RISK MANAGEMENT IN AGRICULTURAL COMMODITY MARKETS: A STUDY OF SOME SELECTED COMMODITY FUTURES

K.G. Sahadevan, Ph.D Associate Professor Indian Institute of Management Prabandh Nagar Off Sitapur Road Luckno 226 013 INDIA E-mail: devan@iiml.ac.in Phone: 0522-361889

This study constitutes a part of the research project titled Derivatives and Price Risk Management: A Study of Agricultural Commodity Futures in India being carried out by the author at IIM Lucknow.

RISK MANAGEMENT IN AGRICULTURAL COMMODITY MARKETS: A STUDY OF SOME SELECTED COMMODITY FUTURES

ABSTRACT
The present study investigates into the problems and prospects of the futures market in agricultural commodities in India. The results of the study reveal that many of t he commodity futures exchanges fail to provide an efficient hedge against the risk emerging from volatile prices of many farm products in which they carry out futures trading . The results obtained from a statistical analysis of the data on price discovery in a sample of six commodities traded in four exchanges showed that the futures market in those commodities are not efficient in the sense that the futures prices are not an unbiased predictor of the future ready rates. A revie of the nature of institut ional and policy level constraints facing this segment calls for more focused and pragmatic approach from government, the regu lator and the exchanges for making the agricultural futures markets a vibrant segment for risk management which can play an important role especially in an agriculture dominated economy of India.

1. Introduction Instability of commodity prices has always been a major concern of the producers, processors, traders as well as the consumers in an agriculture -dominated country like India. Farmers direct exposure to price fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities. There are various ways to cop with this problem. Apart from increasing the stability of the market, various actors in the farm sector can better manage their activities in an environment of unstable prices through commodity exchanges. Commodity exchanges as defined in a narrow sense in the Indian context are centres where futures trade is organized. These exchanges serve a risk-shifting function, and can be used to lock -in futures prices instead of relying on uncertain price developments. Apart from being a vehicle for risk transfer among hedgers and from hedgers to speculators, fu ures markets also play a major role in price discovery The price risk refers to the probability of adverse movements in prices of commodities, services or assets. Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would attract only lower price during the harvest season. The forward and futures contracts are efficient risk management tools which insulate buyers and sellers from unexpected changes in future price movements. These contracts enable them to lock in the prices of the products well in advance. Moreover, futures prices give necessary indications to producers and consumers about the likely future ready price and demand and supply conditions of the commodity traded. The cash market or ready delive y market on the other hand is a time-tested market system which is used in all forms of business to transfer title of goods. The objective of this paper is to survey the price risk management system prevailing in agricultural commodity markets in India and to empirically investigate how efficient is the price discovery function of futures for ensuring better hedge against price uncertainty

in some selected commodities. In the light of the visit paid to some of the selected futures exchanges and the discussions held with the exchange authorities, the study has identified bottlenecks in the development of agricultural futures market and suggested fundamental policy remedial for its revival 2. What is Commodity Futures Contract? Futures contracts are an improved variant of forward contracts. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price, with settlement expected to take place at a future date. While forward contracts are mainly over-the-counter and tailor-made which are settled by physical delivery, futures are standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery. The closing out involves buying a different times of two identical contracts for the purchase and sale of the commodity in question, with each canceling the other out. The futures contracts are standardized in terms of quality and quantity, and place and date of delivery of the commodity. The commodity futures contracts in India as defined by the FMC has the following features: (a) Futures trading is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members o the association in accordance with the procedure laid down in the Rules and Bye-laws of the association. It is invariably entered into for a standard variety known as the basis variety with permission to deliver other identified varieties known as tenderable varieties. The units of price quotation and trading are fixed in these contracts, parties t the contracts not being capable of altering these units. The delivery periods are specified. The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centres. In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.

