1.

1 Introduction

Commodity futures exchanges have a long history in trading agricultural commodities in order to
reduce market risks across world economies. In India, though commodity futures trading existed
for decades, organised futures market commenced in 2003 with the introduction of national
commodity derivative exchanges such as Multi Commodity Exchange (MCX), National
Commodity Derivative Exchange (NCDEX) and National Multi Commodity Exchange (NMCE).
The introduction of new national commodity exchanges expanded futures trading in many of the
agricultural commodities in India. Futures trading in agricultural commodities have been
criticised for the influence of futures market on spot market prices of agricultural commodities in
India. This criticism was taken more seriously when inflation rates peaked on the back of hikes
in the prices of essential agricultural commodities in India. Actual benefits to the commodity
stakeholders particularly farmers from the futures market and the role of futures market in
influencing spot market prices were debated (Expert Committee, 2008). Existing studies on
commodity futures trading in India have largely addressed the performance of futures market and
the impact of futures market on spot.In this background, the present study tries to address
questions related to price discovery and relationship between futures and spot market prices of
select agricultural commodities and the barriers to stakeholders’ effective participation in
commodity futures market of rubber and pepper. The detailed background of the study and
objectives are discussed in the next section.

This chapter is organised as follows. The detailed background of the study is given in the second
section. The third section reviews literature on different aspects of commodity futures trading in
India. Research gaps in literature are identified in the fourth section. The fifth section explains
the analytical framework used in the study followed by the objectives of the study presented in
the sixth section. The details of data and methods used in the study are explained in the seventh
section. The final section organises the thesis.

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Background of the Study

Agricultural development and farmers’ welfare have been a major concern of government
policies in most developing countries. This has become a serious concern especially after the
economic reforms pursued in most countries often had adverse impacts on the economy
particularly on the agriculture sector. One such effect was the increasing instability of
agricultural commodity prices, which mainly affected commodity producers of developing and
less developed countries. The major questions addressed by earlier studies in this context include
how the agriculture market has changed in the process of globalization and how small and
marginal farmers manage risks and uncertainties produced by these developments. It is the small
growers who face output and price risks due to imbalances between demand and supply and the
changes in economic policies across the world. The small scale farmers are disadvantaged by the
emerging centralized and globalised marketing systems as they lack the capital and organization
that the system demands.They find it difficult to meet volume and quality demands and often
they are far from the markets they need to access and therefore relatively voiceless.

Agricultural commodity prices have been subject to long term cycles as well as short term booms
and bursts. Prices of all major agricultural crops have exhibited extreme price volatility since
mid-2007, rising to record levels in early 2008. The highly volatile agricultural output price is
mainly influenced by international market trends rather than domestic output. Price volatility has
direct influence on production, supply, farmers’ income and food security. High commodity
prices push farm income to increase and lead to high food price inflation while low commodity
price plummet farm income and consumers get commodities at cheaper rates.

Volatile prices increase risks and costs associated with production and trading. For some crops
(particularly for wheat and rice), the price increase is likely to be relatively short term in nature
and is due to weather related crop shortfalls in major producing countries. Cash crops (such as
cotton and sugar) have experienced long term price fluctuations, mainly due to periodic supply
shortages in the producing countries and high demand from consuming countries. It was found
that inter year price variability is lower in the domestic markets than in international markets and
the intra-year variability is higher in the domestic market than in the international markets for
commodities like rice, sugar, wheat, groundnut oil, coconut oil and cotton

