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