(b)

(c) (d) (e)

(f)

The futures contracts are designed to deal directly with the credit risk involved in locking in prices and obtaining forward cover. These contracts can be used for hedging price risk and discovering future prices. For commodities that compete in world or national markets, such as coffee, here are many relatively small producers scattered over a wide geographic area. These widely dispersed producers find it difficult to know what prices are available, and the opportunity for producer, processor, and merchandiser to ascertain their likely cost for coffee and develop long range plans is limited. Futures trading, used in the Midwest for grains and similar farm commodities since 1859, and adapted for coffee in 1955, provides the industry with a guide to what coffee is worth now as well as

todays best estimate for the future. Moreover, since all transactions are guaranteed through a central body, clearing house, which is the counter party to each buyer and selle ensuring zero default risk, market participants need not worry about their counte rparts creditworthiness. 3. Regulation of Commodity Futures Merchandising and stockholding of many commodities in India have always been regulated through various legislations like the Essential Commodities Act, 1955 (ECA, 1955) and Forward Contract (Regulation) Act, 1952, (FCRA, 1952) and Prevention of Blackmarketing and Maintenance of Supplies of Commodities Act, 1980. The ECA, 1955 gives powers to control production, supply, distribution, etc. of essential commodities for maintaining or increasin g supplies and for securing their equitable distribution and availability at fair prices. Using the powers under the ECA, 1955 various Ministries/Departments of the Central Government have issued control orders for regulating production/distribution/quali ty aspects/movement etc. pertaining to the commodities which are essential and administered by them. The FCRA, 1952 provided for 3-tier regulatory system for commodity futures trading in India: (a) an association recognized by the Government of India on the recommendation of Forward Market Commission, (b) the Forward Markets Commission and (c) the Central Government. Stock exchanges and futures markets being a part of the Union list their regulation is the responsibility of the central government. All types of forward contracts in India are governed by the provisions of the FCRA, 1952. The Act divides commodities into three categories with reference to extent of regulation, viz., (a) the commodities in which futures trading can be organized under the auspices of recognized association, (b) the commodities in which futures trading is prohibited and (c) the free commodities which are neither regulated nor prohibited. While options in goods are prohibited by the FCRA, 1952, the ready delivery contracts remain outside its purview. The ready delivery contract as defined by the Act is the one which provides for the delivery of goods and payment of a price therefor, either immediately or within a period not exceeding eleven days after the date of the contract. Al l ready delivery contracts where the delivery of goods and/or payment for goods is not completed within eleven days from the date of the contract are forward contracts. The Act classified forward contracts into two: (a) specific delivery contracts and (b) other than specific delivery contracts or futures contracts. Specific delivery contract means a forward contract which provides for the actual delivery of specific qualities or types of goods during a specified time period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned. The specific delivery contracts are of two types: transferable and non-transferable. The distinction between the transferable specific delivery ( TSD) contracts and nontransferable specific delivery (NTSD) contracts is based on the transferability of the rights or obligations under the contract. Forward trading in TSD and NTSD contracts are regulated by the government. As per the section 15 of th e FCRA, 1952 every forward contract in notified goods (currently 36 commodity items) which is entered into excep