2
Role of Speculation

From the above discussion on financialisation of commodity markets, it is understood that a

majority of the investors do not base their trading on the fundamentals of demand and supply of
primary commodities. This leads to price distortion in the commodity market by transferring
price risks from futures market to spot market and vice versa. By doing so, large financial
investors and traders try to make profit from price distortions. This further leads to increase in
speculation in commodity trading by anticipating a profitable price at a future date (Wahl, 2009).
This section reviews some of the studies related to speculation in the commodity trading and its
impacts on spot markets. There are two sets of arguments on commodity market speculation in
the literature. The first set of literature argues that speculative activities destabilize commodity
prices and the other literature makes a case for being speculation essential for smooth
functioning of futures trading. Newman (2009) argued that increased speculative activities by
both spot and futures market actors on futures market have led to heightened volatility in futures
market prices. Moreover, short term fluctuations in futures market prices are increasingly
transmitted to spot markets owing to the increase in participation of spot market actors on futures
markets for hedging purposes. This results in determination of spot market prices by the futures
market prices (ibid). The rise of a new class of speculators has however increased the overall
market participation, which may disrupt traditional spot-futures market convergence and can lead
to price distortions.

Mild speculation in agricultural commodity markets is based on market fundamentals of

commodity demand and supply. It is conventionally thought that such speculation reduces price
volatility, as speculators provide a market for hedgers, because they buy when the price is low
and sell when the price is high, thus evening out extremes of prices (ibid). Another form of
speculation is based on market momentum which is described as ‘herding behavior’ in times of
strong (usually upward) price trends, which in developed and easily accessible markets can result
in the emergence of speculative bubbles. Far from providing a stabilizing hand, such speculation
tends to increase price volatility. Such momentum-based speculation may have been the main
cause for the recent food price crisis. Conventional theory has tended to dismiss problems of
financial speculation using Friedman’s (1953) argument that ‘speculation is stabilizing’.
According to Friedman, market prices are set on the basis of economic fundamentals. When
price diverge from those fundamentals it creates a profitable opportunity. Speculators then step
3
in and buy or sell, driving prices back to the level warranted by fundamentals. The rational
expectations theory acknowledges that market participants can rationally participate in bubbles
if they have expectations of rising prices while the noise trader6 literature initiated by DeLong
(1999) argues that risk neutral speculators who trade purely on speculation can generate market
inefficiency if other traders are risk hesitant. Forward and futures trading were largely promoted
to help the traders to deal with market uncertainty by hedging their transactions and stabilizing
prices for the final producers (Newman, 2009). However, the surge in futures trading could not
be explained solely by hedging requirements and suggestive of a possible increase in speculative
activity.

The speculative and distortionary effect of commodity futures market on the spot market price
discovery was discussed at length in the Indian context as well. In spite of increased amounts of
capital flowing into the commodity futures exchanges, the role of futures market participants in
forming or distorting spot market prices of the underlying commodities needs to be studied
(Kumar, 2012). Increasing speculative activity in futures markets i.e., large percentage of market
participants has no intent of taking futures contracts to delivery, causes price volatility and
setting prices of commodities as an asset (Expert Committee, 2008; Sahadevan, 2008;
UNCTAD, 2012). Speculators can therefore create a price distortion and push a speculative
bubble by anticipating significant profits from major movements in the markets (ibid). Persistent
inflationary pressures in global commodity prices in the recent past have sparked a debate over
its origin and speculation in commodity markets being singled out as the primary factor behind
rising prices, even leading to a demand for a ban on futures trading for several important
commodities in India (Expert Committee, 2008).

From this review we can conclude that speculation may have both stabilizing and destabilizing
effects on commodity markets. However, a majority of the research undertaken tend to show that
excessive speculation in commodity market deteriorates commodity prices in the spot market.
With this, we move onto the next section to discuss literature on commodity futures trading in
the Indian context. The focus is on price discovery and risk management role of futures trading,
effect of futures market on spot markets and participation of commodity stakeholders in the
commodity futures market.

