik e p r ice is a b ove (b elow) t h e
u n der lyin g fu t u r es pr ice. A pu t (ca ll) opt ion is s a id t o be a t
t h e mon e y i f t h e s t r i k e p r i c e i s e qu a l t o (e qu a l t o) t h e
u n der lyin g fu t u r es pr ice. A pu t (ca ll) opt ion is s a id t o ou t of
t h e mon ey if t h e s t r ike pr ice is below (a bove) t h e u n der lyin g
fu t u r es pr ice. At a n y given t ime, t h e r a n ge of s t r ike pr ices
qu ot ed will cover valu es in t h e mon ey, at t h e mon ey, an d ou t
of t h e mon ey. Th u s , a h edger or s pecu lat or h as t h e opt ion of
41
pu r ch a s in g a n opt ion a t a n y of t h es e t h r ee levels . Typica lly,
opt ion s in t h e mon ey will h ave t h e h igh es t pr emiu m, followed
by opt ion s a t t h e mon ey, a n d opt ion s ou t of t h e mon ey will
h a ve t h e lowes t pr emiu ms .
6 . 3 VALUE OF AN OPTION
6.3.1 Th er e a r e t wo compon en t s wh ich ma ke u p t h e va lu e of t h e
op t ion , in t r in s ic a n d t ime va lu e. Bot h of t h es e va lu es a r e
i mp l i c i t va l u e s n ot ob s e r ve d , b u t t h e or e t i c a l l y p r e s e n t .
In t r in s ic va lu e is t h e va lu e of t h e op t ion r ela t ive t o t h e
u nderlying fu t u res price. That is, a Rs. 500 per t on Pu t opt ion
for s oy oil h a s a n in t r in s ic va lu e of Rs . 2 0 / t on n e if t h e
u n der lyin g s oy oil fu t u r es is pr iced a t Rs . 480/ t on n e. Th is is
du e t o t h e fa ct t h a t t h e Pu t opt ion cou ld be exer cis ed (s ell a
fu t u res cont ract a t Rs. 500 and bu y back at Rs. 480). Typically,
t h e ch a n ge in in t r in s ic va lu e of t h e opt ion is det er min ed by
t h e ch a n ge in fu t u r es pr ice. However , t h e ch a n ge in opt ion
price is t ypically n ot as large for ou t of t h e an d at t h e mon ey
opt ion s .
6.3.2 Addit ion a lly, t h er e is a t ime compon en t t o t h e va lu e of a n
opt ion . Th e t ime va lu e r eflect s t h e t ime bet ween t h e opt ion
pr emiu m qu ot e a n d con t r a ct expir a t ion . Typica lly, t h e la r ger
t h e t ime p er iod t h e gr ea t er t h e imp licit t ime va lu e of t h e
opt ion . Th a t is , t h e gr ea t er n u mber of da ys u n t il con t r a ct
expir a t ion , t h e h igh er t h e pr oba bilit y of t h e fu t u r es ma r ket
changing in valu e enou gh t o improve t he int rins ic valu e of t he
opt ion . Let u s t a ke a n exa mple.
6 . 4 AN EXAMPLE
6.4.1 Su ppose Trader A believes t he domest ic produ ct ion of soyabean
h as been u n der es t imat ed an d Trader B believes t h e domes t ic
pr odu ct ion h a s been over es t ima t ed. Us in g t h e commodit y
exchange as a market place, s ince Trader A believes s oyabean
pr ices ar e des t in ed t o go lower , h e pu r ch as es t h e r igh t t o s ell
a fu t u r es con t r a ct (Pu t ) a t a pr edet er min ed pr ice a t a la t er
d a t e, a n d Tr a d er B p u r ch a s es t h e r igh t t o b u y a fu t u r es
c on t r a c t (Ca ll) a t a p r e d e t e r min e d p r ic e a t a la t e r d a t e
becau s e he believes t he price is going t o go higher. Unlike t he
cas e of t h e fu t u r es , Tr ader A & Tr ader B will n ot off-s et each
ot h er s pos it ion . In t h e opt ion s ma r ket t h er e a r e wr it er s of
opt ion s . Th es e people a r e like a n in s u r a n ce a gen cy. A wr it er
42
of a n op t ion is willin g t o t a k e a s et p r emiu m p er u n it of
commodit y in exch an ge for t h e r is k t h at t h e commodit y pr ice
ma y move a ga in s t t h em.
6.4.2 Su ppos e Tr a der B pu r ch a s es t h e r igh t t o s ell (pu t opt ion ) a
fu t u r e con t r a ct for s oya bea n a t a la t er da t e a t a s t r ike pr ice
of Rs . 260 per 10 kg for a pr emiu m of Rs .15 an d t h e fu t u r es
pr ice is a t Rs . 270 per 10 kg t h a t da y, t h en Tr a der B wou ld
in it ia lly pa y t h e commodit y br oker Rs . 15000 (if t r a din g is in
u n it of 1000) plu s commis s ion s . Th e Rs . 15000 wou ld go t o
t h e wr it er of t h e opt ion . An yon e can wr it e opt ion s . Becau s e if
t h e p r ice d oes n ot d eclin e or t h e p r ice r is es t h e p r emiu m
wou ld declin e over t ime a n d t h e opt ion wr it er wou ld pr ofit
Rs . 1 5 0 0 0 . However , t h e fu t u r es ma r k et p r ice cou ld h a ve
decr ea s ed t o Rs .240 a n d t h e pr emiu m in cr ea s ed t o Rs . 35.
6.4.3 Gen er a lly t h er e is n ot a on e-t o-on e r ela t ion s h ip bet ween a
ch an ge in t h e fu t u r es mar ket pr ice an d opt ion pr emiu ms du e
t o les s r is k in t h e opt ion s mar ket . Th u s , Tr ader B cou ld n ow
eit h er s ell t h e opt ion for Rs . 35 per 10 kg a n d pr ofit Rs . 20
per 10 kg (Rs . 2000) or exer cis e t h e opt ion . Exer cis in g a n
op t ion s h ou ld on ly b e d on e if t h er e is con cer n a s t o t h e
liqu idit y in fillin g a n or der t o s ell t h e opt ion .
6.4.4 Take anot her example of an opt ion which gives t he seller right
t o s ell if h e s o ch oos es wit h ou t b ein g ob liged t o d o s o. A
farmer who get s int o an opt ions cont ract t o s ell rice at Rs . 10
p er k g a t t h e t ime of h a r ves t in Oct ob er p a ys a n op t ion
p r emiu m of s a y Re. 0 . 5 0 for t h e s a me. In Oct ob er , if t h e
ma r k et p r ice is s a y Rs . 1 2 , t h en h e d oes n ot s ell on t h e
exchange and does s o in his local market and get s Rs . 12 per
kg. He get s t h is ben efit a t t h e cos t of t h e pr emiu m wh ich is
for feit ed. His n et ga in wou ld be Rs . 1.50. In ca s e of fu t u r es ,
h e wou ld be per for ce compelled t o s ell at Rs . 10, as t h at was
t he price it was cont ract ed. There wou ld be an implicit los s or
a n oppor t u n it y los s of Rs . 1. 50. Th is is t h e s cen a r io wh ich
t h e fa r mer h a s in min d wh en con fr on t ed wit h t h e is s u e of
s ellin g in t h e fu t u r es ma r ket . He wou ld like t o h a ve t h e bes t
of bot h s ides , wh ich can be s at is fied on ly by allowin g opt ion s
t r a din g on t h e commodit y exch a n ges .
6.4.5 Opt ions are different from fu t u res in s everal as pect s . Bot h are
exch a n ge t r a ded a n d exch a n ge it s elf defin es t h e pr odu ct , i.e.
p r od u ct s t a n d a r d is a t ion exis t s s imila r t o fu t u r es ma r k et .
43
Th es e t wo t ools a r e differ en t in r es pect of s t r ike pr ice. Wh ile
t h er e is n o pr ice (pr emiu m a mou n t ) in fu t u r es ma r ket a n d
s t r ike pr ice moves a ccor din g t o movemen t in t h e pr ice of t h e
u nderlying, s t rike price is fixed in cas e of opt ions and price of
t h e opt ion (pr emiu m) moves . Th e opt ion bu yer pays in fu ll at
t h e t ime of t h e pu r ch as e. So, t h er e is n o pos s ibilit y of opt ion
pos it ion gen er a t in g a n y fu r t h er los s es t h a n t h e a mou n t of
premiu m already paid at t h e t ime of con t ract . Th ou gh fu t u res
is fr ee t o en t er in t o b y p a yin g a ma r gin a mou n t , it ca n
gen er a t e h u ge los s es wit h a dver s e movemen t s in t h e pr ice of
t h e u n der lyin g. Th is ch a r a ct er is t ic ma kes opt ion a t t r a ct ive t o
ma n y p a r t icip a n t s wh o ca n n ot p u t in t h e t ime t o clos ely
mon it or t h eir fu t u r es pos it ion .