those between members of a recognized association or through or with any such membe is treated as illegal or void. The section 18(1) of the Act exempts the NTSD contracts from the regulatory provisions. However, over the years the regulatory provisions of the Act were applied to the NTSD contracts and 79 commodity items are currently prohibited for NTSD contracts under section 17 of the Act. Moreover, another 15 commodity items are brought under the regulatory provisions of the section 15 of the Act out of which trading in the NTSD contract has been suspended in 12 items. At present, the NTSD contracts in cotton, raw jute and jute goods are permitted only between, through or with the members of the associations specifically recognized for the purpose. Subsequent to the report of the Committee on Forward Markets (known as the Kabra Committee) submitted in 1994 the government has so far permi tted futures trading in nearly 35 commodities under the auspices of 23 commodity exchanges located in different parts of the country. The commodities in which futures trading is permitted are: pepper, turmeric, gur, castorseed, Hessian, jute sacking, cott on, potato, castor oil, soyabean and its oil and cake, coffee, mustardseed and its oil and oilcake, ground nut and its oil, sunflower oil, copra/coconut and its oil and oilcake, cottonseed and its oil and oilcake, kapas, RBD palmolein, rice bran and its oil and oilcake, sesame seed and its oil and oilcake, safflower seed and its oil and oilcake, and sugar. This list may get enlarged with the repeal of ECA, 1955 and with further liberalization of farm sector as envisaged in the Union Budget, 2002-03. 4. The Profile of Futures Exchanges Presently, 15 exchanges in India are in operation carrying out futures trading activities in as many as 30 commodity items (details are given in table -1). Moreover, permission has been given to another two exchanges viz., The First Commodities Exchange of India Ltd, Kochi (for copra/coconut, its oil and oilcake), and Keshav Commodity Exchange Ltd., Delhi (for potato), where futures trading is expected to start soon. The government has also permitted four exchanges viz., East India Cotton Association, Mumbai; The Central Gujarat Cotton Dealers Association, Vadodara; The South India Cotton Association, Coimbatore; and The Ahmedabad Cotton Merchants Association, Ahmedabad, for conducting NTSD contracts in cotton. Lately, as part of further liberalization of trade in agriculture and dismantling of ECA, 1955 futures trade in sugar has been permitted and three new exchanges viz., e -Commodities Limited, Mumbai; NCS Infotech Ltd., Hyderabad; and e-Sugar India.Com, Mumbai, have been given approval for conducting sugar futures. A brief profile of the exchanges which are currently in operation has been presented in table-1. Many of these exchanges have become weaker in spite of considerable membership strength and potential for large volume of trade. Some of the observations drawn on the basis of visit to six of these exchanges have been presented in the later part of this paper. The number of members who are actively involved in trading in all these exchanges is abysmally low. A ny attempt to revive the exchanges and rejuvenate the futures market in India needs an investigation into why members shy away from trading.

It is interesting to note that even in case of commodities in which very active domestic and international ready market exists with volatile prices, futures trade in those commodities are no attraction to the merchandisers. The pepper exchange located in Cochin which is known for futures trade in spices for over five decades has not attracted many traders. It is the only exchange in the world engaged in trading of futures in pepper. Kerala being the producer of lions share (around 95 per cent) of pepper in India and Cochin being the port city where majority of pepper exporters are operating the existing futures exchange is expected to have a larger role to play. However, in spite of having more than 150 members in the exchange, only around 10 members cubicles in the trading ring found to have the presence of their representatives during the trading hour. A further inquiry in to the issue reveals that these members have been trading for generations and no new member is coming forward to the business. The members of the exchange still choose to retain the status of the exchange as a single-commodity exchange! The Bombay Commodity Exchange arguably the richest exchange in India in terms of it infrastructure is also facing the problem of empty trading ring. Though the exchange has membership strength close to 600, only less than 5 members are actively trading. I is clear from the data given in table-1 that the volume in castor seed futures declined from 2.53 lakh tonnes during 1996-97 to just 10,000 tonnes during 2000-01. The cotton exchange in Mumbai which is one of the oldest exchanges in the country has a different story to tell. Cotton has a long tradition of futures trading in India. Cotton futures started in 1857 and continued until it was suspended in 1966. Cotton has large potential for futures trading due to its uncontrolled and uncertain supply and va riability of prices. While prices within a crop season fluctuate between 7.5 to 26.2 per cent in the last decade, its output varied as much as 14 per cent from one year to the next. It has a very strong domestic and international market. India is the third largest producer and the second largest consumer of cotton in the world. Moreover, cotton is placed under OGL list with zero import duty, and quota system for its exports is likely to be dismantled by 2005. Nevertheless, the present status of cotton exchange and the Indian cotton futures contract is no different from other exchanges. Although the exchange has membership strength over 400, not more than 10 members actively trade in the exchange. It is often argued by the exchange authorities that the governments indirect control on supply of cotton and on prices by its procurement makes the futures market unattractive. Futures market in many other commodities indeed shows that there is scope for the rejuvenation of this sector in the country. The rading activities in the newly started National Board of Trade at Indore, the old exchanges like the Chamber of Commerce Hapur; Viajai Beopar Chamber, Muzaffarnagar; Ahmedabad Commodity Exchange; Bhatinda oil exchange; The East India Jute Exchange, Calcutta, etc., are the indications of prospects of futures trade in agricultural commodities.