4
Commodity Futures Trading

The various measures introduced by the Government of India to curb price instability faced by
producers in the country include price stabilization fund, minimum support prices, crop
insurances and calamity relief funds. The reach of these schemes to the needy in a post-reform
regime with a larger role for the market in determining commodity prices is important. Apart
from price stabilization schemes, a number of market instruments were encouraged to curb
instability in commodity prices. Commodity future market is one such mechanism by which the
commodity producers and traders can reduce their price risks. India has a very long history of
commodity futures trading which began in 1857 with a formal futures contract setup in Cotton.
At present, commodity futures exchanges are large in number, trading both in agricultural and
nonagricultural commodities. As mentioned previously, available studies in the Indian context
are largely focused on the impact, performance and efficiency of futures markets on spot market
prices of agricultural commodities. Among these, many of the studies compared spot market
volatility before and after the introduction of futures trading while some of them investigated the
impact of futures market activities on spot market prices. In the following sections, we elaborate
upon literature on price discovery and risk management functions of futures market, volatility in
futures and spot market prices and participation in the futures market.

1.3.3.1Price Discovery and Risk Management

Price discovery and risk management are the two major economic functions of a commodity
futures market. Efficient price discovery and risk management have great importance in the
growing inter linkage between the futures and spot market. It is essential for a country like India
to protect the interests of domestic farmers, traders and other intermediaries from increasing
market risks. Commodity exchanges play a vital role in price discovery, stabilization and
hedging risks involved in commodity trading Both the futures and spot markets contribute to
price discovery by transferring information from one market to other and reducing spot market
volatility by hedging prices The price discovery and price risk management mechanisms of
commodity futures market are given in the charts below (chart 1.1 and chart 1.2).

5
 Chart 1.1 Price Discovery Process

Source: UNCTAD (2009), Page Number 15

Chart below (chart 1.2) explains the functions, benefits, impacts on farmers and other impacts of
price risk management of commodity futures market.

6
 Chart 1.2 Price Discovery Process

Source: UNCTAD (2009), Page Number 19

Price discovery refers to the mechanism through which prices come to reflect known information
about the market. The price level established in the open market can therefore represent an
accurate depiction of the prevailing supply or demand situation in the underlying commodity
markets, whether in the spot market for current deliveries or in the forward or futures markets for
deliveries at specified future occasions The benefits of price discovery can be categorized as
those arising from a more efficient price formation process and those arising from supply of
more accurate market information. The former refers to those benefits arising from the proper
alignment of supply and demand, ensuring that the market pricing signal triggers efficient
production, purchasing and investment decisions by participants in the sector. The latter refers to
those benefits arising from publication and dissemination of market information, with the
resulting price transparency providing a readily available, authoritative and neutral price
reference to sector participants (UNCTAD, 2009).

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The essence of price discovery is to establish a competitive reference (futures market) price from
which the spot market price can be derived and hinges on whether information is reflected first in
changed futures market price or in changed spot market price. The futures market price serves as
the market’s expectation of subsequent spot market price (Zapata et.al, 2005). The significance
of price discovery depends upon a close relationship between futures and spot market prices. The
extent to which futures market performs this function well can be measured from the temporal
relation between futures and spot market prices (UNCTAD, 2002). If information is reflected
first in futures market price and subsequently in spot market price, futures market price leads to
spot market price, indicating that futures market performs the price discovery function (Karande,
2006). Price discovery is studied in a futures market and its corresponding spot market is known
as price discovery within a market. If a commodity has more than one futures market then we
have price discovery across market. The price discovery expected from futures trading should
ideally lead to better utilization of available information regarding how supply and demand
conditions are likely to evolve; and arbitrage, through speculation and hedging, should ideally
affect spot market prices only to the extent of bringing these in line with evolving fundamentals
and the cost of holding physical stocks

Futures Market and Spot Market Price Volatility

It is argued in literature that commodity futures market is the cause for increasing volatility in
spot market prices. The existing views on the effect of futures market on spot market prices are
much contested. As we mentioned already there are two sets of arguments on this. The First set
of literature argues that futures market stabilizes the spot market prices (Singh, 2004; Ranjan,
2005; Karande, 2006), While the second set argues the opposite effects (Nath and Lingareddy,
2008; Coble and Knight, 2001; Yang and Leatham, 2005). Kamara (1982) compared spot market
volatility before and after the introduction of futures trading and found out that the introduction
of commodity futures trading has reduced spot market price volatility. Similarly, Singh (2004)
investigated the Hessian cash (spot) price variability before and after the introduction of futures
trading (1988-1997) using the multiplicative dummy variable model and concluded that futures
trading has reduced the price volatility in the Hessian cash market. On the other hand, Yang
(2005) examined the lead-lag relationship between futures trading activities and cash price

