Role and Impact of Futures markets for Agriculture Tanushree Mazumdar Senior Economist & Vice President NCDEX Ltd.
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
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.
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
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
Trading Screen
Contracts offered on NCDEX Spices Grains Pulses Fibres NCDEX Oil & Oil Seeds Bullion Energy Metal
Indian Commodity futures market For the fiscal year 2011-12 futures market in India, recorded highest turnover of Rs.181.13 lakh crore.
Share of Commodities Traded
Annual Volatility Year Jeera Pepper Turmeric Chilli Dhaniya Chana 2007-08 7.18 7.54 7.29 9.65 11.00 2008-09 5.49 8.42 7.50 6.85 14.26 9.00 2009-10 5.64 8.16 16.37 6.87 10.33 9.00 2010-11 5.60 8.26 10.53 13.08 13.70 7.00 2011-12 5.17 8.02 10.65 7.98 13.02 10.00
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-12 500 NCDEX Rs per Quintal 1500 1000 CBOT 2000 Corn Futures (Near Month) Link with International Prices 3-Jan-13 3-Mar-13
Link with International Prices
Link with International Prices
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
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
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 2000 2500 3000 Rs/Quintal 3500 4000 4500 5000 5500 Domestic prices - Chana
Domestic prices - Wheat Rs/Quintal 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 2-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
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 4000 3800 3600 3400 3200 3000 2800 2600 2400 2200 2000 Domestic prices - Sugar
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 1700 1600 1500 1400 1300 1200 1100 1000 900 800 Domestic prices - Maize
2-Mar-13 2-Feb-13 2-Jan-13 Domestic prices - Soyabean 5500 5000 4500 4000 3500 3000 2500 2000 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
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 4800 4600 4400 4200 4000 3800 3600 3400 3200 3000 Domestic prices - RM Seed
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-13 500 550 600 Rs/10 kg 650 700 750 800 850 Domestic prices - Refined Soya Oil
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 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 Domestic prices - Barley
Commodity Futures in India: 2012-13 Cumulative value of trade from April 1, 2012 to February 28, 2013 was ` 15782840 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%
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
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.
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.
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.
Thank you