5. Is Futures Market Efficient? Futures trade assumes significance in a volatile ready market and price risk managemen because of the price discovery. The price di scovery is the process of determining the price of a commodity, based on supply and demand factors. The expectations theory hypothesises that the current futures price is a consensus forecast of the value of the ready (spot) price in the future. For example, todays 180 day pepper futures rate is a market forecast of the ready rate that will exist in 180 days. The futures market for a commodity is said to be efficient when the n-period futures rate (Ft,n) is equal to the future ready rate (St+n). The efficient market ensures that the average difference between todays futures rate (with n day maturity) and the subsequent ready rate n days later was zero. The difference, if any, represents both the futures rates forecasting error and the opportunity for gain (or loss) from open positions in the market. The efficiency of the futures market is usually examined by testing the unbiasedness of futures rate as a predictor of the future ready rate. The hypothesis that the premium or discount in the futures ma rket is an unbiased linea predictor of the price change in the corresponding ready market may be tested using the regression equation:

DS i t +1 = + FP i t + u i t +1 ,
t=1,,T, i=1,,N (commodities) in which

(1)

DS i t +1 ( S i t +1 S i t ) and FP i t ( F i t S i t ),
where St and St+1 are the logarithm of the ready rate at time t and t+1 respectively, Ft is the logarithm of the futures rate established at time t for period t+1, and ut+1 is an error term. In this form, the unbiasedness hypothesis implies that
 and . Such a restriction is consistent with a model of a competitive market with no transaction costs, risk-neutral speculators and market expectations which are rational. For that model, we should have (2) Et DS i t +1 = FP i t , Where Et is the mathematical expectation operator conditional upon some information set. The test relation (1) and the joint null hypothesis of rational expectations and no risk premium implicit in (2) can be related by decomposing the actual change in the spot rate into two orthogonal components: (3) DS i t +1 = Et DS i t +1 + ( DS i t +1 Et DS i t + 1 ) Substituting (2) into (3) yields (1) under the null hypothesis. Testing the unbiasedness hypothesis involves estimating regression equation (1) and determining whether the coefficient estimates of
and  are significantly different from zero and one respectively. Alternatively, futures rate is an unbiased predictor of the future ready rate, if the average forecast error ( et+1 in (1)) is not significantly different from zero. The optimal forecas would be one that minimizes the average of the squared forecast errors i.e., minimum mean square errors (MSE) over the sample period. The forecast error (et+1) represents the

speculative profit for traders who buy futures contracts at Ft and sell in the ready marke at St+1. The forecast error is unlikely to be consistently large and positive because large profits would attract speculators buying futures resulting increase in Ft and decrease in et+1, thus removing profits. 5.1. Empirical Results The test results based on the estimates of the equation (1) have been presented in table-2. The study has utilized the OLS method to estimate the equation for daily futures prices o six commodities viz., pepper, cotton, castor seed and castor oil, mustard seed and gur traded in pepper exchange in Cochin, cotton exchange in Mumbai, Bombay Commodit Exchange and Kanpur Commodity Exchange respectively. The coefficient estimates of the equation are corrected for serial correlation by using iterative Cochrane -Orcutt procedure an d the autoregressive parameter ( ) estimates are reported. For each commodity item daily prices of multiple contracts have been used for estimation. The price data used for the analysis have been sourced from the respective exchanges directly. To test the unbiasedness and whether futur es prices are the optimal forecaster of the future ready prices, the restriction
0 and =1 has been tested by estimating equation (1) by OLS and by using Wald chi-square test of the joint hypothesis that
=0 and =1. The joint null hypothesis that
=0 and =1 is rejected in all sample cases baring two (Mustard seed, July 2000 and Gur, March 1998 contracts) out of 25 sample futures contracts. The significant Wald chi-square test statistics indicate that futures markets are not efficient in predicting the future ready prices. This result is rather expected given the fact that many exchanges have thin trade volumes and infrequent trading. In spite of a developed ready market in most of these commodities, futures markets do not attract traders. The results also testify the fact that the futures contracts are not perfect hedge against the variations in ready prices. A perfect hedge guarantees that the profit or loss on the futures contracts fully offsets the loss or profit on the physical transactions in t he ready market. Any disparity between the futures price for a specific maturity contract and the ready prices in physical market on the day of the maturity of futures contract exposes the participants to basis risk. The users of futures markets face this risk because the specific physical commodity they wish to hedge does not have the same price development as tha of the standardized futures contract. There may be many imperfections in the market for the commodities under study which would make ready p rices deviate from the corresponding futures prices. The export oriented commodity like pepper the prices in ready market are to certain extent driven by the unexpected changes in exchange rate which are not factored into the futures prices and by the dem and situation in international market. Secondly, in cases where government intervenes to manipulate the market by affecting supply (e.g., cotton) the relation between futures prices and ready market prices may get distorted. Thirdly, in most cases future s exchanges are not located in the area where very developed ready market exists. Though gur futures are traded in Kanpur and Hapur exchanges, this particular commodity has ready market spreading across the country. Finally, most of the agricultural products are produced in unorganized sector

