Overview of Futures Trading in Agricultural Commodities: A Conceptual Perspective

Abstract

Futures trading in agricultural commodities in India has a past spanning more than a century. Commodity Futures are traded for castor seed, hessian, sacking, turmeric pepper, gur and potato. Trading has also commenced in cotton. Conditions of supply, demand, transportation, storage, and processing are main causes of price fluctuation, which at times are very wide and violent. The prices of the commodities emanating from the futures markets may help farmers/producers to plan their productions. In futures markets there are mainly two types of traders (buyers and sellers), (a) Hedgers and (b) speculators. Hedgers are predominant players of futures markets, which they share with speculators. Hedgers enter the future markets to hedge themselves from risks while speculators have profit in mind. However, the speculators enter into future contracts after assessment of information available to them about the market and price conditions. They may buy or sell based on their assessment. It is the speculators who bear the risk of their decision. In a future market the correctness / trust that futures prices are unbiased is based mainly on the profit motive of the speculators. This is an important characteristic of futures markets because if hedgers (also called commercial buyers) do not regard futures prices as ‘unbiased equilibrium prices’ they would not enter the market to hedge their risks at all. If India has to replicate something like the Brazilian experience, then it would have to adopt a multi-pronged strategy involving the agricultural producers, marketers and processors, marketing agencies, government departments and most importantly the financing agencies – mainly banks. The system of certification of stocks and storage of commodities can create a system of warehouse receipts that show proof of ownership of a certain quantity of a commodity. Such warehouse receipts can be treated as collaterals by commercial banks for futures financing stocks. Certificates of ownership can easily be used to meet delivery obligations. In this way commodity financing can be transformed radically and favorably futures markets warehousing systems.