Role and Impact of Futures markets for Agriculture. Tanushree Mazumdar Senior Economist & Vice President NCDEX Ltd.

Transcription

1 Role and Impact of Futures markets for Agriculture Tanushree Mazumdar Senior Economist & Vice President NCDEX Ltd.

2 The Context The latest Economic Survey highlights the success of Indian agriculture India is first in the production of milk, pulses, jute and jute-like fibres; It is ranked second in rice, wheat, sugarcane, groundnuts, vegetables, fruits and cotton production; India s agricultural exports are booming. However, food inflation remains a persistent problem. Volatile food prices continue to be characteristic of Indian agriculture

3 Derivatives A derivative is a term that refers to a wide variety of financial instruments or "contract whose value is derived from the performance of underlying market factors, such as market securities or indices, interest rates, currency exchange rates, and commodity, credit, and equity prices. The most common underlying assets include: commodities, stocks, bonds, interest rates and currencies.

4 Futures Futures - commitment to give or take delivery of a given commodity at a specific location and time in the future All terms of contract are standardized Prices are discovered through open and competitive bidding on the Exchange platform Contracts are settled either through closing out transaction or physical delivery

5 Objectives of an Exchange Platform for fair price discovery through: Wide participation Real time information dissemination Efficient risk transfer platform for value chain participants Orderly functioning of markets through: Effective supervision & monitoring Various Checks & Controls 5

6 Trading Screen

7 Contracts offered on NCDEX Spices Grains Pulses Fibres NCDEX Oil & Oil Seeds Bullion Energy Metal

8 Indian Commodity futures market For the fiscal year futures market in India, recorded highest turnover of Rs lakh crore.

9 Share of Commodities Traded

10 Annual Volatility Year Jeera Pepper Turmeric Chilli Dhaniya Chana

11 3-Jan-11 3-Mar-11 3-May-11 3-Jul-11 3-Sep-11 3-Nov-11 3-Jan-12 3-Mar-12 3-May-12 3-Jul-12 3-Sep-12 3-Nov NCDEX Rs per Quintal CBOT 2000 Corn Futures (Near Month) Link with International Prices 3-Jan-13 3-Mar-13

12 Link with International Prices

13 Link with International Prices

14 Correlation Correlation between NCDEX and corresponding international futures prices Commodity Correlation Soy Oil 94.86% Soy Bean 95.17% Wheat 76.77% Sugar 91.35% Mustard Seed 90.36% High correlation seen for all commodities except Wheat

15 International Linkages World wheat prices have limited impact on domestic wheat prices Imports and exports are highly regulated NCDEX platform can be used to hedge for international exposure in soya bean, mustard and sugar (long term price equilibrium exists) International prices factor in the feedback from domestic prices of soya oil, soyabean and sugar

16 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar Rs/Quintal Domestic prices - Chana

17 Domestic prices - Wheat Rs/Quintal Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 2-Jul-12 Spot 2-Aug-12 2-Sep-12 Near Month 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13

18 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 Rs/Quintal Domestic prices - Sugar

19 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 Rs/Quintal Domestic prices - Maize

20 2-Mar-13 2-Feb-13 2-Jan-13 Domestic prices - Soyabean Rs/Quintal 2-Dec-12 2-Nov-12 2-Oct-12 2-Sep-12 2-Aug-12 2-Jul-12 2-Jun-12 2-May-12 2-Apr-12 2-Mar-12 2-Feb-12 2-Jan-12 Spot Near Month

21 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 Rs/Quintal Domestic prices - RM Seed

22 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar Rs/10 kg Domestic prices - Refined Soya Oil

23 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 Spot Near Month 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 Rs/Quintal Domestic prices - Barley

24 Commodity Futures in India: Cumulative value of trade from April 1, 2012 to February 28, 2013 was ` crore Share of agricultural commodities traded value was 12.80% Trade in agricultural commodities in value grew by 5.80% in this period over the same period last year Trade in bullion fell by 22.72% Trade in metals other than bullion grew by 14.91% Trade in energy grew by 30.94%

25 The need Growing awareness among investors about commodity futures Growing economy will only increase the need for hedging tools for commodities Empowered regulation will strengthen and widen the market

26 In conclusion.. Futures trading in commodities is useful to all sectors of the economy including farmers. The forward prices give advance signals of an imbalance between demand and supply. This helps the government to make plans and arrangements in a shortage situation for timely imports, instead of having to rush in for such imports in a crisis-like situation when the prices are already high. This ensures availability of adequate supplies and averts spurt in prices.

27 In conclusion.. Similarly, the early price signals emitted by futures market help the importers and exporters to hedge inherent price risks. The agriculture sector makes a strong case for better cyclicality management. Mercurial agroclimatic conditions, which can seriously impact farm productivity, can aggravate the situation through large variances in production and inventories.

28 In conclusion.. Given the scarcity of additional fertile land, increase in farm productivity will be critical for sustaining the future growth of the agricultural sector. Given the above, a greater adoption of hedging instruments available on commodity exchanges can help the agriculture sector and also end users mitigate price risk which will be in the larger interest of the farmers.

29 Thank you