involving thousands of smallholdings and there are many intermediaries between farmer and wholesaler/exporter. This makes the supply and price development in ready marke unpredictable. 6. Constraints and Policy Options Commodity exchanges in India are in their nascent stage of development. There are numerous bottlenecks in the growth of this particular segment in India. These institutional and policy level issues have to be addressed by the government and the FMC for taking appropriate solutions towards rejuvenation of the paralyzed agricultural futures markets. Some of the major problems that handicap the commodity exchanges are discussed below. 6.a. Constitution of exchanges: All commodity exchanges in Ind ia are mutual organizations. They are promoted by traders who carryout trading as well as manage the exchanges. The exchange staff including the chief executive officer/secretary is the staff of promoters. This structure poses a serious threat to the in tegrity of exchanges. The structure needs to be altered so as to ensure an arms length relationship between those who promote and manage the exchange on the one hand and those who have trading interest in exchanges on the other. Many leading exchanges in the world like Chicago Mercantile Exchange, International Petroleum Exchange, and New York Mercantile Exchange etc. are demutualized organizations where arms -length relationship between management and trading is maintained. The pepper exchange in Cochin is seriously considering change in its set up from a non -profit making organization to a profit making equity based organization. 6.b. Infrastructure: Lack of efficient and modern infrastructural facilities are a majo bottleneck in the growth of futures markets in India. Though some of the exchanges notably Bombay Commodity Exchange and Cotton Exchange, Mumbai own huge office premises, they lack necessary institutional infrastructure including warehousing facilities independent clearing house in addition to modern trading ring. The Kanpur Commodity Exchange for example, lacks basic facilities to disseminate the trading information. The exchange has only a couple of small office rooms and a poorly maintained trading ring which seems to have never been utilized. 6.c. The trading system: Most of the exchanges till date have open outcry system. Of the sample of six exchanges visited, only Coffee Futures Exchange, Bangalore has introduced electronic trading system. The Forward Markets Commission has bee n emphasizing the need for automation and on -line trading system for ensuring better transparency and fairness in trading practices. It has been observed that less than 10 pe cent of members are only actively trading in these exchanges. Volume of trade has been consistently declining. In some exchanges e.g., Kanpur Commodity Exchange the market is non-existent. An active and vibrant market is necessary for introducing electronic trading system. Steps have to be initiated for creating market and making the exchange financially sound for investing in automation and on-line trading. The Coffee Futures Exchange, Bangalore where automation was introduced which did not encourage

