role and impact of futures markets for agriculture -...

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

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

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

Trading Screen

Contracts offered on NCDEX

NCDEX

Spices

Pulses

Oil

& Oil

Seeds

Energy

Metal

Bullion

Fibres

Grains

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

Lin

k w

ith In

tern

atio

nal P

rices

Co

rn Fu

tures (N

ear Mo

nth

)

50

0

10

00

15

00

20

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

3-Jan-13

3-Mar-13

Rs per Quintal

CBO

T

NCD

EX

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

Dom

estic

pric

es - C

hana

20

00

25

00

30

00

35

00

40

00

45

00

50

00

55

00

2-Jan-122-Feb-122-M

ar-122-Apr-122-M

ay-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-13

2-Mar-13

Rs/Quintal

Sp

ot

Ne

ar M

on

th

Domestic prices - Wheat

800

900

1000

1100

1200

1300

1400

1500

1600

1700

1800

2-Jan-1

2

2-Feb

-12

2-Mar

-12

2-Apr-1

2

2-May

-12

2-Jun-

12

2-Jul-1

2

2-Aug-

12

2-Sep

-12

2-Oct

-12

2-Nov-

12

2-Dec

-12

2-Jan-1

3

2-Feb

-13

2-Mar

-13

Rs/

Qu

inta

l

Spot Near Month

Dom

estic

pric

es - S

ugar

20

00

22

00

24

00

26

00

28

00

30

00

32

00

34

00

36

00

38

00

40

00

2-Jan-122-Feb-122-M

ar-122-Apr-122-M

ay-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-132-M

ar-13

Rs/Quintal

Sp

ot

Ne

ar M

on

th

Dom

estic

pric

es - M

aiz

e

80

0

90

0

10

00

11

00

12

00

13

00

14

00

15

00

16

00

17

00

2-Jan-122-Feb-122-M

ar-122-Apr-122-M

ay-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-13

2-Mar-13

Rs/Quintal

Sp

ot

Ne

ar M

on

th

Dom

estic p

rices -

Soyabean

20

00

25

00

30

00

35

00

40

00

45

00

50

00

55

00

2-Jan-12

2-Feb-12

2-Mar-12

2-Apr-12

2-May-12

2-Jun-12

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-13Rs/Quintal

Sp

ot

Ne

ar

Mo

nth

Dom

estic

pric

es - R

M S

eed

30

00

32

00

34

00

36

00

38

00

40

00

42

00

44

00

46

00

48

00

2-Jan-122-Feb-122-M

ar-122-Apr-122-M

ay-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-132-M

ar-13

Rs/Quintal

Spo

tN

ear M

on

th

Dom

estic

pric

es - R

efin

ed S

oya O

il

50

0

55

0

60

0

65

0

70

0

75

0

80

0

85

02-Jan-122-Feb-12

2-Mar-122-Apr-12

2-May-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-13

2-Mar-13

Rs/10 kg

Sp

ot

Ne

ar M

on

th

Dom

estic

pric

es - B

arle

y

10

00

11

00

12

00

13

00

14

00

15

00

16

00

17

00

18

00

19

00

2-Jan-122-Feb-122-M

ar-122-Apr-122-M

ay-122-Jun-122-Jul-122-Aug-122-Sep-122-Oct-122-Nov-122-Dec-122-Jan-132-Feb-132-M

ar-13

Rs/Quintal

Spo

tN

ear M

on

th

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 agro-climatic 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