8
volatility for major agricultural commodities. Granger causality tests and generalized forecast
error variance decompositions have shown that an unexpected and unidirectional increase in
futures trading volume drove cash price volatility up. However, Ranjan (2005) analyzed the
implications of soy oil futures in the Indian markets using simple volatility measures and
concluded that futures trading was effective in reducing seasonal price volatility but did not bring
down daily price volatility significantly. Sahi (2006) studied the impact of futures contracts on
price volatility of some agricultural commodities in India. The empirical result suggested that the
nature of volatility did not change with the introduction of futures trading in wheat, turmeric,
sugar, cotton, raw jute and soy oil. Nevertheless, a weak destabilizing effect of futures market on
spot price was found in case of wheat and raw jute. Further, results of granger causality tests
indicated that unexpected increase in futures market activity in terms of rise in volume and open
interest has caused increase in cash price volatility in all the commodities under study (ibid).

However, views on the spot and futures market price volatility and integration of the two markets
are much contested. It is also believed that spot market prices of agricultural commodities have
become more volatile with the advent of futures trading in the country. Sabnavis and Jain (2007)
in their empirical study showed that price volatility decreased after the introduction of futures
trading in the case of wheat, sugar, chana and maize. Bhardwaj and Vasisht (2009) in their
empirical study investigated the integration of futures and spot markets of gram. The co-
integration technique and Granger causality tests were used to examine the integration of spot
and futures markets and the lead lag relationship between the two markets respectively. The
results have shown that the price series of gram crop witnessed persistent price volatility both in
spot and futures markets. The effect of the introduction of futures trading on spot market prices
of pulses has shown that volatility in urad, gram and wheat prices was higher during the period
of futures trading than the period prior to introduction and after the ban of futures contracts (Nath
and Lingareddy, 2008). Another empirical study by Kumar et.al, (2009) examined price
discovery and volatility spillovers in Indian commodity spot and futures markets using four
futures and spot market indices of Multi Commodity Exchange (MCX). The study shows that
commodity futures like agriculture future price index, energy futures price index and aggregate
commodity index effectively serve the price discovery function in the spot market, implying that
there is a flow of information from futures to spot commodity markets but the reverse causality

9
does not exist while there is no co- integrating relationship between metal futures price index and
metal spot price index.

Futures Market Participation

The commodity market needs many participants with different investment objectives and risk
profiles. This allows the market to function effectively. The participants play different roles in
the market by using the commodity futures contract.

As a commodity market participant, you could take up one of three roles: hedger, speculator, and
arbitrageur.

Hedgers: 

Hedgers are commercial producers or consumers of a traded commodity. Examples are copper
smelters, oil companies, farmers, and jewellers. Hedgers are exposed to commodity price
volatility in the spot market. They use the futures market to offset (hedge) this risk. Suppose gold
prices are unstable. A jeweller would want to offset a possible risk of loss on his monthly gold
purchases due to this volatility. If he expects the price to rise next month, he could go long on
(buy) a gold futures contract with a one-month expiry period. The contract will let him buy gold
at the current price even if the prices rise in a month. But, if the prices fall during this time, he
will not profit from it. That is because he still has to buy gold at the price specified in his futures
contract.

Speculators:

Speculators may not have any exposure to the spot market. To them, commodity futures are an
investment avenue, like the stock market. They try to make money by speculating on commodity
prices, just as they would by speculating on stock prices. As such, speculators never receive
delivery of the physical commodity. They take a position in commodity futures and square it off
before expiry. This means, they settle by buying or selling a contract that is exactly the opposite
of the contract they currently hold. This only involves payment in cash and no delivery of the
underlying commodities.