the traders consequent to which volume dropped leaving a large financial burden . Moreover, majority of trading members in some of the exchanges are not educated enough to handle English and to operate computer. For example, most of the members of the commodity exchange in Hapur said to have no working knowledge in English without which computer based trading is almost impractical. 6.d. Broking community: Although a large number of members exist in the records of exchanges, most of them shy away from trading due to the fact that the business is not very profitable. It is essential to attract large scale broking firms who have diversified into stock broking and other related businesses. Regulation including setting standards for brokers, imposing capital adequacy norms, qualification criterion, etc would become more meaningful when more and more active traders are attracted to the business. 6.e. Existence of unofficial market: The grey/black market which existed outside the exchange premises during the ban on futures trading for over 30 years still continues to exist even inside the exchanges. It has been widely accepted and admitted by some of the CEOs/Secretaries of exchanges that at least 25 30 per cent trade in the exchanges go unreported. The unofficial market operating outside the official exchange is much larger. These unofficial traders find the margin, stamp duty and income tax requirements least encouraging to come to the official contract channels. 6.f. Multiplicity of exchanges: Currently twenty exchanges are operational of which three are specifically for conduc ing NTSD contracts and the remaining are in the trade of nearly 30 commodity items. Recently, five new exchanges have been approved and three of them are exclusively for futures contract in sugar. Many of these exchanges are set up as specialized ones for trading in one or a few commodities. The international experience shows that exchanges are only to provide a platform for trade in many commodities and different forms of contracts. The Chicago Mercantile Exchange started as an agricultural exchange, and now largely relies on trade in financial futures; while the New York Mercantile Exchange, now the worlds largest energy exchange, once traded butter and potatoes. If an exchange provides a well-organised trading system for certain commodities, with well-developed procedures, a good intermediary structure, and a sound clearing house, it can build on these strengths to introduce new products. 6.g. Controlled market: Price variability is an essential pre-condition for futures markets. Any distortion in the market mechanism where free play of supply and demand forces for commodities determines prices will dilute the variability of prices and potential risk. It is imperative that for a vibrant futures market commodity pricing must be left to market forces, without monopolistic or undue government control. However, in India many of the commodities in which futures trading is allowed have been still protected under ECA, 1955. There are also commodity based specialized government agencies like Cotton Corporation of India, NAFED, Jute Corporation of India, etc. which seek to control supplies of some farm products. 6.h. Regulation and self -regulation: Government has two important role to play: an oversight role by which the government disciplining those who try to manipulate the

markets for their own benefit, and ensuring the sanctity of contracts; and secondly, an enabling role by which the government providing the necessary legal and regulatory framework for the smooth functioning of the system. The regul atory intervention shoul be most active at the time of the establishment of the exchange and of contracts. If the contracts are well formulated, and delivery modalities provide effective line of defence against attempts at manipulation, government has to only act as a watchdog intervening only when necessary. The goal of regulatory agency is not only regulate but also to inculcate the culture of sel -regulation among the participants. This in turn, over a period of time, will give way for more self-regulation supported by the advisory role of state regulation. 7. Conclusions The present study has outlined the status of futures markets in agricultural commodities in the Indian context. A statistical analysis of the data on price discovery in a sample o f six commodities traded in four exchanges revealed that the futures market in those commodities are not efficient in the sense that the futures prices are not an unbiased predictor of the future ready rates. The difference between the futures prices and the future ready prices is an indication of inefficiency arising from the underdeveloped nature of the market. Many bottlenecks faced by this segment are common across exchanges. A review of the nature of institutional and policy level constraints facing this segmen calls for more focused and pragmatic approach from government, the regulator and the exchanges for making the agricultural futures markets a vibrant segment for risk management which can play an important role especially in an agriculture dom inated economy of India.

10

BIBLIOGRAPHY Commodity Futures Trading Commission ; Economic purposes of futures trading, Washington, 1997. Forward Markets Commission, Ministry of Food and Consumer Affairs, Government of India; Forward Contracts (Regulation) Act, 195 . Forward Markets Commission, Ministry of Food and Consumer Affairs, Government of India; Forward trading and Forward Markets Commission, 2000. Ministry of Food and Consumer Affairs, Government of India; Futures trading, commodity exchanges and Forward Markets Commission, New Delhi, 1999. Tomek, W G and Peterson, H H; Risk management in agricultural markets: A review, The Journal of Futures Markets, Vol. 21 (10), 2001, pp.953-985. United Nations Conference on Trade and Development, Feasibility study on a worldwide pepper futures contract, (UNCTAD/COM/64), October 1995. United Nations Conference on Trade and Development, Emerging commodity exchanges: From potential to success, (UNCTAD/ITCD/COM/4), February 1997. Youssef, Frida; Integrated report on commodity exchanges and Forward Market Commission, Report of the World Bank Project for the improvement of the commodities futures markets in India, 2000.