45
CHAPTER 7
INFLUENCE OF FUTURES TRADING ON
SOWING DECISIONS AND CROPPING PATTERN
7 . 1 INTRODUCTION
7.1.1 It is gen er a lly s a id t h a t fu t u r es t r a din g ben efit s s pecu la t or s
more rat h er t h an t h os e wh o u s e it for ris k mit igat ion . In cas e
of fu t u r es t r adin g in agr icu lt u r al commodit ies like s oybean oil
i t i s ge n e r a l l y a r gu e d t h a t t r a d i n g t h r ou gh c ommod i t y
exch a n ges does n ot h a ve a s ign ifica n t impa ct on fa ct or s t h a t
d et er min e s owin g d ecis ion s a n d cr op p in g p a t t er n . In d ia n
econ omy h a s h is t or ica lly been a s u bs is t en ce econ omy wh er e
pr odu ct ion is ma in ly for s elf-con s u mpt ion a n d a pa r t of pr o-
du ct ion (ma r ket a ble s u r plu s ) is t r a ded. However , t h is pa t t er n
has had a paradigm s hift in las t 9-10 years , part icu larly pos t -
liber a lis a t ion a n d r ela xa t ion in t r a de of commodit ies bot h ,
in s ide a n d ou t s ide t h e bou n da r y of t h e n a t ion .
7.1.2 Madhya Pradesh is t he soya bowl of t he cou nt ry cont ribu t ing
abou t 2/ 3
rd
of t h e t ot al produ ct ion of miracle bean (s oyabean )
in t h e cou n t r y. Next comes Ma h a r a s h t r a wit h a n ot h er 1/ 4
t h
cont ribu t ion. Ot her t han t hese t wo st at es, except for Rajast han,
n o ot h er s t at e h as more t h an 1% s h are in t ot al produ ct ion of
s oya bea n . Tr a din g of s oya bea n h a s been pr eva ilin g in In dor e
(M. P. ) ma r k et s in ce lon g. So fa r a s imp a ct of t r a d in g on
pr odu ct ion , cr oppin g pat t er n an d u s e of t ech n ology is con cer -
n ed, Ma dh ya Pr a des h demon s t r a t es h igh er lin ka ge t h a n a n y
ot h er s oya bea n pr odu cin g s t a t e in t h e cou n t r y.
Table 7 . 1 : Major Soyabe an Produc ing St at e s
Ye ar 2 0 0 3 -0 4 Are a Unde r Soybe an Pe rc e nt t o
Cult ivat ion t ot al Are a (%)
(Million He c t are )
Ma dh ya Pr a des h 4.091 63.38%
Ma h a r a s h t r a 1.559 24.15%
Ra ja s t h a n 0.563 8.73%
Ch a t t is ga r h 0.050 0.77%
Ot h er St a t es 0.192 2.97%
Tot a l 6.455 100.00%
46
Figure 7 . 1 : Area Under Soyabean in India
7.1.3 In la s t 22-23 yea r s t h e a r ea u n der cu lt iva t ion of Soya bea n
cr op h a s in cr ea s ed b y 1 0 t imes fr om low of 0 . 6 2 million
h ect a r e in 1981-82 t o 6. 5 million h ect a r e in 2003-04. Th er e
has been cont inu ou s growt h in t he area u nder s oyabean from
0
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Area under Soybean Cultivation (Million Hectare)
Growth in Area
Annual Average
47
1981-82 t o 1993-94 befor e it fell by 0. 34 million h ect a r e in
1994-95. From 1999-2000 onwards t here has been increase in
cr opped a r ea except for 2002-03. If fu t u r es t r a din g h a s a n y
impa ct on t h is fa ll, t h en r ela t ion s h ip t h a t emer ges is in ver s e
on e becau s e du r in g t h is per iod fu t u r es as well as s pot pr ices
of s oya bea n h a s s h own in cr ea s in g t r en d. Even Soy oil pr ices
(fu t u res as well as s pot ) in creas ed from abou t Rs . 300 per 10
kg in t h e begin n in g of 2002-03 t o n ea r Rs . 400 per 10 kg a t
t h e en d of t h e yea r . Du r in g pr eviou s yea r , t oo, ma r ket for
s oya bea n & Soy oil wa s la r gely bu llis h wh ich s h ou ld h a ve
idea lly in du ced fa r mer s t o in cr ea s e t h e a r ea u n der s oya bea n
cr op. Bu t t h is did n ot h a ppen .
7.1.4 Simila r ly d u r in g s owin g s ea s on of s oya b ea n in 2 0 0 3 - 0 4 ,
ma r k et wa s b ea r is h b u t a r ea s own u n d er s oya b ea n cr op
in cr ea s ed b y wh op p in g 1 4 p er cen t . Pr ice of s oya b ea n a t
Indore was Rs . 151 per 10 kg on April 2003, which decreas ed
t o Rs . 125 du ring J u ly 2003. Similarly price of refined Soy oil
decr ea s ed t o Rs . 420 per kg in J u n e 2003 fr om a level of
Rs . 440 in Apr il. Fu t u r es t r a din g in bot h t h es e commodit ies
did n ot r eflect a n y bu llis h s en t imen t t h a t cou ld h a ve led t o
14% in cr ea s e in cr opped a r ea . Hen ce, fu t u r es t r a din g do n ot
t r u ly r eflect t h e s owin g d ecis ion s . On e imp or t a n t r ea s on
beh in d t h is ma y be t h a t t r a der s in commodit y exch a n ges a r e
n ot t h e r ea l gr ower s of a pa r t icu la r a gr icu lt u r a l commodit y.
Ot h er t h a n t h is , fa ct or s like r a in , cos t of in pu t s a ls o pla y
pr edomin a n t r ole in s owin g decis ion s .
7.1.5 Refin ed Soy oil is on e of t h e impor t a n t a n d a ct ively t r a ded
der iva t ive pr odu ct of s oya bea n . Wh en t wo s et s of da t a wer e
u s ed t o fin d ou t t h e cor r ela t ion bet ween t h em, a moder a t e
va lu e wa s obt a in ed. Th e t wo s et s of da t a bein g pr ices of Soy
oil a n d a r ea s own u n d er s oya b ea n cr op fr om 1 9 9 1 - 9 2 t o
2003-04 yielded a correlat ion coefficient of 0.42. However if we
s ee t h e cor r ela t ion b et ween t h e s a me s et s of d a t a for t wo
differ en t per iods , i. e. pr e a n d pos t fu t u r es t r a din g yea r s , it
a ppea r s t h a t r ela t ion s h ip bet ween t h em h a s become mu ch
s t r on ge r d u r i n g t h e ye a r s wi t h fu t u r e s t r a d i n g t h a n i n
a bs en ce of it . Cor r ela t ion bet ween Soy oil pr ices a n d a r ea
cu lt ivat ed u n der it s par en t cr op was mer e 0.23 in abs en ce of
fu t u r es t r adin g, i.e. 1991-2000. It , h owever , in cr eas ed t o 0.37
d u r in g 2 0 0 - 2 0 0 4 . It s h ou ld a ga in b e n ot ed t h a t fu t u r es
t rading in Soy oil is a recent phenomenon and it s t ru e impact
on fa ct or s like pr odu ct ion a n d t ech n ology wou ld be felt on ly
a ft er a few mor e yea r s .
48
7.1.6 Fa r mer s t a k e t h eir s owin g d ecis ion s a ft er con s id er in g a
nu mber of fact ors and one of t he import ant being likelihood of
get t in g r emu n er at ive pr ices for t h eir pr odu ct s . Th e likelih ood
ca n be bu ilt mor e emph a t ica lly if t h er e is a mech a n is m for
efficien t pr ice dis cover y.
7. 1. 7 Fu t u r es t r a din g a n d it s lon g-t er m a n d s h or t -t er m in flu en ces
ma k e u s b e lie ve t h a t it is a n e ffe c t ive me t h od for s u c h
efficien t p r ice d is cover y wh ich lea d s t o ch a n ges in s owin g
decis ion s a n d cr oppin g pa t t er n , t oo.