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Arbitrageurs:

Arbitrageurs try to profit from the difference in the prices of the same commodity in two
different markets. They take a long position (buy) in the market where the price is lower and a
short position (sell) in the market where it is higher. The difference between the two prices is
their profit. Arbitrage transactions are usually risk-free. Constant arbitrage reduces the price in
the market where it is higher and increases it in the market where it is lower. Arbitrage stops
when prices become similar in both markets.

Their varying preference for risk and return distinguishes market participants from each other.
The different categories of participants respond differently to a market development because of
their differing risk-return preferences. These differing responses determine how the market price
of a commodity will move.

Literature review
Rohit and Varsha;( August 2014) Indian commodity market- A performance review, In this
study they discussed the evolution and performance of the market, its status and the future
prospect of commodity market. They conducted a study using National Commodity and
Derivative Exchange limited (NCDEX), and Multi Commodity Derivative Exchange of India
(MCX), and National Multi Commodity Exchange of India (NMCE). and reported the annual
growth of commodity from 2006 to 2011 and traded volume and traded value in the commodity
future market and they also examine the performance of the commodity exchanges and currency
derivative from 2006 to 2011.they evaluated the different commodities like agriculture Bullions,
metal, energy and other commodities and they have given the clear picture and figures of the
commodity market by using various graphs .till2011-12.

Raveendarnaik (2016), ‘The Major Issues in Development of Commodity Derivatives Market

in India. In this study he depicts the history of the commodity Markets and various initiative
taken by the government of India for commodity market (FMC-Forward Market Commission
along with RBI) initiative like awareness programme for the farmerand awareness program for
the stakeholders’etc. Andgives the clear pictureabout the various challenges (like legal
challenges, regulatory challenges, infrastructural challenges, awareness among the investor and

11
producer and other challenges related to trading) faced by Indian commodity market also
represent the sector wise commodity market development.

Sushismita Bose(2008), commodity future market in India-A study of trends in National Multi-
Commodity indices; examines some characteristics of Indian commodity futures in order to
judge whether the prices fulfil the efficient functions of the markets or not. She analyses this
issue by applying different methods such as correlation, co-integration and causality and using
the price indices from the MCX and the NCDEX from June 2005 to September 2007. The results
show that the multi-commodity futures indices help to reduce volatility in the spot prices of
corresponding commodities and provide for effective hedging of price risk, while the agricultural
indices do not exhibit these features clearly.

Jain, Brain, David(2005), Futures Trading Activity and Commodity Cash Price Volatility- This
paper they examines the lead-lag relationship between futures trading activity (volume and open
interest) and cash price volatility for major agricultural commodities. They used Granger
causality tests and generalized forecaster or variance decompositions show that an unexpected
increase in futures trading volume unidirectional causes an increase in cash price volatility
foremost commodities. Likewise, there is a weak causal feedback between open interest and cash
price volatility.

Pravakar and RajivKumar(2009) has evaluated that trading in commodity derivatives on

exchange platform is an instrument to achieve price discovery, better price risk management
besides helping macro economy with better resource allocation. He examine the efficiency and
futures trading price for 5 top selected commodities namely gold, copper, petroleum crude, soya
oil and Chana in commodity futures market in India. He suggests that commodity futures market
is efficient for all 5 commodities. Further he has not supported that futures market leads to higher
inflation due to lack of evidence.

Nissar and DevajitMahanta(2012)-Indian Commodity Derivatives Market and Price Inflation.

In this study they have given an introduction about the derivative market in India and their value
and volume of trade in the commodity derivative exchanges in India. They conducted T-test with
different sample size to know the effect of futures prices on spot prices for different commodities
like gold, soybean oil and wheat etc. By using MCX future trading contracts. Test reveals that

12
the effect of futures prices on spot prices of different commodities differs which implies that
there is no uniform impact of commodity derivatives trading on the spot prices of the wide
assortment of commodities that are traded.

