Futures trading in pepper

Abstract

The study on “Futures trading in Pepper” has been conducted with the main objectives of analyzing price discovery mechanism of pepper futures in NMCE and examining the benefits of futures trading in pepper to farmers and traders. Both primary and secondary data were used for the study. The first objective of analyzing the price discovery mechanism of pepper futures was done using secondary data on daily futures and spot prices from May 2003 to March 2008 of NMCE. For examining the benefits of futures trading in pepper to farmers and traders, primary data were collected from sample farmers and traders by means of a structured interview schedule.

Two districts of Kerala, namely, Ernakulam and Wayanad were selected to identify the farmers and traders respectively, for collecting information regarding the benefits derived from futures trading. From each of the two districts of Ernakulam and Wayanad, 30 respondents were selected to analyze the benefits of futures trading in pepper to farmers and traders. These respondents were classified as trading farmer, non - trading farmers and non- farmer traders. The data collected have been processed using MS – Excel sheets. Co-integration technique, Kendall’s Co-efficient of Concordance, Mann Whitney U Test, Student’s t – Test, Compound Annual Growth Rate and annual growth rate were used to analyse the data. An analysis of trend of futures and spot prices of pepper has revealed the efficiency of the price discovery mechanism of pepper futures. The spot and futures prices under the study period showed an increasing trend. As spot price is always below the futures price there is opportunity for hedging. Both the spot and futures prices are moving more or less in the same direction. Since the trend lines are very closely moving, it implies that the two prices are highly related and prediction of one using the other is possible. To analyse price discovery mechanism of pepper futures Co-integration technique was used. Futures prices prior to three months (F3), four months (F4) and five months (F5) prior to delivery are closer to the spot price. This also brought to light the efficiency of the co integration technique in identifying the movement of two variables in the same direction. The advantages of online trading to different group of traders in the pepper futures by means of Kendall’s co-efficient of concordance outlined increased trade volume, increasing liquidity in trading and better terminal facility as the most preferred advantages for the farmer traders of Wayanad. For the non farmer traders, easy settlement, increased number of participants and time saving are of importance, while increased liquidity is of least advantage to them. As far as the traders of Ernakulam are concerned, increase in liquidity in trading, increased trade volume and time saving are the most available advantages to the non farmer traders, while price discovery seemed to be the least available advantage for them. Pair wise comparison of benefits of futures trading to various groups of respondents by means Mann-Whitney U test revealed that there is significant difference between the traders and farmers with respect to the extent of benefits of futures trading enjoyed by them. It is also proved that there is no significant difference between the different categories of traders, irrespective of whether they are farmers or hill produce merchants or exporters or speculators. The criterion for enjoying the benefits is not whether the trader is a farmer or a non farmer, but whether he trades in futures or not. Starting of terminal outlets in remote areas, extensive campaign for awareness creation about futures trading and computer education to remove the aversion towards screen based trading will attract more number of participants to futures trading. Compulsory delivery of the underlying asset is to be enforced by the regulatory authorities to make the real farmers the beneficiaries of futures trading and thereby ensuring a remunerative price. Also co-operative marketing societies in the field of spice market should be strengthened to give farmers benefits of remunerative prices through large scale marketing and processing.