P.K. Jain and B.S. Hansra School of Agriculture Indira Gandhi National Open University (IGNOU)

1. Interrelation of Futures and Spot Market: A Study of Wheat and Urd Market P.K. Jain and B.S. Hansra School of Agriculture Indira Gandhi National Open University (IGNOU) New Delhi-110 068

2. Agricultural Economy • The agricultural sector dominant in terms of providing livelihood security to majority of people in the country. • Prices of agricultural commodities affects the agricultural production. • Stable and assured prices have a positive impact on production. • Agricultural prices have always been major concern of the producer-farmers as well as the consumers. • Agricultural prices should be remunerative to agriculturists yet non-inflationary for the other sectors • Agricultural production unlike others have an added risk.

3. Concerns • Seasonality in production; Year round consumption • Fragmented rural markets, • Large number of middlemen • Instability and volatility of commodity prices-producers, consumers • Distress sale - Reducing potential gains • To cope up with this problem- measures initiated • Cooperative marketing societies • Minimum support / procurement prices, • Crop insurance • Futures trading - Risk shifting Function (Lock-in-prices)

4. Role of Futures and forward market • Insulate buyers and sellers from unexpected change in future price • Lock in the prices of the products well in advance • Indication to the producers and consumers about likely future ready price and demand and supply conditions - Price Discovery Continuous process of arriving at a price figure at which a person buys and another sells a futures contract for a specific expiry date

5. Commodity Transactions • Cash/Spot Contract • Agreement for ready transaction of an asset through private negotiation • Spot physical delivery and cash settlement (Within 11 days) • Demand-Supply imbalance • Forward Contract • OTC agreement for transaction of specific asset for future date at pre-determined price (Physical delivery essential ) • Risk mitigation tool for future demand • Holders face spot price risk • May expose to ‘default risk’ or ‘counter-party risk’ • Futures Contract • Redefined version of forward- traded on the platform - organized exchanges • Tool for protecting against risk of price fluctuations in ready market • Physical delivery and/or cash settlement • Prices are freely and competitively derived

6. Role of commodity exchanges • Providing platform for trade • Efficient price discovery • Development of contract specifications • Fixation of quality specification of commodities • Price dissemination to ensure that farmers can view them • Provision of delivery platform • Warehousing logistics • Quality assurance • Insure fare trading through rules and regulation of exchange

7. Commodity Futures in India • Bombay Cotton Trade Association Ltd- 1875 (Cotton) • Gujajrati Vyapari Mandali -1900 (Oilseeds) • Calcutta Hessian Exchange Ltd -1919 (Raw jute) • East India Jute Association Ltd -1927 (Raw jute) • East India Cotton Association, Mumbai -1921(Cotton) • Hapur, Muzaffarnagar, Bhatinda Exchanges– Before 1942 (Wheat) • IPSTA in Cochin-1957 (Spices) • Mumbai Bullion Association- Till mid 50s (Gold & Silver) • However, the government withdrew the ban on futures with passage of Forward Contract (Regulation) Act in 1952. • Futures trade was altogether banned by the government in 1966 • Khusro Committee (1980) recommended reintroduction of futures in cotton, jute, potatoes, etc. • Kabra Committee (1994) recommended reintroduction of futures in many more commodities including silver. • National Agricultural Policy(2000) proposed to enlarge the coverage of futures markets • Establishment of multi commodity exchanges and start of online futures trading (2003)

8. Issues emerges • functioning of futures market, • role and impact of futures market on general economy. • Some opine that futures trading are responsible for inflationary trend in prices. • Others section arguing that futures market is efficiently discovering right market prices. • Other opines that it is good provided the farmers should be benefited. • Some are ready to accept the futures trading provided only genuine users of commodity participated and the speculator should be given out. • With this divided opinion govt banned the futures trading in two pulses, and cereals in January and February, 2007.

9. Issues to be addressed… • Is futures trading facilitate hedging against price risk? • Are futures markets guided by ready market or vice versa? • Are these markets efficient enough to stabilize spot price? • How much efficient is the price discovery mechanism? • Role of futures trading in price rising • Impact of futures trading on farmers economy • Reasons of less farmers participation of in futures trading • Consumers and futures trading • Futures trading as balancing bridge between producer and consumer • Is future trading plays its positive role in a situation of short supply (mis-match in demand and supply)

10. Objectives of the study • Keeping above issues, the proposed research papers aims to cover mainly two areas: • Variability and integration of futures and spot market and • Movement in prices of agricultural commodities in the market during and after banning of futures trading.

11. Methodology Crops One cereal crop- Wheat One pulse crop- Urd Market Cash markets One major market for wheat One major market for Urd Futures market- NCDEX Data Time series data on daily prices, arrivals and trading volume in futures and spot market.

12. Analytical framework Times series analysis Stationarity (Mean, variance and auto-covariance remain same) Spurious and nonsense regression Stationarity test-Augmented Dickey Fuller unit root test Where is a vector to be tested for co-integration t is time or trend variable The null hypothesis that =0; that is, there is unit root – the time series is non-stationary. The alternative hypothesis is that is less than zero; that is the time series is stationary. If null hypothesis is rejected it means that series is stationary.

13. Analytical framework- Contd… Co-integration test- Augmented Engle–Gragner test (AEG) Where is the spot prices crop, is the futures price series. residual (residual) is the cointegration vector. the ADF test is used to test for a unit root in the cointegration vector or residual (for spot price series). For Spot price series where is stationary the spot price and futures price series are co-integrated

14. Analytical framework- Contd… Graphical presentation Growth rates Standard Deviation Ratio of standard deviation Coefficient of variation Correlation and Regression analysis

15. Thanks