Impact of Futures Trading on Commodity Prices

Golaka C. Nath and T. LingareddyVice President and Deputy Manager

Research and Surveillance CCIL, Mumbai

Objective

• To study the impact of futures trading on agricultural commodity prices.

Methodology

• Simple percentage variations, correlations, • Granger Causality Test

• Linear Regression

dummyfoodgrainsallcommo

pulseschanauradurad

tt

ttt t

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654

3211

tktp

k kktp

k kt uXYY 110

tktp

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k kt XYX 110

Source: Market Review, FMC (www.fmc.gov.in), NCDEX, MCX

Trends in volumes

2005 2006 2007Q1Total Agri-com 100 Total Agri-com 100 Total Agri-com 100Guarseed 38.4 Gram 26.5 Gram 16.4

Gram 18.9 Guarseed 25.4 Jeera 15.6

Urad 12.1 Urad 11.3 Guarseed 14.6

Mentha Oil 2.2 Soy Oil 6.7 Pepper 13

Tur 2.7 Mentha Oil 4.9 Soy Oil 11.5

• Only three commodities have contributed for about 65 per cent of agril. volumes

• Gram and urad dominated the volumes among food grains in 2005 and 2006

Trends in prices & futures volumes

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urad gram Pulses gram vol urad vol

Descriptive Statistics Jan 2001- Aug 2007Variable N Mean Std Dev Minimum Maximumchurad 345 0.04989 2.07594 -7.89254 9.05657chgram 345 0.0732 1.28355 -6.16466 5.07658chpulses 345 0.08544 0.97699 -2.78082 4.77107chfood 345 0.06593 0.37391 -1.14091 1.60584chcommo 345 0.08639 0.20299 -0.45767 1.08874

  churad chgram chpulses chfood chcommoch urad 1ch gram 0.23* 1ch pulses 0.76* 0.61* 1ch food 0.37* 0.32* 0.47* 1ch commo 0.05 0.13* 0.16* 0.16* 1

ch: Indicates change; * Indicates significant at one per cent level

Correlation Coefficients of Price Changes

Results of regression for uradVariables Coefficient Std. Error t-Statistic Prob.

Significance

C -0.145 0.085 -1.709 0.088Urad (-1) -0.093 0.031 -3.006 0.003 *Gram -0.615 0.063 -9.793 0.000 *Pulses 2.076 0.088 23.563 0.000 *Food grains 0.218 0.193 1.130 0.259All-commodities -0.556 0.318 -1.749 0.081D-urad 0.278 0.136 2.041 0.042 **

   R-squared 0.688274Adjusted R-squared 0.682724 Durbin-Watson stat 2.187826n 345* and ** indicates significant at 1% and 5% level

Regression results for gram

Coefficients t- Statistic P-value Significance

Intercept -0.081 -1.112 0.267D-gram 0.112 1.116 0.265Gram(-1) 0.028 0.501 0.617pulses 1.331 16.047 0.000 *food 0.163 1.085 0.279All-commodities -0.084 -0.340 0.734urad -0.359 -9.671 0.000 *

R Square 0.526Adjusted R Square 0.512Observations 345

Granger causality results for price changesNull Hypothesis: F-Statistic Prob. Significance

CHPULSES does not Granger Cause CHGRAM 0.66079 0.6196

CHGRAM does not Granger Cause CHPULSES 2.72157 0.0296 **

CHURAD does not Granger Cause CHGRAM 1.36752 0.2449

CHGRAM does not Granger Cause CHURAD 4.07355 0.0031 *

CHURAD does not Granger Cause CHPULSES 2.53494 0.0401 **

CHPULSES does not Granger Cause CHURAD 5.42427 0.0003 *

Granger causality results for price volatilities

** and *** indicates significant at 5% and 10% level

Null Hypothesis: F-Statistic Prob. significance

VOLA_URAD does not Granger Cause VOLA_FOOD 2.4075 0.0923 ***

VOLA_FOOD does not Granger Cause VOLA_URAD 0.20121 0.8179

VOLA_PULSES does not Granger Cause VOLA_GRAM 1.56526 0.2112

VOLA_GRAM does not Granger Cause VOLA_PULSES 3.44068 0.0337 **

VOLA_URAD does not Granger Cause VOLA_PULSES 3.19125 0.0429 **

VOLA_PULSES does not Granger Cause VOLA_URAD 1.00275 0.3684

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VOLA_COMMO VOLA_FOODVOLA_GRAM VOLA_PULSESVOLA_URAD

Volatility of Prices (Jan 2003 - Aug 2007)

Volatilities in Prices

Urad Gram Pulses Food grains Commodities Average change in pricesP-I -0.168 -0.054 -0.012 0.023 0.093P-II 0.463 0.390 0.303 0.140 0.079P-III -0.296 -0.450 -0.211 0.026 0.073Standard DeviationP-I 1.716 1.226 0.827 0.389 0.202P-II 2.544 1.306 1.174 0.349 0.215P-III 1.756 1.284 0.784 0.336 0.157

Conclusions

• There was a significant increase in spot urad prices during the period of futures trading

• Although gram prices too have posted a moderate rise in the post-futures trading period, the impact was not found statistically significant.

• The average price increase and volatilities in urad, gram and total pulses have gone up during the period of futures trading

Thank you