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Table 1: Profile of Commodity Futures Exchanges Exchange Active Member

2000 42 3 6 2 Kanpur Commodity Exchange, Kanpur. The East India Cotton Association, Mumbai. The Chamber of Commerce, Hapu 15 36 26 Coffee Futures Exch ange Ltd., Bangalore. Ahmedabad Commodity Exchange Ltd. The Rajkot Seeds Oil & Bullion Merchant Association Ltd National Board of Trade Ltd., Indor 5 38 12 9 8 17 36 34 5 36 8 5 7 21 26 4 55 9 2001 31 7 5 2 -

Commodity Traded
Pepper Pepper (intl.) Castor seed Castor oil RBD Palmol Mustard seed, oil and cake Cotton Potato Gur Coffee Castor seed Castor seed 1996-97 0.86 (765) 2.53 (279) 0.79 (29) 29.28 (1655) 54.84 (5981) 19.85 (2167) 40.71 (2281) 29.81 (1936) 2.45 (144) 8.51 (548) 41.38 (15604) 0.83 (149)

Volume in lakh tonnes (Value in Rs. Crore)

1997-98 1.56 (2834) 0.25 (30) 1.76 (56) 30.10 (2760) 68.76 (8006) 21.36 (2495) 44.06 (3429) 23.60 (1896) 3.25 (248) 28.60 (2231) 26.60 (7342) 0.81 (152) 1998-99 1.73 (3411) .007 (15) 0.11 (17) 0.02 (9) 0.09 (5) 23.85 (2162) 44.91 (6854) 16.77 (2562) 61.34 (9518) 20.41 (1813) 3.58 (304) 4.51 (383) 25.21 (5022) 2.43 (569) 0.01 (6) 1999-00 1.24 (2862) 0.40 (106) 0.9 (15) 0.04 (14) 0.35 (143) 0.22 (5) 23.79 (2236) 30.68 (5220) 16.35 (2811) 1.093 (261) 47.48 (4510) 21.88 (2263) 4.1 (389) 8.24 (787) 5.58 (1234) 0.003 (0.81) 0.0002 (0.03) 2000-01 1.29 (2580) 0.02 (5.6) 0.10 (14) 0.01 (5) 0.04 (9) 0.108 (14) 0.21 (139) 0.52 (14) 28.80 (2555) 0.50 (289) 24.73 (3469) 18.94 (2761) 32.56 (7874) 0.13 (31) 31.28 (2877) 21.24 (2060) 3.7 (311) 7.78 (668) 7.88 (1703) 0.0008 (0.22) 0.002 (0.21)

1999 India Pepper and Spice 55 Trade Association, Cochin. The Bombay Commodity Exchang Ltd., Mumbai. 8 3

48 4 35 16

51 35 15

Vijai Beopar Chamber Ltd., Muzaffarnaga Bhatinda Om Oil & Oilseeds Exchang Ltd Bhatinda The Meerut Agro Commodities Exchang Co. Ltd., Meerut The Rajdhani Oils and Oilseeds Exchang Ltd., Delhi. The East India Jute & Hessian Exchang Ltd., Calcutta. The Spices & Oilseeds Exchange Ltd., Sangli

40 16

Soy seed, oil & cake Mustard seed & Mustard oil Gur Gur

10

11

11

Gur

17

21

24

Gur

57 1 -

40 1 3

71 1 7

Sackin Hessia Turmeric

Source: Forward Markets Commission, Mumbai.

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Table 2: Testing the Unbiasedness Hypothesis

Commodity Contract (NOBS) June 1999 (117) Jan. 2000 (75) Dec. 1999 (51) Nov. 2000 (143) Dec. 2000 (142) June 2000 (126) Feb. 2000 (80) Cotton April 2000 (119) Sep. 2000 (114) Sep. 1999 (73) Castor Seed Sep. 2000 (78) June 2000 (60) Dec. 2000 (87) Feb. 2001 (64) Apr. 2001 (34)

0.04 (2.72)* -1.00 (-9.4)* -0.07 (-1.15) -0.59 (-10.92)* -0.23 (-1.22) -0.01 (-0.70) -0.17 (-16.37)* 0.08 (2.88)* 0.01 (1.05) 0.01 (2.47)* -0.12 (-2.73) -0.04 (-0.96) -0.04 (-1.14) -0.02 (-0.64) -0.02 (-1.14)


