Abstract:
This paper seeks answers to three express questions germane to
the role forward markets play in the price discovery-risk management in
the context of two plantation crops, viz; black pepper and rubber.
Quintessentially, forward markets are touted as an effective vehicle for
realistic price discovery in an underlying asset; acting as a leveler by
ironing out price volatility, the bane of commodity markets. Since
futures price acts as a beacon, the prices in cash markets are posited to
stay steady in the near-term ‘if other things remain same’ ensuring a winwin
deal for both producers and consumers. An a priory price also
minimise the risk associated with the trade since it is an insurance against
any wild swings in prices capping both upside and downside risks. The
study assumes importance in the context of the raging debate on the
root cause of commodity inflation and the green signal given to the
Forward Contracts (Regulation) Amendment Bill 2010, which promises
to be a game changer by ushering in sweeping changes in commodity
forward markets.
To put it succinctly, the answers elicited by the study from the
published data paint a grim picture as far as the efficacy of forward
market in price discovery and in its risk mitigation, roles were concerned.
In all counts, the answers found by the study are in negative, in the case
of both the commodities in question. These revealing answers have far
reaching policy implications. The most important is that the government
should not try to put the cart before the horse, and instead, approach the
market reforms on a step-by-step fashion. Instead of hastily joining the
reform bandwagon, a calibrated approach is the need of the hour. Learning
from the past mistakes in other markets – equity, forex and foreign
commodity markets – cautious gradualism should be the guiding
principle leading the commodity markets reforms. Analytically, the study,
so far, banked heavily on simple arithmetic measurements and visual
presentation of the facts to arrive at its conclusions. A part reason for
this is the difficulty in crunching the futures data which is beset with
inconsistency and gaps. The study intends to take the analytics further
forward by reconciling the time-series data, thereby surmounting the
data deficiency and inaccuracy using relevant methods to give the early
findings the much needed analytical rigor.