49
CHAPTER 8
SUPPLY RESPONSES OF FUTURES PRICES ON
TECHNOLOGY ADOPTION & YIELD
AUGMENTATION
8 . 1 INTRODUCTION
8.1.1 We h a ve s een in t h e pr eviou s ch a pt er t h a t fu t u r es t r a din g
does n ot h a ve a s ign ifica n t impa ct on s owin g decis ion . Ar ea
u n der s oya bea n cr op in cr ea s ed even wh en fu t u r es ma r ket
dis played bearis h s ent iment s . Similarly du ring a bu llis h period
area s own declined. However, more import ant as pect is higher
pos it ive correlat ion bet ween t he t wo in t he pres ence of fu t u res
ma r ket t h a n du r in g t h e per iod wh en t h er e wa s n o fu t u r es
t r a din g in Soy oil.
8.1.2 Similarly, correlat ion bet ween prices of Soy oil & produ ct ion of
s oyabean and prices of s oy oil and yield of s oyabean make u s
believe t h a t fu t u r es t r a din g h elps fa r mer s in t h eir cr oppin g
decis ion s .
Table 8 . 1 : Correlat ion Fact or
Influe nc e Of Fut ure s Trading
CORRELATION BETWEEN PRICE OF
SOY OIL AND
CROP PRODUCTION YIELD
AREA OF OF OF
SOYABEAN SOYABEAN SOYABEAN
PRE-FUTURES 0 . 1 9 0 . 2 3 0 . 8 1
TRADING (1 9 9 1 -2 0 0 0 )
POST-FUTURES 0 . 6 0 0 . 3 7 0 . 9 8
TRADING (2 0 0 0 -2 0 0 4 )
By how far cropping decis ions are influ enced by t rading of t he
commodit y in commodit y exch a n ges is n ot ea s y t o es t a blis h
b e c a u s e of s e ve r a l ot h e r fa c t or s me n t i on e d e a r l i e r t h a t
in flu en ce decis ion s of t h e fa r mer s .
50
Figure 8 . 1 : Produc t ion & Yie ld of Soyabe an
8.1.3 Du r in g yea r s wit h fu t u r es t r a d in g in Soy oil, cor r ela t ion
bet ween t r a ded pr ice of Soy oil a n d pr odu ct ion of s oya bea n
h a s in cr ea s ed t o 0. 37 fr om 0. 23 wh en t h er e wa s n o fu t u r es
market for Soy oil. Similarly, wit h yield, t oo, correlat ion of Soy
oil pr ices h a s been h igh ly pos it ive a t 0.98 du r in g 2000-2004,
i.e. per iod wh en fu t u r es t r a din g exis t ed.
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8
4
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1
9
8
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9
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5
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1
9
8
6
1
9
8
6
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9
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9
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1
9
9
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9
9
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9
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6
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9
9
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1
9
9
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51
8. 1. 4 In cr ea s e in yield du r in g t h e yea r s wh en fu t u r es t r a din g wa s
present in Soy oil may be becau se of produ cers inclinat ion for
in cr ea s in g t h e pr odu ct ivit y of s oya bea n by a dopt in g n ewer
t ech n ology. However, it can n ot be es t ablis h ed s t at is t ically t h at
t he u se of t echnology for yield au gment at ion is t he ou t come of
fu t u r es t r a din g. Simila r ly, if we go a lon e by s t a t is t ica l r es u lt
t h en it wou ld be difficu lt t o fin d wh y pr odu ct ion of s oya bea n
in 2002-03 fell t o 4.52 million t on s fr om 5.28 million t on s in
2 0 0 0 - 0 1 , t h ou gh fu t u r es ma r k et wa s in d ica t ive of b u llis h
ou t look . In fa ct , b elow n or ma l r a in fa ll for t h e la s t t h r ee
s ea s on s in t h e ma jor pr odu ct ion t r a ct s h a s been t h e ma in
r ea s on for t h is fa ll in pr odu ct ion .
53
CHAPTER 9
NON-TRANSPARENCY OF PRICES AND PRODUCT
STANDARDISATION IN INDIAN COMMODITY
EXCHANGES
9.1 Self-regu lat ory measu res devised and adopt ed by t he exchanges
a im a t in cu lca t in g or d er lin es s in t h e fu n ct ion in g of t h e
exch a n ges t h r ou gh t h e s t a n da r dis a t ion of t h e t r a de pr a ct ices
wit h in t h e exch a n ge. Su ch s t a n d a r d is a t ion s a r e lik ely t o
redu ce t ransact ion cost , cou nt er-part y risks and risks inherent
in t h e flu ct u a t ion s in commodit y pr ices .
9.2 Before s et t ing u p of nat ional level mu lt i-commodit y exchanges ,
a l m os t a l l c om m od i t y e xc h a n ge s i n In d i a we r e s i n gl e
commodit y exch a n ges . Th e ma jor pa r t of t h e t ot a l t r a de wa s
rest rict ed t o a single commodit y. There also exist exchanges at
clos er dis t a n ce t r a din g in t h e s a me commodit y. For exa mple,
J a gger y fu t u r es t r a de is a s et of s even t o eigh t exch a n ges in
t h e U. P. / Delh i r egion wit h in 1 0 0 k m of ea ch ot h er . Th e
t r a n s pa r en cy wit h r ega r d t o ma r ket in for ma t ion a n d pr ice
movemen t s wa s p oor a s t r a n s fer of in for ma t ion fr om on e
ma r ket t o a n ot h er wa s s low a n d limit ed beca u s e of fa ct or s
lik e con flict in g own er s h ip in t er es t s , p oor a n d u n r elia b le
in for ma t ion in fr a s t r u ct u r e et c.
9.3 Th ou gh m u l t i - c om m od i t y e xc h a n ge s b r ou gh t m u l t i -
commod it ies a t a common t r a d in g p la t for m a n d t h er eb y
b r in gin g s ever a l p la yer s in on e fold , t h e d is s emin a t ion of
in for ma t ion fr om on e ma r ket t o a n ot h er is s t ill limit ed. Th e
web-bas ed common int erface, however, makes daily prices and
ot h er in for ma t ion in on e ma r ket a cces s ible a t a n ot h er . Now
s ome or ga n is a t ion s like Agr iwa t ch is ma kin g a va ila ble r ea l
t ime pr ices of commodit ies a va ila ble via mobile SMS (s h or t
mes s a gin g s er vice). Th is is limit ed t o p r ices a t on ly a few
exch a n ges , n a mely NBoT, NCDEX, MCX, NMCE a n d s ome
ot h e r la r ge e xc h a n ge s . Ac c e s s in g p r ic e d a t a fr om ot h e r
exch a n ges , s a y for exa mple Mu za ffa r n a ga r J a gger y Exch a n ge
is s t ill difficu lt . For s u ch exch a n ges , t h e collect ion of pr ice
in for ma t ion is don e a t t h e in it ia t ive of in dividu a l t r a der s a n d
dea ler s . Res t of t h e exch a n ges a r e a ble t o a cces s in for ma t ion
fr om n a t ion a l level mu lt i- commod it y exch a n ges b u t t h eir
in for ma t ion is n ot r ea dily a cces s ible.
54
9.4 All t h e fou r n a t ion a l mu lt i-commodit y exch a n ges h a ve t h eir
webs it es dis playin g real t ime s pot an d ready prices wit h s ome
t ime la g, ge n e r a lly 5 min u t e s . Bu t t h e r e is n o c ommon
p l a t for m wh e r e l i ve p r i c e s a t d i ffe r e n t e xc h a n ge s for a
part icu lar commodit y cou ld be acces s ed. Secondly, t he market
da t a wh er ever a va ila ble is mos t ly for t h a t pa r t icu la r da y a n d
not a his t orical one. The fu t u res t rading mu s t be backed wit h
proper research and analysis, for which t ime-series dat a is not
r ea dily a va ila ble wit h t h e exch a n ges .
9.5 Pr odu ct s t a n da r dis a t ion is on e of t h e pr er equ is it e for fu t u r es
t r a din g u n like for wa r ds ma r ket wh er e cu s t omis ed con t r a ct s
pr eva il.
Th er e a r e s ever a l con s t r a in t s a ls o in pr odu ct s t a n da r dis a t ion
pr oces s . Pr omin en t a mon g t h em a r e:
1. Wa r eh ou s e r eceip t s is s u ed b y va r iou s wa r eh ou s es la ck
cr edibilit y
2. Th er e is la ck of in fr a s t r u ct u r e for qu a lit y cer t ifica t ion of
va r iou s a gr icu lt u r a l pr odu ct s
3. In a dequ a t e r elia ble wa r eh ou s in g/ s t or a ge s ys t em
4. Ba n k s a n d fin a n cia l in s t it u t ion s a r e u n willin g t o len d
a ga in s t pledge r eceipt du e t o lega l pr oblems of t r a n s fer -
a bilit y of t it le
9.6 Th e In dia n commodit y exch a n ges h a ve, of la t e, been a ble t o
move t owa r ds pr oces s of pr odu ct s t a n da r dis a t ion by s et t in g
u p n at ion al-level mu lt i-commodit y exch an ges an d fr amin g apt
r egu la t or y mech a n is ms .
