IMPACT OF FUTURES MARKETS ON PRICES OF PLANTATION CROPS: The Indian experience

Abstract

In order to make the plantation sector vibrant and to sustain its past glory, and also to safeguard the welfare of the various market participants, the Government of India has come up with various interventions. Futures market is one of the interventions by the government with the objective of delivering two key economic functions namely better price discovery and price risk management. However, the impact of futures trading on the prices realised by the growers in general and its bearing on growing price instability in particular, is yet to receive the attention of scholars. Beyond domestic fundamentals (supply and demand conditions) a host of other variables do influence the price level and the change therein (instability). These include global demand and supply, exchange rates, food price inflation and WTO commitments and others. This paper attempts to compare the price trends in the plantation crops before and after the commencement of futures trading at national level during 2003-04. The performance of these crops (pepper, cardamom, coffee, rubber) Vs non exchange traded commodity like tea has also been compared using statistical and econometric tools. Findings of the study indicates that in case of exchange traded plantation crops, except natural rubber, the observed price instability and volatility were higher before commencement of futures as compared to the period since futures trading was introduced. In case of nonexchange traded commodity (tea), the level of price volatility was much lower as compared to other crops. The impact of futures markets by way of price discovery and price risk management made the spot prices of these commodities to realign their path to have a co-movement. Some policy suggestions have been made for the welfare of the plantation sector to revive its pride.