-0.05 (-0.46) 0.43 (2.56)* 0.33 (1.88)** 0.06 (0.51) 0.02 (0.17) -0.05 (-0.52) 0.34 (2.63)* 0.94 (29.29)* 0.55 (10.34)* 0.69 (10.03)* 0.13 (1.61) 0.64 (6.33)* 0.12 (1.76)*** 0.69 (5.98)* 0.10 (0.92)

Wald

D-W

Adj. R2

1
1.23 (13.75) 1.51 (13.01) 1.45 (11.71) 1.02 (68.97) 1.29 (16.21) 1.33 (16.10) 1.38 (12.11) 1.47 (18.36) 1.23 (13.70) 1.12 (9.83) 1.14 (10.28) 0.99 (45.12) 1.39 (14.35) 1.16 (9.47) 1.29 (8.04)

2
-0.27 (-2.98) -0.68 (-3.48) -0.47 (-3.77) -

3
-

Pepper

110.19 (0.00) 172.23 (0.00) 16.7 (0.00) 189.93 (0.00) 76.93 (0.00) 137.05 (0.00) 498.21 (0.00) 11.89 (0.003) 75.56 (0.00) 22.86 (0.00) 118.26 (0.00) 14.27 (0.00) 169.37 (0.00) 7.64 (0.02) 73.04 (0.00)

1.99

0.93

1.91

0.98

0.17 (1.42) -

1.85

0.96

1.47

0.99

1.51 2.00

0.99 0.94

-0.30 (-3.76) -0.38 (-4.59) -0.47 (-2.52) -0.49 (-6.14) -0.27 (-3.04) -0.23 (-1.97) -0.17 (-1.48) -

1.95

0.96

0.10 (1.84) -

1.72

0.97

1.72 1.92

0.97 0.96

1.40

0.96

1.68

0.88

1.41

0.99

-0.42 (-4.26) -0.19 (-1.54) -0.35 (-2.17)

1.98 1.96

0.97 0.91

13

Item

Contract (NOBS) Apr. 2001 (70) Apr 2000 (68) Oct.2000 (52)

-0.03 (-1.94)** 0.13 (8.78)* -0.06 (-1.64)*** -0.11 (-9.19)* -0.01 (-0.14) -0.03 (-3.32)* 0.03 (5.54)* 0.45 (16.26)* -0.03 (-1.97)** 0.19 (39.18)*


0.61 (9.73)* 0.76 (13.25)* 0.35 (3.15)* 0.62 (7.68)* 0.80 (7.69)* 0.93 (46.86)* 0.92 (26.06)* 0.92 (38.77)* 0.98 (38.87)* 0.99 (37.03)*

Wald

D-W

Adj. R2

1
1.30 (11.54) 1.03 (35.73) 1.38 (10.89) 0.73 (5.30) 1.31 (9.22) 1.06 (12.62) 0.86 (15.06) 1.02 (54.39) 0.94 (23.17) 1.41 (13.22)

2
-0.33 (-2.92) -0.40 (-3.15) 0.36 (1.86) -0.35 (-2.48) -0.15 (-1.80) -

3
-

Castor Oil

45.11 (0.00) 86.06 (0.00) 37.46 (0.00) 471.44 (0.00) 3.76 (0.15) 13.39 (0.00) 31.86 (0.00) 349.98 (0.00) 4.31 (0.12) 1784.4 (0.00)

2.20

0.95

1.71 1.45

0.99 0.98

Mustard Seed

Oct. 2000 (63) July 2000 (43)

1.48

0.92

-0.09 (-1.59) -

1.89

0.96

Gur

Dec. 1998 (136) Mar. 1999 (76) Dec. 1997 (132) Mar. 1998 (73) July 1997 (63)

1.93

0.99

1.83 2.37

0.98 0.99

1.72

0.99

1.73

0.99

-0.52 (-4.88)

The contract indicates the month and year in which the particular contract matures. One, two and three asterisks indicate level of confidence at one, five and ten percent. Wald is the Wald Chi-square test statistic with the corresponding p-values in parenthesis. D-W is the Durbin-Watson statistic. NOBS is the number of data points under each contract.
1
2 
3 are first, second and third order autoregression parameter estimates respectively with their t-statistic in parenthesis.

14