55
CHAPTER 1 0
NATURE AND VOLUME OF
COMMODITY TRADING PATTERN
10.1 Despit e fu t u res t rading being condu ct ed in many commodit ies,
mos t commodit y exch an ges in t h e cou n t r y con t in u e t o r ecor d
ver y low t r a din g volu mes in r ela t ion t o t h e pr odu ct ion of t h e
c on c e r n e d c om m od i t i e s . Th e fou r n a t i on a l - l e ve l m u l t i
commodit y exchanges have been es t ablis hed bu t t he nat u re of
t r a de r evea ls t h a t even t h es e exch a n ges a r e ch a r a ct er is ed by
a ct ive t r a d e in on e or t wo commod it ies on ly. Res t of t h e
commod it ies d o n ot wit n es s h igh volu me of t r a d in g. For
exa mp le, NBoT (In d or e) is r es t r ict ed t o s oya b ea n a n d it s
produ ct s wh ile bu llion (gold) t radin g is s o s ign ifican t at Mu lt i-
c ommod i t y e xc h a n ge of In d i a (MCX, Mu mb a i ) t h a t t h i s
exchange is now popu larly known as Gold Exchange of India.
10.2 Amon g t h e n ewly es t a blis h ed exch a n ge a s s ocia t ion s , t h e on ly
pr ofit a ble on e h a ve been t h e Na t ion a l Boa r d of Tr a de, In dor e
(NBoT) a n d t h e In dia Pepper a n d Spice Tr a de As s ocia t ion ,
Koch i, (IPSTA) wit h pr ofit levels of Rs 72, 000 a n d Rs 10. 94
lakh, res pect ively in 1999-2000. Bu t even here, t heir record in
gen er a t in g volu mes h a ve b een limit ed . NBoT ma n a ged t o
r epor t t r a din g of 61, 800 t on n es of s oy oil in 1999-2000 a n d
a bou t 30 la kh t on n es du r in g 2000-01, bu t cou ld n ot r egis t er
s u fficien t volu mes in s oya s eed or cake. Similarly, t h e IPSTAs
d omes t ic d ivis ion r ecor d ed t r a d in g of 1 . 2 3 la k h t on n es in
1999-2000 a n d a bou t 1 la kh t on n e du r in g 2000-01, bu t t h e
volu mes in it s in t er n a t ion a l con t r a ct s h a s been a min u s cu le
1 , 0 0 0 - 3 , 5 0 0 t on n e s a n n u a l l y. Th e a b s e n c e of d ol l a r -
d en omin a t ed con t r a ct s h a s b een t h e ma in r ea s on for low
volu mes in in t er n a t ion a l pepper fu t u r es .
10.3 Fu t u r es t r a din g in cot t on is don e a t five exch a n ges Ea s t
India Cot t on As s ociat ion Lt d (Mu mbai), Cent ral Gu jarat Cot t on
Dea ler s As s ocia t ion (Va d od a r a ), Sou t h er n Gu ja r a t Cot t on
Dea ler s As s ocia t ion (Su r a t ), Ah meda ba d Cot t on Mer ch a n t s
As s ocia t ion a n d Sou t h In dia Cot t on As s ocia t ion , Coimba t or e.
Of t h es e, on ly t h e fir s t exch a n ge h a s r epor t ed a n y s ign ifica n t
t r adin g. Accor din g t o t h e dat a compiled by t h e Depar t men t of
Con s u mer Affairs , t h e Eas t In dia exch an ge recorded a t radin g
volu me of 2,03,775 bales (of 170 kg each) du ring t he whole of
56
1999-2000 a n d 1,12,695 ba les in 2000-01. Compa r ed t o t h e
cou n t r ys a n n u a l cot t on ou t pu t of 11.5-12 million ba les , t h is
i s ve r y n e gl i gi b l e . Low t r a d i n g vol u m e s h a s l e d t o t h e
exch a n ge r u n n in g a los s of Rs 15.87 la kh in 1999-2000.
10.4 Th e ca s e is s imila r in t h e ca s e of ca s t or , wh er e t h er e a r e
t h r ee exch a n ge a s s ocia t ion s Bomb a y Oils eed s a n d Oil
Exchange, Ahmedabad Commodit y Exchange and Rajkot Seeds
Oil and Bu llion Merchant s Associat ion. The first one has failed
t o cr ea t e volu me in eit h er ca s t or s eed (9,000 t on n es in 1999-
2000 and 6,900 t onnes in 2000-01 or cas t or oil (2,500 t onnes
in 1999-2000 a n d 1, 100 t on n es in 2000-01). Th e ot h er t wo
exch a n ges h a ve don e r ela t ively bet t er , wit h t h eir t r a din g in
cas t or s eed for t h e above per iods bein g 30.68 lakh t on n es an d
16. 98 la kh t on n es for t h e Ah meda ba d exch a n ge a n d 16. 35
la kh t on n es a n d 15.63 la kh t on n es for t h e Ra jkot exch a n ge.
Bu t even h er e, t h e Depar t men t h as obs er ved t h at t h e volu me
in t h e Ah medabad exch an ge h as declin ed compar ed t o ear lier
yea r s . Th e Ah meda ba d exch a n ge r ecor ded a pr ofit of Rs 3.72
lakh in 1999-2000, wit h t he Su rat exchange report ing a figu re
of Rs 7.23 la kh .
10.5 Th e Ea s t In d ia J u t e & He s s ia n Exc h a n ge Lt d , Ca lc u t t a
r ecor ded a los s of Rs 6. 75 la kh in 1999-2000, wit h t r a din g
a mou n t in g t o 7. 08 la kh t on n es in s a ckin g a n d a mer e 260
t on n es for h es s ian . For 2000-01, t h e exch an ge h ad a s ackin g
volu me of on ly 4. 13 la kh t on n es t ill December 2000 a n d n il
in t h e ca s e of h es s ia n . Th e Coffee Fu t u r es Exch a n ge In dia
Lt d, Ba n ga lor e r ecor ded a t r a din g volu me of 32,600 in 1999-
2 0 0 0 a n d 3 7 , 5 0 0 i n 2 0 0 0 - 0 1 . Du r i n g 1 9 9 9 - 2 0 0 0 , t h e
exch a n ge pos t ed a los s of Rs 2.01 la kh .
10.6 It is in t er es t in g t o n ot e t h a t t h e exch a n ges t h a t h a ve fa r ed
r ela t ively b et t er in t h e cou n t r ys over a ll con t ext a r e t h os e
dea lin g wit h les s s ign ifica n t commodit y, n a mely gu r (ja gger y).
Th er e a r e five gu r exch a n ges , a ll of wh ich h a ve wit n es s ed
a ct ive t r a din g. Th e 297-member Vija i Beopa r Ch a mber Lt d,
Mu za ffa r n a ga r r ecor ded a pr ofit of Rs 9.97 la kh s a n d t r a din g
volu me of 47. 48 la kh t on n es in 1999-2000 a n d 23. 30 la kh
t on n e in Apr il-December 2000, wit h t h e cor r es pon din g figu r es
bein g Rs 5. 51 la kh , 23. 66 la kh t on n e a n d 15. 06 la kh t on n e
for t h e Bh a t in da Om & Oil Exch a n ge a n d Rs 18, 400, 23. 92
l a k h t on n e a n d 2 2 . 6 3 l a k h t on n e for t h e Ch a m b e r of
Commer ce, Ha p u r . Con s id er in g t h a t t h e cou n t r y a n n u a lly
57
pr odu ces 90-100 lakh t on n es of gu r , t h e t ot al fu t u r es t r adin g
volu me of n ea r ly t h e s a me level is r a t h er s ign ifica n t .
10.7 Th e t u r n ove r of In d i a n c ommod i t y fu t u r e s ma r k e t ma y
over t ake t h e capit al mar ket t u r n over in t h e n ear fu t u r e. Th e
t ot a l t u r n over of commod it y fu t u r es ma r k et in In d ia h a s
a lr ea dy r ea ch ed t h e level of Rs 1. 4 la kh cr or e by Ma r ch 31,
2004.
Table 1 0 . 1 : Turnove r Of Indian Commodit y Exc hnage s
Name of Commodit y Exc hange Produc t s Approx.