Kedarnath Mukherjee (2008), Impact of futures trading on the Indian agricultural commodity
market. In this study they analysed the role, history of derivatives in commodity market and
current scenario of the commodity derivative. In this an attempt has been made to validate the
market perceptions of different bodies on the usefulness and suitability of futures contract in
developing the underlying agricultural commodity market in agricultural based Indian economy.
They conducted many test such as Multiple Regression, Vector Auto Regression(VaR), Granger
Causality Test, GARCH model, etc. by using The daily price information in spot and futures
markets, for a period of 7 years (2004 – 2010), for 9 major agricultural commodities taken from
different categories (Spices, Pulses, Cereals, Oil and Oil Seeds, and Others) is extracted from
NCDEX data. And found that there is no significant change in spot prices post futures period in
essential commodities, but a comparative advantage found through causality analysis proves that
bidirectional relation exists between futures and spot market through flow of information. Given
the above perspective of commodity futures.

Shaik Masood and Satyanarayana (2016), -Performance of a commodity derivative market in

India. In this study they the growth, trends and prospects of commodity derivative market in
India The data analysed by using the relevant statistical tools. To estimate the trend, least square
method is applied; t-test is employed to examine the significance in the means of estimated and
actual trend; F-test test applied to find the significance in the variance between estimated and
actual values in series and chi square test is employed to examine dependency of the
performance growth of the market on the Indian commodities market.

Brajesh Kumar, Ajay Pandey (2016)-Role of Indian Commodity Derivatives Market in

Hedging Price Risk: Estimation of Constant and Dynamic Hedge Ratio, and Hedging
Effectiveness. In this study they examines hedging effectiveness of four agricultural (Soybean,
Corn, Castor seed and Guar seed) and seven non-agricultural (Gold, Silver, Aluminium, Copper,
Zinc, Crude oil and Natural gas) futures contracts traded in India. In this they applied VECM and
CCC-MGARCH model to estimate constant hedge ratio and dynamic hedge ratios respectively.

13
They find that agricultural futures contracts provide higher hedging effectiveness (30-70%) as
compared to non-agricultural futures (20%). The results are similar for whether hedging is done
using constant hedge ratio or dynamic hedge ratios. It is found that the near month futures
provide higher hedging effectiveness than next to near month futures. also find that the hedging
role of Indian commodity futures markets has increased in the recent period with increased
activity in the market. Hedging effectiveness increases dramatically which indicate the fact that
Indian futures contracts are more effective for hedging exposures to global prices.

HariKumar and Manoj (2017) - Commodity Derivatives Market in India; Evolution,

Development and Growth- In this study they have studied the Evolution and Growth of
Commodity Derivatives and they have given clear picture about the History and Evolution
Commodity Derivative Trading in India, from 1875 when the Bombay Cotton Trade Association
was established to till 2017-introduction of option trading in commodities.

Rajamohan and vijayakumar (2014)- Commodity Futures Market in India; In this study
they depicts the clear picture about commodity future market in India and structure of Indian
commodity derivatives and they also stated the turnover of top exchanges like (MCX) Multi
Commodity Exchange, (NCDEX) national commodity and derivatives exchange ltd, AND
National multi commodity Exchange (NMCE)

Bhagwat and Deepak; (2015)-Commodity Futures market in India: Development,

Regulation and Current Scenario; In This study they summarise the theoretical and empirical
research on the growth and current scenario of commodity market and the resulting implications
of policies and regulation. And they have also given comparative development of commodity,
stock and commodity future trading.

Sunitha Ravi (2013) in his research paper ‘price discovery and volatility spill over
Indiancommodity futures market using selected commodities’-investigated the results of the
research. Study indicates that the future market of commodities is more efficient as compared to
spot market. The future market also helps spot market in the process of price discovery. They
found that derivative instruments are available for the underlying commodities significantly
influence the volatility.

