Price discovery mechanism under pepper futures trading

Abstract

The study entitled ‘Price discovery mechanism under Pepper futures trading’ was undertaken to analyse the price discovery of pepper futures market. The study also attempted a critical review of the policies adopted by the India Pepper and Spice Traders Association in the promotion of futures trading in Pepper.

For the purpose of analysis, secondary data on spot and future prices of pepper for a period of twelve months for the year 2002 were used. Also discussions with the authorities of the IPSTA were sought for the purpose of the study.

The null hypotheses that α=0 and β=1 is rejected in all sample cases of analysis of price discovery indicating that pepper futures market is not efficient in predicting the future ready prices. Moreover the Pepper exchange has registered only thin trade volume. In spite of a developed ready market for black pepper. Futures market does not attract farmers. Analysis also revealed that Access to the market has has been made more difficult by rules, which force members of the exchange to obtain a local sales tax registration in accordance with government regulations. This takes a minimum of six months to one year, and is only feasible for those who have an office in Kochi.

The Exchange will have to adopt an action programme to bring it up to a higher operational level. Since this is an era in which multi commodities are traded through commodity exchanges, Pepper Exchange would have to adopt a policy to start commodities other than pepper in order to sustain in the long term. Besides, the participation of farmers should be enhanced. A promotional campaign by the Cochin Pepper Exchange would be essential to promote active price discovery.

Thus the study concluded that the Pepper exchange is not effective in price discovery and it would have to consider which practical arrangements need to be made to promote its international visibility and, in particular how to adapt its contract specifications – delivery grades and location, contract currency to make them attractive to both local and international players.