Annual
Volume
(Rs c rore )
Nat ional Board of Trade Soya, mus t ard 8 0 0 0 0
Nat ional Mult i-c ommodit y Exc hange Mult iple 4 0 0 0 0
Ahme dabad c ommodit y Exc hange Cas t or, c ot t on 3 5 0 0
Rajdhani oil & oils e e ds Mus t ard 3 5 0 0
Vijai Be opar Chambe r Lt d. Gur 2 5 0 0
Rajkot s e e ds , oil & bullion Cas t or, 2 5 0 0
Exc hange groundnut
IPSTA Pe ppe r 2 5 0 0
Chambe r of Comme rc e (Hapur) Gur, Mus t ard 2 5 0 0
Bhat inda Om & oil Exc hange Gur 1 5 0 0
Ot he rs (mos t ly inac t ive ) 1 5 0 0
TOTAL 1 4 0 0 0 0
As p er t h e r ep or t s a va ila b le in Feb r u a r y 2 0 0 5 , t h e t ot a l
volu me is likely t o t ou ch arou nd Rs.500000 crore for 2004-05.
In dollar t erms t his will be arou nd $112 billion. For improving
t h e in come of t h e far mer s t h r ou gh commodit y fu t u r es mar ket
gover n men t h a s a bolis h ed Es s en t ia l Commodit ies Act for fr ee
move me n t of a gr ic u lt u r a l good s a c r os s s t a t e s . For fu lly
u t ilizin g t h e pot en t ia l of t h e commodit y fu t u r es ma r ket t h e
bas ic infras t ru ct u re of t he Indian commodit ies market need t o
be impr oved fu r t h er .
59
CHAPTER 1 1
CONCLUSIONS AND RECOMMENDATIONS
11.1 CONCLUSIONS
11.1.1 In t h e mids t of t h e gr owin g in t egr a t ion of In dia n econ omy
wit h t h e r es t of t h e wor ld , imp or t a n ce of efficien t p r ice
dis cover y mech a n is ms h a s in cr ea s ed. It is a ls o r equ ir ed t o
pr ot ect t h e in t er es t s of domes t ic fa r mer s , t r a der s a n d ot h er
in t er media r ies . Th eor et ica lly, commodit y exch a n ges pla y a
vit a l r ole in pr ice dis cover y, it s s t a bilis a t ion a n d h edgin g of
r i s k s i n vol ve d i n c om m od i t y t r a d i n g. Wh i l e fi n a n c i a l
d er iva t ives h a ve es t a b lis h ed t h eir r ole in r is k h ed gin g,
commodit y exch a n ges h a ve a lon g wa y t o go.
11.1.2 Wor ld wid e volu mes in commod it y d er iva t ives h a ve b een
in cr eas in g in las t decade, par t icu lar ly in n on -US exch an ges .
Wh ile volu me at US exch an ges h as in cr eas ed by abou t 90%
b e t we e n 1 9 9 1 t o 2 0 0 1 , in c r e a s e in volu me a t n on - US
exch an ges in cr eas ed by abou t 600%. US volu me was h igh er
t h a n n on -US exch a n ges in 1991, bu t t h e s cen a r io ch a n ged
in 2001 wh en volu mes a t n on -US exch a n ges wa s a bou t 3
t imes t h a t of US exch a n ges . Th is s h ows t h e n eed a n d
popu la r it y of fu t u r es t r a din g in commodit ies .
11.1.3 Th er e h a s b een a p a t h y on t h e p a r t of t h e gover n men t
t owa r ds fu t u r es t r a din g in commodit ies . Th ou gh in In dia ,
t rading in commodit y fu t u res has been in exis t ence from t he
1 9
t h
c e n t u r y wi t h or ga n i s e d a c t i ve t r a d i n g i n c ot t on .
Re gu l a t or y c on s t r a i n t s i n 1 9 6 0 s r e s u l t e d i n vi r t u a l
dis man t lin g of commodit ies fu t u res market in In dia. Of lat e,
t h e n at ion al agricu lt u re policy an d bu dget of t h e year 2002-
03 h a s pu t in pla ce a mech a n is m of fu t u r es t r a de in In dia .
Th e fu t u r es t r adin g is n ow per mit t ed in all t h e commodit ies
wh ile opt ion s t r a din g is s t ill pr oh ibit ed.
11.1.4 Th e fu t u r es t r a d in g in Refin ed Soya b ea n Oil s t a r t ed a t
Na t ion a l Boa r d of Tr a de (NBoT), In dor e in Febr u a r y 2000.
Soy oil is a d er iva t ive of Soya b ea n , p op u la r ly k n own a s
mira cle bea n. On cr u s h in g, 1 0 0 k g of s oya b ea n , we get
abou t 18 kg of s oy oil. Th e Soy oil con s u mpt ion in In dia in
t er ms of volu me is n ext on ly t o gr ou n dn u t oil. It h as edible
60
u s es like cookin g oil, coffee cr ea mer s , ma r ga r in e, s a n dwich
s pr ead an d in du s t r ial u s es as an t i-cor r os ion agen t s , elect r ic
in s u la t ion , dies el fu els , lu br ica n t , pa in t s et c. En t ir e s oy oil
p r od u c e d i n t h e c ou n t r y i s c on s u me d a n d a d d i t i on a l
qu a n t it y is impor t ed. Th e s h a r e of s oy oil impor t in t ot a l
ed ib le oil imp or t s in cr ea s ed fr om 1 9 . 9 9 % in 1 9 9 8 - 9 9 t o
33.42% in 2001-02. Pr es en t ly, impor t volu me is mor e t h a n
volu me of pr odu ct ion .
11.1.5 Soy oil prices over t h e years h ave dis played a volat ile t ren d.
Th is pr ice u n cer t a in t y a n d u n pr edict a ble pr ice movemen t
c a u s e s h e a vy l os s e s t o a l a r ge n u mb e r of p r oc e s s or s ,
gr ower s an d ot h er in t er mediar ies . Hen ce t h e fu t u r es t r adin g
in s oy oil ga in s impor t a n ce. NBoT, In dor e is t h e pr in cipa l
fu t u r es ma r ket for s oy oil a n d a ls o for s oya bea n a n d s oy
mea l. Th er e a r e t wo pr omin en t r ea dy ma r ket s in s oy oil
In d or e & Mu mb a i. Wh ile for mer r ep r es en t s ma r k et for
d omes t ica lly p r od u ced s oy oil, t h e la t t er is in d ica t ive of
impor t ed s oy oil pr ices .
11.1.6 Du ring 1991-2000 mont hly variat ion in s oy oil prices was in
t h e r a n ge of Rs . 50 - Rs . 150. It declin ed t o Rs . 30-Rs . 70
a ft er s t a r t of fu t u r es t r a d in g, i. e. p os t - 2 0 0 0 , excep t in
2001-02 wh en t h e differ en ce in ma ximu m a n d min imu m
mon t h ly p r ices wa s Rs . 1 2 0 . Th is wa s b eca u s e of p oor
soyabean crop du ring t his period. The produ ct ion of soyabean
d ecr ea s ed fr om 5 . 9 0 million t on n es in 1 9 9 8 - 9 9 t o 5 . 0 1
million t on n es in 2000-01. Gen er a lly s pea kin g, in t er -mon t h
va r ia t ion in s oy oil pr ices declin ed du r in g fu t u r es t r a din g
yea r s .
11.1.7 Th e s t a n da r d devia t ion of mon t h ly pr ices , i. e. devia t ion of
mon t h l y p r i c e s fr om a n n u a l me a n p r i c e a l s o d e c l i n e d
s h a r ply a ft er 2000 a s compa r ed t o pr e-2000 per iod. It wa s
33.58 in 1999-2000, wh ich declin ed t o 9.23 in 2000-01 an d
3. 01 in 2003-04. It ca n be, t h er efor e, in t er pr et ed t h a t t h e
fu t u r es t r a din g in s oy oil is a ls o effect ive in r edu cin g t h e
s ea s on a l pr ice vola t ilit y.
11.1.8 Pr ice of a n y commodit y is t h e fu n ct ion , t h ou gh n ot s imple,
of i t s d e ma n d a n d s u p p l y. Th e s e t wo fa c t or s , c e t e r i s
pa r ibu s , ca n ca u s e mon t h ly, weekly, da ily a n d even in t r a -
day price flu ct u at ions . Bu t in a compet it ive market degree of
pr ice volat ilit y s h ou ld be r eas on able. Th e s t u dy r eveals t h at
61
t h e d a ily p r ice va r ia t ion s in s oy oil wa s 0 . 0 2 % in t h e
a bs en ce of fu t u r es t r a din g wh ich ch a n ged t o 0.07% du r in g
t h e yea r s wh en fu t u r es t r a din g t ook pla ce. It s h ows t h a t
fu t u r es t r a din g did n ot h a ve a n y pos it ive impa ct on da ily
pr ice vola t ilit y. However , wh en we s ee a ver a ge da ily pr ice
variat ion as a rat io of weekly average price, effect s of fu t u res
t r a din g a ppea r s t o be pos it ive. Ma gn it u de of va r ia t ion h a s
decr ea s ed s h a r ply a ft er s t a r t of fu t u r es t r a din g, pa r t icu la r ly
fr om mid-2001.