14
Thanushree Sharma(2015) - An Empirical Analysis of Commodity Futures Market in
India-The present study attempts to investigate long and short run causality between spot price and
future prices of selected agricultural commodities of NCDEX in India.The data looks at the spot and
futuredaily closing prices of chana,Soyabean,soyarefined,Guargum,Potato and Pepper. They found
strong evidence of co-integration between the daily spot and one-month futures commodity prices of
chana, soyabean,soya oil and pepper. But not found any correlation between guargum and potatofuture
and spot price. After identifying single co integration vector between spot and future prices of the

selected agricultural commodity, the Vector Error Correction Model (VECM) was employed to
examine the causal nexus between future and spot market of the selected agricultural
commodity.. This is consistent with market efficiency. Finally, VECM model and Wald test are
used to measure long run as well as short run causality among these four commodities .The
evidence shows that future leads to spot in case of soya bean and soya oil. Where as in case of
chana and pepper they find bi-directional relationship.

Mallikarjunappa and Afsal (2010)-price discovery process and volatility spillover in spot
and future market; Evidence of individual stocks; In this study they found no significant
leading or lagging effects in either spot or futures markets with respect to top twelve individual
stocks. There exists a contemporaneous and bi-directional lead-lag relationship between the spot
and the futures markets. As against the widely accepted hypothesis of futures market, with its
cost and hedging advantages, leading the spot market, Indian futures market fails to supply early
information to spot market.

Bhagwat and Deepak (2012) -A historical background of Indian commodity market- In this
study depicts the historical background of commodity market in India. The study evaluates the
extent to which commodity policies and regulatory framework with the current pace of growth,
India would emerge as a major player in the international market in terms of commodity
consumption, production and trade. This study also attempts to discuss the types of commodities
traded , regulation and policy developments, trend and growth of commodity market.

Sivarethinamohan and Aranganathan(2013) in this paper “A Study on Investors

Preference in Indian Commodities Market”. finally the research conclude with investment
behaviour of investors and their attitude towards commodities market investments, that is the
different respondents consider the different factors to take their investment decisions particularly

15
in commodities market investments, because it is having more both risk and return factors, if the
company advice the make the respondents to know the long benefits, they will also turn their
eyes on commodities market. They found that particularly the Bullions have more value and
being traded in huge volume per day.

Brajesh Kumar and Ajay Pandey(2011)International linkages of the Indian Commodity

Futures Markets-In this study the author investigates the cross market linkages of Indian
commodity futures for nine commodities with futures markets outside India. These commodities
range from highly tradable commodities to less tradable agricultural commodities. In this they
analyse the cross market linkages in terms of return and volatility spill overs. The nine
commodities consist of two agricultural commodities: Soybean, and Corn, three metals:
Aluminium, Copper and Zinc, two precious metals: Gold and Silver, and two energy
commodities: Crude oil and Natural gas. Return spillover is investigated through Johansen’s co-
integration test, error correction model, Granger causality test and variance decomposition
techniques. They apply Bivariate GARCH model (BEKK) to investigate volatility spill over
between India and other World markets. They find that futures prices of agricultural
commodities traded at National Commodity Derivatives Exchange, India (NCDEX) and Chicago
Board of Trade (CBOT), prices of precious metals traded at Multi Commodity Exchange, India
(MCX) and NYMEX, prices of industrial metals traded at MCX and the London Metal Exchange
(LME) and prices of energy commodities traded at MCX and NYMEX are co-integrated. In case
of commodities, it is found that world markets have bigger (unidirectional) impact on Indian
markets. In bivariate model, we found bi-directional return spillover between MCX and LME
markets. However, effect of LME on MCX is stronger than the effect of MCX on LME. Results
of return and volatility spillovers indicate that the Indian commodity futures markets function as
a satellite market and assimilate information from the world market.

