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

***

***

654

3211

tkt

p

k kkt

p

k kt uXYY 110

tkt

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k kkt

p

k kt XYX 110

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

Trends in volumes

2005 2006 2007Q1

Total Agri-com 100 Total Agri-com 100 Total Agri-com 100

Guarseed 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 2007

Variable N Mean Std Dev Minimum Maximum

churad 345 0.04989 2.07594 -7.89254 9.05657

chgram 345 0.0732 1.28355 -6.16466 5.07658

chpulses 345 0.08544 0.97699 -2.78082 4.77107

chfood 345 0.06593 0.37391 -1.14091 1.60584

chcommo 345 0.08639 0.20299 -0.45767 1.08874

  churad chgram chpulses chfood chcommo

ch urad 1

ch gram 0.23* 1

ch pulses 0.76* 0.61* 1

ch food 0.37* 0.32* 0.47* 1

ch 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 urad

Variables Coefficient Std. Error t-Statistic Prob.

Significance

C -0.145 0.085 -1.709 0.088

Urad (-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 0.259

All-commodities -0.556 0.318 -1.749 0.081

D-urad 0.278 0.136 2.041 0.042 **

   

R-squared 0.688274

Adjusted R-squared 0.682724

Durbin-Watson stat 2.187826

n 345* and ** indicates significant at 1% and 5% level

Regression results for gram

Coefficients t- Statistic P-value Significance

Intercept -0.081 -1.112 0.267

D-gram 0.112 1.116 0.265

Gram(-1) 0.028 0.501 0.617

pulses 1.331 16.047 0.000 *

food 0.163 1.085 0.279

All-commodities -0.084 -0.340 0.734

urad -0.359 -9.671 0.000 *

R Square 0.526

Adjusted R Square 0.512

Observations 345

Granger causality results for price changes

Null 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 prices

P-I -0.168 -0.054 -0.012 0.023 0.093

P-II 0.463 0.390 0.303 0.140 0.079

P-III -0.296 -0.450 -0.211 0.026 0.073

Standard Deviation

P-I 1.716 1.226 0.827 0.389 0.202

P-II 2.544 1.306 1.174 0.349 0.215

P-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