11.1.9 In t h e lon g-t er m s pot pr ices h a ve pos it ive cor r ela t ion wit h
fu t u r es pr ices . Cor r ela t ion coefficien t comes t o 0. 42. Th e
va lu e of R
2
obt a in ed t h r ou gh r egr es s ion a n a lys is s u gges t s
t h a t a b ou t 2 5 % va r i a t i on i n s p ot p r i c e s of s oy oi l i s
explain ed by variat ion s in fu t u res prices . Over a lon g period
of t ime, t he difference bet ween t wo prices has als o narrowed
down , i. e. ba s is (differ en ce bet ween s pot & fu t u r es pr ices )
h a s declin ed, s u gges t in g t h er eby t h a t t h e s pot pr ices move
clos er t o t h e fu t u r es pr ices of s oy oil.
11.1.10 Wh et h er fu t u r es t r a d in g h elp s in s owin g d ecis ion s , cr op
d i ve r s i fi c a t i on a n d yi e l d a u gm e n t a t i on i s n ot r e a d i l y
es t a blis h ed. Th er e is er r a t ic gr owt h in a r ea u n der s oybea n
crop since 2000, i.e. t he year when fu t u res t rading in soy oil
s t a r t ed. Th ou gh fu t u r es ma r ket wa s ver y bu llis h befor e t h e
s owin g s ea s on in 2002-03, t h e a ct u a l a r ea cr opped u n der
s oya bea n cr op declin ed by mor e t h a n 5%. In fa ct , s owin g
d ecis ion s d ep en d mor e on clima t ic con d it ion s t h a n on
ou t look of fu t u r es ma r k et . It is p r oved h er e. Th e fa ll in
cr opped a r ea wa s ba s ica lly du e t o below n or ma l r a in fa ll in
major produ cin g region s . Similarly, t h ere is in creas e in yield
of s oya bea n , t oo. Bu t t h is a ga in h a s been t h e t r en d even
befor e fu t u r es t r adin g. However , cor r elat ion bet ween fu t u r es
pr ices a n d a r ea s own , yield a u gmen t a t ion a n d pr odu ct ion
h a s s t r en gt h en ed a ft er fu t u r es t r a din g wh en compa r ed t o
t h e yea r s wh en fu t u r es t r a din g wa s n ot a llowed.
11.1.11 Th e wea k n es s of t h e commod it y fu t u r es ma r k et in In d ia
impact s on t h e far mer s in come an d in t er es t s . For in s t an ce,
t h ou gh In d i a i s t h e l a r ge s t p r od u c e r of c a s t or s e e d s ,
a ccou n t in g for 70% of t h e globa l pr odu ct ion , t h e cou n t r y
h a s a n in s ign ifica n t r ole in det er min in g pr ices , wh ich a r e
decided in t he fu t u res market at Rot t erdam. Similarly in t he
cas e of gold, where India is t he larges t cons u mer, t he abilit y
62
t o in flu en ce glob a l p r ices of t h e p r od u ct is ver y limit ed
beca u s e of t h e la ck of efficien t ma r ket mech a n is ms in t h e
cou n t r y. It is t ime t o t h in k wh y In dia s h ou ld n ot t a ke a
mor e effect ive r ole in pr icin g of t h os e commodit y ma r ket s
wh e r e i t h a s a d omi n a n t r ol e e i t h e r i n p r od u c t i on or
con s u mpt ion .
11.1.12 Fu t u r es mar ket of t h e commodit y s ect or can be an effect ive
t ool for s h a pin g emer gin g cr oppin g pa t t er n s of t h e fa r mer s ,
p r ovid e t h em wit h p r ice h ed ges t o imp r ove t h eir in come
l e ve l s a n d i m p r ove h ol d i n g p owe r . Ap a r t fr om t h i s ,
t rans parency in price informat ion will benefit all part icipant s
in t h e va lu e ch a in . Robu s t wa r eh ou s in g fa cilit y r ea ch in g
down t o r u r a l a r ea s is a key in fr a s t r u ct u r e r equ ir emen t . To
a c h i e ve t h e s e goa l s , p e r m i t t i n g op t i on s t o fa r m e r s ,
negot iabilit y of warehou s e receipt s (WR), enabling banks and
ot h er fin a n cia l s ect or p a r t icip a n t s t o en t er commod it y
ma r ket s a r e s ome of t h e key lega l a n d r egu la t or y ch a n ges
wh ich a r e u r gen t ly r equ ir ed t o be u n der t a ken . Negot ia bilit y
s t at u s t o t h e WR is s u ed by t h e gover n men t war eh ou s es ar e
l a r ge l y a c c e p t e d b y l e n d i n g b a n k s b u t i s n ot l e ga l l y
n egot iable. At pres en t demat erialis ed WR does n ot h ave an y
s t at u s s imilar t o t h e Depos it or ies Act 1996. In t h e mid-year
r eview of t h e An n u a l Mon et a r y & Cr edit Policy a n n ou n ced
on Oct ober 26, 2004 t h e Res erve Ban k of In dia h as decided
t o s et u p a n exper t gr ou p t o s u gges t on t h e a bove is s u es
i n c l u d i n g p a r t i c i p a t i on of c om m e r c i a l b a n k s i n t h e
commodit y ma r ket n ot on ly a s a clea r in g member bu t a ls o
a s a t r a din g member .
11.2 RECOMMENDATIONS
11.2.1 Th e fir s t a n d for emos t fa ct or for a commodit y exch a n ge t o
achieve su ccess is t hat t rade shou ld happen on a large scale
t h r ou gh on -lin e t r a din g. Her e, t h er e is n eed t o lea r n fr om
t he equ it y market and t hey way concept of equ it y inves t ment
h a s p en et r a t ed a cr os s t h e in come- gr ou p s a s well a s it s
r egion a l s p r ea d . Th e ch a llen ge is t o r ea d t h e min d s et of
people in or der t o or ien t t h em t o in ves t men t in commodit y
fu t u r es ma r ket .
11.2.2 Secon dly, s pot mar ket s in In dia ar e s pr ead acr os s les s t h an
30 or ga n is ed ma jor ma r ket s a n d mor e t h a n 7500 ma n dis .
Ma n dis a r e mos t ly u n or ga n is ed a n d h a ve, t h er efor e, la gged
63
beh in d in t h e proces s of price dis covery. Added t o t h is , t h ey
have lit t le t rans parency in t rading and u nwant ed middlemen
a ct ivit ies . Gover n men t con t r ols in t h e for m of min imu m
s u ppor t pr ice, movemen t r es t r ict ion s (r ela xed t o a n ext en t
r ecen t ly), licen s in g r equ ir emen t s fu r t h er lea d t o in effect ive
pr ice dis cover y.
11.2.3 Fa r m e r s i n t e r e s t a l s o n e e d s t o b e a d d r e s s e d b y t h e
commodit y exch a n ges . Th ey for m a n impor t a n t pa r t of t h e
commodit y va lu e ch a in bu t per h a ps , in mos t of t h e ca s es
t hey are exposed t o maximu m risk. The part icipant s in t hese
exch a n ges a r e la r ge t r a d er s wh o cou ld h ed ge t h eir r is k s
t hrou gh commodit y fu t u res t rading bu t farmers ris k hedging
op p or t u n it y is ver y limit ed . Th er e is n eed t o en cou r a ge
pa r t icipa t ion of fa r mer s a n d t h eir cooper a t ives . For t h is ,
en t r y r egu la t ion s of t h e commodit y exch a n ges s h ou ld be
liberalis ed an d en t ry fee s h ou ld als o be brou gh t down t o an
a ffor da ble level. Un les s t h ey become a n impor t a n t s egmen t
of t h e t radin g commu n it y, role of fu t u res t radin g in decis ion
proces s es of t he farmers can not be enlarged. Fu t u res prices
s h ou ld lead t o bu s in es s decis ion s like cr op s elect ion , t imin g
of t h e s a le of commodit y, s t or a ge et c.