Hussain Yaganti and Kamaiah(2012)- Hedging Efficiency of Commodity Futures Markets

in India

This study investigates the hedging effectiveness of commodity futures contracts for spices and
base metals by using co-integration and error correction methodology with different maturity
time horizons varying from one month to three months, i.e., maturity month, nearby month and
far month. The optimal hedge ratios are calculated from Ordinary Least Squares (OLS)

16
regression and Error Correction Model (ECM). It is found that the futures market dominates in
price discovery in nearby month contracts. In far month contracts, there is no long-term
relationship between spot and futures prices for turmeric and cardamom. In case of base metals,
futures market leads spot market for all the three contracts. This study supports that futures price
representing the collective market opinion is considered as reference price for spot market
players like traders, farmers and other stakeholders in commodity trading domain. Hedging
effectiveness is also measured at various maturity periods. The results suggested that only 40%
of contracts are suitable for hedging. It is generally found that there is no significant difference in
hedging performance between far month and nearby month maturity periods for spices, while in
the case of base metals slight variation is seen in hedging performance among different maturity
periods.

Venkateswari and Karthikeyan,(2017)-Investor’s behaviour towards Commodity Market:

with the Special Reference to Salem; This study evaluates the investor’s behaviour towards the
factors influencing while selecting commodity trading, goals of investors, investors contribution
to commodity trading and risk factors. For this study a sample of 100 respondents is taken In
general, the study reveals that market risk is the prime threat. Hence, the investors shall diversify
their investment options in the commodity market.

Gaps in Literature

Existing studies on commodity futures trading have brought out the conceptual and
methodological problems in analyzing the effect of futures market on spot market prices. The
review of studies on futures trading in agricultural commodities in India emphasized the need for
crop specific analysis to understand the structure and mechanisms through which futures markets
function and their influence on spot market. This is imperative provided that each crop has its
own differences and similarities in terms of integration of market with the rest of the world,
seasonality in demand and supply, trends in domestic and international prices, production
conditions, government interventions and farmers conditions. Though, there is much debate on
the impact of futures trading on soaring agricultural commodity prices, there is less empirical
evidence on this. This is because of lack of detailed data to study the structure and mechanisms

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through which futures market affects spot market and the participation of different spot market
stakeholders in futures market and their role in spot market.

As our review shows, analyses of the participation and experiences of farmers and traders on the
futures markets are available only for few crops i.e., soybean, mentha oil and potato in the Indian
context. In this study we try to analyze farmers’ and traders’ participation and their experiences
in the futures markets of Cardamom. The details of selection of crops are discussed in the data
and method section.

Statement of the problem:

Majority of the studies concentrated the future trading on the Bullions and Base Metals
commodities like Gold, Silver, Iron& Steel, Copper, Zinc, and Nickel etc., so for this study I am
considering precious agricultural commodity i.e., Cardamom. Most of the respondents are
interested in equity investment other than alternatives investments because they feel investing in
equity will provide more returns to them 82% of investors are aware about commodity future
market, 67% of investors have not invested as they have a perception that it is risky and they
even do not have much knowledge about trading mechanism . so many people not invested in
gold and silver because of dollar depreciation/ appreciation, increase in the money supply and
inflation.

Research Methodology

Research Methodology may be defined as the study of steps and process involved in the

various activities of the project. The methodology indicates the various forms with adequate data

could be collected for the successful completion of the project.

The data collection is completely based on secondary data i.e, data published through

journals, articles, and websites. Majority of data are collected through MCX, NCDEX and SEBI

(statistical handbook 2017).

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 The data are evaluated using Linear regressing with the help of IBM’s SPSS statistical

tool

Objective of the Study

 To understand the overview of Indian commodity market.

 To understand the relationship between spot price and future price.

 To analyze market trend in cardamom commodity futures.

LIMITATIONS OF THE STUDY:

Some of the major limitations of this study are as follows.

 This study is limited to Agricultural commodity products

 We are considering only cardamom futures commodity

 Time is also a important factor for not considering other commodity products

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