1. Indira Gandhi National Open University (IGNOU)
Interrelation of Futures and Spot Market: A Study of Wheat and Urd Market
P.K. Jain and B.S. Hansra
School of Agriculture
Indira Gandhi National Open University (IGNOU)
New Delhi

2. Agricultural Economy
The agricultural sector dominant in terms of providing livelihood security to majority of people in the country.
Prices of agricultural commodities affects the agricultural production.
Stable and assured prices have a positive impact on production.
Agricultural prices have always been major concern of the producer-farmers as well as the consumers.
Agricultural prices should be remunerative to agriculturists yet non-inflationary for the other sectors
Agricultural production unlike others have an added risk.

3. Concerns Seasonality in production; Year round consumption
Fragmented rural markets,
Large number of middlemen
Instability and volatility of commodity prices-producers, consumers
Distress sale - Reducing potential gains
To cope up with this problem- measures initiated
Cooperative marketing societies
Minimum support / procurement prices,
Crop insurance
Futures trading - Risk shifting Function (Lock-in-prices)

4. Role of Futures and forward market
Insulate buyers and sellers from unexpected change in future price
Lock in the prices of the products well in advance
Indication to the producers and consumers about likely future ready price and demand and supply conditions - Price Discovery
Continuous process of arriving at a price figure at which a person buys and another sells a futures contract for a specific expiry date

5. Commodity Transactions
Cash/Spot Contract
Agreement for ready transaction of an asset through private negotiation
Spot physical delivery and cash settlement (Within 11 days)
Demand-Supply imbalance
Forward Contract
OTC agreement for transaction of specific asset for future date at pre-determined price (Physical delivery essential )
Risk mitigation tool for future demand
Holders face spot price risk
May expose to ‘default risk’ or ‘counter-party risk’
Futures Contract
Redefined version of forward- traded on the platform - organized exchanges
Tool for protecting against risk of price fluctuations in ready market
Physical delivery and/or cash settlement
Prices are freely and competitively derived

6. Role of commodity exchanges
Providing platform for trade
Efficient price discovery
Development of contract specifications
Fixation of quality specification of commodities
Price dissemination to ensure that farmers can view them
Provision of delivery platform
Warehousing logistics
Quality assurance
Insure fare trading through rules and regulation of exchange

7. Commodity Futures in India
Bombay Cotton Trade Association Ltd (Cotton)
Gujajrati Vyapari Mandali (Oilseeds)
Calcutta Hessian Exchange Ltd (Raw jute)
East India Jute Association Ltd (Raw jute)
East India Cotton Association, Mumbai -1921(Cotton)
Hapur, Muzaffarnagar, Bhatinda Exchanges– Before 1942 (Wheat)
IPSTA in Cochin-1957 (Spices)
Mumbai Bullion Association- Till mid 50s (Gold & Silver)
However, the government withdrew the ban on futures with passage of Forward Contract (Regulation) Act in 1952.
Futures trade was altogether banned by the government in 1966
Khusro Committee (1980) recommended reintroduction of futures in cotton, jute, potatoes, etc.
Kabra Committee (1994) recommended reintroduction of futures in many more commodities including silver.
National Agricultural Policy(2000) proposed to enlarge the coverage of futures markets
Establishment of multi commodity exchanges and start of online futures trading (2003)

8. Issues emerges functioning of futures market,
role and impact of futures market on general economy.
Some opine that futures trading are responsible for inflationary trend in prices.
Others section arguing that futures market is efficiently discovering right market prices.
Other opines that it is good provided the farmers should be benefited.
Some are ready to accept the futures trading provided only genuine users of commodity participated and the speculator should be given out.
With this divided opinion govt banned the futures trading in two pulses, and cereals in January and February, 2007.

9. Issues to be addressed…
Is futures trading facilitate hedging against price risk?
Are futures markets guided by ready market or vice versa?
Are these markets efficient enough to stabilize spot price?
How much efficient is the price discovery mechanism?
Role of futures trading in price rising
Impact of futures trading on farmers economy
Reasons of less farmers participation of in futures trading
Consumers and futures trading
Futures trading as balancing bridge between producer and consumer
Is future trading plays its positive role in a situation of short supply (mis-match in demand and supply)

10. Objectives of the study
Keeping above issues, the proposed research papers aims to cover mainly two areas:
Variability and integration of futures and spot market and
Movement in prices of agricultural commodities in the market during and after banning of futures trading.

11. Methodology Crops Market Data
One cereal crop- Wheat
One pulse crop- Urd
Market
Cash markets
One major market for wheat
One major market for Urd
Futures market- NCDEX
Data
Time series data on daily prices, arrivals and trading volume in futures and spot market.

12. Analytical framework
Times series analysis
Stationarity (Mean, variance and auto-covariance remain same)
Spurious and nonsense regression
Stationarity test- Augmented Dickey Fuller unit root test
Where
is a vector to be tested for co-integration
t is time or trend variable
The null hypothesis that =0; that is, there is unit root – the time series is non-stationary. The alternative hypothesis is that is less than zero; that is the time series is stationary. If null hypothesis is rejected it means that series is stationary.

13. Analytical framework- Contd…
Co-integration test- Augmented Engle–Gragner test (AEG)
Where
is the spot prices crop,
is the futures price series. residual
(residual) is the cointegration vector.
the ADF test is used to test for a unit root in the cointegration vector or residual (for spot price series).
For Spot price series where
is stationary the spot price and futures price series are co-integrated

14. Analytical framework- Contd…
Graphical presentation
Growth rates
Standard Deviation
Ratio of standard deviation
Coefficient of variation
Correlation and Regression analysis

15. Thanks