11.2.4 Fu r t h er impor t a n t fa ct or for gr owt h of fu t u r es ma r ket in
commodit ies is it s liqu idit y. Unless hedgers, arbit rageu rs and
s pecu la t or s a ll pla y s ign ifica n t r ole in t h e ma r ket , it is ver y
difficu lt for a n y der iva t ives ma r ket t o h a ve volu mes . Th e
proces s an d en t ry level res t rict ion s s h ou ld be s implified an d
removed wherever possible t o increase liqu idit y. Liqu idit y can
be increas ed by allowing financial int ermediaries like mu t u al
fu n ds , ba n ks wh o h a ve n o u n der lyin g ph ys ica l expos u r e t o
t he commodit y t o part icipat e in fu t u res t rading as principals
a s a b u s in es s b y it s elf a n d n ot for h ed gin g. (Min is t r y of
Fin a n ce a n d RBI a r e lea r n t t o h a ve in it ia t ed t h e pr oces s in
t h is r ega r d). Th is will lea d t o developmen t of vibr a n t , liqu id
a n d efficien t commodit y exch a n ges .
11.2.5 Commodit y exchanges s hou ld fu rt her ens u re effect ive s ys t em
of war eh ou s in g an d war eh ou s e r eceipt . It becomes es s en t ial
t hat commodit y exchanges ens u re a proper s ys t em of qu alit y
a s s u r a n c e a n d c e r t i fi c a t i on p r oc e d u r e i n p l a c e . Th e
s t a n d a r d s t o b e d ecid ed s h ou ld ma t ch t h e commer cia l
pract ices an d admin is t rat ion of cert ificat ion s h ou ld be t aken
u p by r epu t ed qu a lit y cer t ifica t ion a gen cies .
64
11.2.6 Th e r e is a ls o a n e e d for a s u p e r - r e gu la t or . Cu r r e n t ly,
fin a n cia l ma r ket s a r e bein g r egu la t ed by t h e Res er ve Ba n k
of In d ia (RBI), s ecu r it ies ma r k et s b y t h e Secu r it ies a n d
Exch a n ge Boa r d of In dia (SEBI) a n d commodit y ma r ket s by
t h e For wa r d Ma r ket s Commis s ion (FMC). Fu r t h er t o t h is ,
fir s t t wo a r e r egu la t ed b y t h e Min is t r y of Fin a n ce wh ile
commod it y exch a n ges a r e r egu la t ed b y t h e Min is t r y of
Con s u mer Affa ir s , Gover n men t of In d ia . As t h e ma r k et s
in t egr a t e, t h e pa r t icipa n t s will h a ve expos u r e in mu lt iple
ma r k et s , It is imp er a t ive, t h er efor e, t o h a ve a n effect ive
mon it or in g s ys t em wit h ou t a n y con flict of in t er es t s . In t h is
cont ext , st eps shou ld be init iat ed t o increase t he coordinat ion
bet ween t h e r egu la t or y a u t h or it ies . Als o, t h e pos s ibilit y of a
s u per -r egu lat or y body s h ou ld be examin ed fr om a lon g-t er m
per s pect ive.
65
NOTES
1. Th e Un ion Min is t ry of Con s u mer Affairs , Food & Pu blic Dis t ribu t ion con s t it u t ed
High Level Commit t ee for for mu lat in g a Lon g-t er m Gr ain Policy for t h e cou n t r y
on t h e 1 7 t h of Novemb er 2 0 0 0 for exa min in g t h e a r ea s of con cer n s lik e
Min imu m Su ppor t Pr ices (MSP) a n d Pr ice Su ppor t Oper a t ion s , t h e r ole of t h e
FCI, fu n ct ion in g of t h e PDS et c.
Th e Commit t ee viewed in s u r a n ce a n d fu t u r es t r a din g a s a n impor t a n t r is k
ma n a gemen t t ools , bu t n ot a s a lt er n a t ives t o pr ice s t a bilis a t ion t h r ou gh MSPs
a n d t h r ou gh policies r ega r din g t a r iffs on impor t s a n d expor t s .
2. Ch ar act er is t ics of fu t u r es t r adin g h ave been t aken fr om t h e webs it e of For war d
Ma r ket s Commis s ion . GOIs High -level commit t ee on Lon g-t er m gr a in policy
opined, Benefit s of fu t u res t rading are t hat t his can, firs t , lead t o more efficient
pr ice dis cover y by allowin g mor e agen t s wit h r elevan t in for mat ion t o par t icipat e
in pr ice for ma t ion t h a n wou ld be pos s ible if a ll t h es e a gen t s h a d t o bea r t h e
fixed cos t s of ph ys ical t r adin g. Secon dly, s in ce r is ks in ph ys ical t r adin g can be
r edu ced t h r ou gh h edge opt ion s , exis t en ce of fu t u r es ma r ket s ca n r edu ce cos t s
of in s u r in g a ga in s t pr ice r is ks a n d en cou r a ge mor e t r a de in s pot ph ys ica ls . As
a r es u lt , commodit y ma r ket s , bot h fu t u r es a n d s pot , a r e expect ed t o be bet t er
able t o dis cou n t likely fu t u r e developmen t s an d cau s e pr ices t o be les s s u bject
t o u n a n t icipa t ed s h ocks . Alt h ou gh it is ver y u n likely t h a t ma n y fa r mer s wou ld
be a ble t o pa r t icipa t e in fu t u r es ma r ket s t h ems elves , t h ey cou ld s t ill ben efit
fr om s ign a ls r ega r din g likely fu t u r e pr ices . Mor e impor t a n t ly, t h er e cou ld be
b en efit s of comp et it ion if exis t in g t r a d er s t ook lon ger p os it ion s b eca u s e of
redu ced risk and t his also encou raged new ent rant s int o physical market s. Most
impor t a n t ly, fa r mer s wou ld ga in dir ect ly if t h is en a bled bet t er lin ka ge bet ween
s t or a ge a n d cr edit a n d in du ced ba n ks t o offer mor e pledge loa n s .
Givin g a n ot e of c a u t ion , Commit t e e fu r t h e r s a id , a lt h ou gh fu t u r e s
exchanges have pot ent ial in India, t his is u nlikely t o be realis ed wit hou t t he far
more difficu lt t as k of reformin g procedu res in ph ys ical commodit y market s , an d
i mp r ovi n g t h e l ow c u r r e n t d e gr e e of i n t e gr a t i on b e t we e n t h e m t h r ou gh
developmen t of es s en t ia l in fr a s t r u ct u r e. Mos t impor t a n t ly, it s h ou ld be r ea lis ed
from t he act u al fu nct ioning of exis t ing fu t u res market s in t he Unit ed St at es and
e l s e wh e r e t h a t fu t u r e s p r i c e s a r e a l wa ys h i gh l y c or r e l a t e d wi t h t h e
cor r es pon din g s pot pr ices a n d do n ot dis pla y a n y s ign ifica n t ly lower degr ee of
vola t ilit y. Exis t en ce of s u ch ma r ket s h a s a llowed r is ks t o be h edged, in du ced
mor e fin an ce in t o s t or age, an d may als o h ave r edu ced s pot pr ice volat ilit y fr om
what t hey wou ld ot herwis e have been. Bu t fu ndament als cau s e high u ncert aint y
in wor ld commodit y ma r ket s , a n d fu t u r es ma r ket s h a ve n ot pr even t ed pr ice
vola t ilit y fr om b ein g s o h igh t h a t if r eflect ed in d omes t ic p r ices wou ld b e
u n bea r a ble for In dia n fa r mer s wit h t h eir limit ed fin a n cia l r es ou r ces .
3. Commodit y ba s is is t h e differ en ce bet ween a loca l ca s h pr ice a n d t h e r eleva n t
fu t u r es con t r act pr ice for a s pecific t ime per iod. For a s pecific commodit y bas is
is defin ed a s :
Ba s is = Ca s h Pr ice - Fu t u r es Pr ice
66
Bibliography
1. Balas u n dar am, D., Pr os pect s for Cot t on fu t u r es in In dia (1998), in Th omas , S.,
edit or , Der iva t ives ma r ket s in In dia , 1998, TMH
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Bu s in es s Lin e, Hyder a ba d
3. Gover n men t of In dia (J u ly 31, 2002), Repor t of t h e High -level Commit t ee on
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Dis t r ibu t ion , New Delh i
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6. Ku mar, Su nil (2004), Linking commodit y derivat ives wit h farm credit : A win-win
pr opos it ion , ICFAI Pr ofes s ion a l Ba n ker , J u n e 2004
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flow: A con cept u a l expos it ion , Ba n k Qu es t (IIBF), J a n u a r y-Ma r ch 2004
8. Lars on , Don ald & Varan gis , Pan os (J an u ary, 1999), Us in g market s t o deal wit h
commodit y pr ice vola t ilit y, Wor ld Ba n k Econ omic Policy Not e
9. Oils & Oils eeds Fu t u r e Con t r a ct s , NCDEX, Mu mba i
10. Res er ve Ba n k of In dia (1997), Repor t of t h e Commit t ee on Hedgin g t h r ou gh
In t er n a t ion a l Commodit y Exch a n ges
11. S a n k h a ya n , P. L. (1 9 8 8 ), In t r od u c t i on t o t h e e c on omi c s of a gr i c u l t u r a l
pr odu ct ion , PHI, New Delh i
12. Sh en oy, P. V. (2 0 0 3 ), Oils eed s Pr od u ct ion , Pr oces s in g a n d Tr a d e: A Policy
Fr a mewor k, Occa s ion a l Pa per 26, NABARD, Mu mba i
13. Th oma s , Su s a n (Ma y 2003), Agr icu lt u r a l commodit y ma r ket s in In dia : Policy
is s u es for gr owt h
14. Th oma s , Su s a n & Ka r a n de, Kir a n (J u ly 2001), Pr ice dis cover y a cr os s mu lt iple
s pot a n d fu t u r es ma r ket s , Tech n ica l Repor t , IGIDR, Mu mba i
15. Commodit y Exch a n ges Fu t u r e Beckon s , www. Commodit yIn dia . com (Au gu s t
2003), Volu me 3 Is s u e 8
16. Abou t Mir acle Bean , www.Commodit yIn dia.com (Oct ober 2003), Volu me 3 Is s u e
10
17. Th e Pu blic Ledger , Wor ld Commodit ies Weekly, Sept ember 1-7, 2003
18. WEBSITES of:
A. For wa r d Ma r ket Commis s ion (www.fmc.gov.in )
B. Soya bea n Oil Pr odu cer s As s ocia t ion of In dia (www.s opa .or g)
C. Na t i on a l Com m od i t y & De r i va t i ve s E xc h a n ge of In d i a Li m i t e d
(www.n cdex.com)
D. Solven t Ext r a ct or s As s ocia t ion (www.s ea ofin dia .or g)
67
Appe ndix I :
Lis t Of Commodit y Exc hange s & Commodit ie s Trade d
No. Name of Exc hange & Loc at ion Princ ipal Commodit y Trade d
1. In dia Pepper & Spice Tr a de As s ocia t ion , Pepper (bot h domes t ic a n d
Koch i (IPSTA) in t er n a t ion a l con t r a ct s )
2. Vija i Beopa r Ch a mber s Lt d., Mu za ffa r n a ga r Gu r
3. Ra jdh a n i Oils & Oils eeds Exch a n ge Lt d., Gu r , Mu s t a r d s eed it s oil &
Delh i oilca ke
4. Bh a t in da Om & Oil Exch a n ge Lt d., Bh a t in da Gu r
5. Th e Ch a mber of Commer ce, Ha pu r Gu r , Pot a t oes a n d Mu s t a r d
s eed
6. Th e Meer u t Agr o Commodit ies Exch a n ge Gu r
Lt d., Meer u t
7. Th e Bomba y Commodit y Exch a n ge Lt d., Oils eed Complex
Mu mba i Ca s t or oil in t er n a t ion a l
con t r a ct s
8. Ra jkot Seeds , Oil & Bu llion Mer ch a n t s Cas t or s eed, Grou ndnu t , it s oil
As s ocia t ion , Ra jkot & ca ke, cot t on s eed, it s oil &
ca ke, cot t on (ka pa s ) a n d RBD
pa lmolein .
9. Th e Ah meda ba d Commodit y Exch a n ge, Ca s t or s eed, cot t on s eed, it s oil
Ah meda ba d a n d oilca ke
10. Th e Ea s t In dia J u t e & Hes s ia n Exch a n ge Hes s ia n & Sa ckin g
Lt d., Ca lcu t t a
11. Th e Ea s t In dia Cot t on As s ocia t ion Cot t on
Lt d., Mu mba i
12. Th e Spices & Oils eeds Exch a n ge Tu r mer ic
Lt d., Sa n gli
13. Ka n pu r Commodit y Exch a n ge Lt d., Ka n pu r Ra pes eed/ Mu s t a r ds eed, it s Oil
a n d ca ke
14. Nat ional Board of Trade , Indore Soya s eed, Soya oil a n d Soya
mea ls . Ra pes eed/ Mu s t a r ds eed
it s oil a n d oilca ke a n d RBD
Pa lmolien
15. Th e Fir s t Commodit ies Exch a n ge of In dia Copr a / cocon u t , it s oil &
Lt d., Koch i oilca ke
16. Cen t r a l In dia Commer cia l Exch a n ge Lt d., Gwalior Gu r and Mu s t ard s eed
68
No. Name of Exc hange & Loc at ion Princ ipal Commodit y Trade d
17. E-s u ga r In dia Lt d., Mu mba i Su ga r
18. Nat ional Mult i-Commodit y Exc hange Oils eed Complex a n d Ru bber ,
of India Lt d. , Ahme dabad Su ga r , Alu min iu m, Nickel,
Zin c, Copper , Lea d. Tin , Pepper ,
Gr a m a n d Sa ckin g.
19. Coffee Fu t u r es Exch a n ge In dia Lt d., Coffee
Ba n ga lor e
20. Su r en dr a n a ga r Cot t on Oil & Oils eeds , Cot t on , Cot t on s eed, Ka pa s
Su r en dr a n a ga r
21. E-Commodit ies Lt d., New Delh i Su ga r
22. Bu llion Mer ch a n t s As s ocia t ion , Bika n er Mu s t a r d s eed it s oil & oilca ke
23. Nat ional Commodit y & De rivat ive s Soy Bea n , Refin ed Soy Oil,
Exc hange Lt d. , Mumbai Expeller Mu s t a r d Oil, Rbd
Pa lolein e cr u de pa lm oil,
Mediu m s t a ple cot t on , Lon g
s t a ple cot t on , Gold, Silver
24. Mult i Commodit y Exc hange Lt d. , Bu llion t r a des , cr u de oil,
Mumbai Ca s t or , Rbd Pa lm oil, Gu r
Not e : Na mes in b old let t er s in d ica t e s t a t u s a s Na t ion - wid e Mu lt i Commod it y
Exch a n ge
Sou r ce : For wa r d Ma r ket s Commis s ion
69
Appendix II : Yearly Crushing, Product ion Of Meal & Oil In India
Oil Ye ar Soybe an Ext rac t i on Oi l
(OCTOBER- Crus he d Produc e d Produc e d
SEPTEMBER)
(In Million Me t ric Ton)
1992-1993 2.755 2.231 0.482
1993-1994 3.199 2.592 0.560
1994-1995 2.578 2.088 0.451
1995-1996 3.505 2.839 0.613
1996-1997 3.182 2.577 0.557
1997-1998 4.156 3.367 0.727
1998-1999 4.274 3.462 0.748
1999-2000 4.447 3.647 0.800
2000-2001 4.327 3.548 0.779
2001-2002 4.867 3.991 0.876
2002-2003 3.600 2.952 0.648
2003-2004 6.091 4.994 1.096
Point -t o-Point Growt h (%)
1992-93 t o 1997-98 50.85 50.92 50.83
1998-99 t o 2003-04 42.51 44.25 46.52
Sou r ce : Soya bea n Oil Pr odu cer s As s ocia t ion of In dia (SOPA)
Appe ndix III :
Share of St at e s in Produc t ion of Soyabe an 2 0 0 3 -0 4
70
Appendix IV : A Typical Cont ract Cycle for a Fut ures Cont ract
Jan Fe b Mar Apr
Time
Jan 2 0 c ont rac t
Da t e of Expir y is 20t h
of t h e expir y mon t h &
Fe b 2 0 c ont rac t t h e n ex da y a n ew fa r -
mon t h con t r a ct s t a r t s
Marc h 2 0 c ont rac t
April 2 0 c ont rac t
May 2 0 c ont rac t
Th e figu r e s h ows con t r a ct cycle for a fu t u r es con t r a ct . At a n y given poin t of
t ime, t h r ee con t r a ct s a r e a va ila ble for t r a din g a n ea r -mon t h , a middle-mon t h
a n d a fa r -mon t h . As t h e J a n u a r y con t r a ct expir es on 20
t h
of J a n u a r y, a n ew
t h r ee mon t h con t r a ct s t a r t s t r a din g fr om t h e followin g da y, on ce mor e ma kin g
a va ila ble for t r a din g t h r ee fu t u r es con t r a ct s for t h e s a me commodit y.