ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
Reader Mode
-A A +A

Traders’ Participation in Commodity Futures Markets in Kerala

A Case Study of Rubber and Pepper Trade

Sumalatha B S ( teaches at the Department of Economics, Central University of Tamil Nadu, Neelakudi, Thiruvarur.

Traders’ participation and barriers to participation in the commodity futures markets of rubber and pepper in Kerala are explored in the context of increasing debate over the use and benefits of commodity futures markets in India. Rubber and pepper traders depend highly on the futures markets price signals to trade in the spot markets and relate it to spot market prices. Factors like education, income, trading experiences in futures markets and in other financial markets influence traders’ participation in futures market. Lack of networking, risks, difficulty in managing spot and futures markets, lack of adequate technological knowledge and skills are the major constraints faced by the traders in futures markets participation.

The author thanks M Vijayabaskar for his valuable suggestions. The author also thanks the anonymous referee for their valuable comments

Commodity futures exchanges have a long history in trading agricultural commodities in order to manage price risks. In India, although commodity futures trading has existed for decades, organised commodity futures exchanges commenced in 2003 with the introduction of national commodity derivative exchanges such as Multi Commodity Exchange (MCX), National Commodity Derivative Exchange (NCDEX) and National Multi Commodity Exchange (NMCE). The introduction of national commodity exchanges expanded futures trading in many of the agricultural commodities in India (Expert Committee 2008). Futures trading in agricultural commodities has been criticised for the influence of futures markets on spot market prices of agricultural commodities in India. This criticism was taken more seriously when inflation rates peaked on the back of increases in the prices of essential agricultural commodities in India (Srinivasan 2008). Its actual benefits to the commodity stakeholders, particularly farmers, and the role of futures markets in influencing spot market prices were highly debated (Expert Committee 2008).

Existing studies on commodity futures trading in India have largely focused on the performances of futures markets and its impacts on spot market prices (Karande 2006; Naik and Kumar 2002; Ahuja 2006; Aggarwal et al 2014; Kumar et al 2014). A few attempts were also made in the literature to understand farmers’ and traders’ awareness and participation in agricultural commodity futures markets in the Indian context (Kumar 2010; MCX 2008; Francis 2013). These studies illustrate that farmers’ participation is very low and traders tend to participate more in futures markets compared to farmers due to their trading experiences and knowledge about trading. However, it is not clear why some traders participate while others do not, as also the challenges and barriers faced by the traders in their participation. Therefore, the present study makes an attempt to explore traders’ participation and barriers to participation in commodity futures markets in the case of rubber and pepper. These two crops are actively traded in the futures exchanges and experience high price volatility. The study hypothesises that higher education, higher income or capital base, risk aversion and networking influences traders’ futures markets participation.

Evolution of Commodity Futures Market in India

The first commodity futures exchange of India was set up in 1875 in Mumbai (erstwhile Bombay), under the aegis of the Bombay Cotton Traders Association. A clearing house for clearing and settlement of the trade was set up in 1918. Following this, futures trading in oilseeds was established in 1900 and a wheat futures market was initiated in Hapur in 1913 (Lokare 2007). Similarly, futures trading in raw jute was set up in Kolkata (erstwhile Calcutta) in 1912 and in bullion in Mumbai in 1920 (Lokare 2007). In the post-independence period, commodity trading has gone through several changes. The Forward Contracts (Regulation) Act was enacted in 1952 and the Forward Markets Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs (Forward Markets Commission 2009). The FMC became the regulatory body of the government for the commodity futures exchanges in India. The 1960s and 1970s witnessed high inflation as a result of unprecedented rise in the prices of oil products and agricultural commodities. Subsequently, futures trade was banned in most of the commodities except for pepper and turmeric to contain speculation in prices (Raizada and Sahi 2006). The government appointed the Dantwala Committee (1966) and Khusro Committee (1980) to study the problems faced by the commodity futures exchanges and suggest steps to revive futures trading in agricultural commodities. On the basis of the recommendations of the Khusro Committee, futures trading was permitted in commodities like gur (Muzaffarnagar and Hapur in 1982), potatoes (Hapur in 1985) and castor seed (Mumbai and Ahmedabad in 1985; Raipuria 2002a).

Subsequent to the liberalisation of the Indian economy in 1991, a series of steps were taken to liberalise commodity futures exchanges. The Kabra Committee (1994), the earliest post-reforms committee had recommended the opening up of futures trading in some more commodities and recommended that futures trading not be resumed in the case of wheat, pulses, non-basmati rice, dry chilly, maize and vanaspati considering the price situations. On the recommendations of the Kabra Committee, futures trading was introduced in coffee (Bengaluru in 1998), cotton (Mumbai in 1999), soya oil (Indore in 1999), sugar (2001), tea (2002) and bullion (2003) and the international futures trading was started in pepper (Kochi in 1997) and castor oil (Mumbai in 1999). The World Bank and United Nations Conference on Trade and Development (UNCTAD) joint mission report (1996) highlighted the role of futures markets as market-based instruments for managing risk and suggested the strengthening of institutional capacity for efficient performance of commodity futures exchanges.

The report also noted that government intervention is pervasive in sensitive commodities like wheat, rice and sugar in necessary situations to prevent the bad consequences of futures trading. Subsequently, the Ministry of Agriculture (2000) and Guru Committee (2001) expressed support for commodity futures exchanges and emphasised the need for and role of futures trading in price risk management and marketing of agricultural produce (Expert Committee 2008). The turning point in the history of commodity futures market was in 2003, when a group of prohibited commodities were reopened for futures trading along with the establishment and recognition of three national commodity exchanges, namely MCX, NMCE and NCDEX with online and standardised trading (Expert Committee 2008). These commodity exchanges are engaged in trading of both agricultural and non-agricultural commodities.

An expert committee was set up under the chairpersonship of Abhijit Sen to examine whether and to what extent futures trading has contributed to price rise in agricultural commodities (Expert Committee 2008). This was in response to the consistent rise of inflation during the first quarter of 2007 and opinions expressed by the Parliamentary Standing Committee of the Ministry of Consumer Affairs, Food and Public Distribution in its 17th report. The empirical analysis of the report in respect of 21 commodities (accounting for about 98% of the share in total futures trade in agricultural commodities) shows that the annual trend in the growth of agricultural commodity prices accelerated after the introduction of futures trading in the case of 14 commodities (chana, pepper, jeera, urad, chillies, wheat, sugar, tur, raw cotton, rubber, cardamom, maize, raw jute and rice). The price decelerated in the post–futures trading period (2004 onwards) for the remaining seven commodities (soy oil, soy bean, rapeseed/mustard seed, potato, turmeric, castor seed and gur). The report further stated that agricultural price inflation acceleration during the post-futures trading period does not mean that this was caused by futures trading. One of the reasons for the acceleration of price increase in the post-futures trading period was that the immediate pre-futures trading period had been one of relatively low agricultural price inflation, reflecting an international downturn in commodity prices (Expert Committee 2008).

The Expert Committee (2008) also recommended that commodity futures exchanges have to decide the appropriateness and usefulness of commencing futures trading in agricultural commodities based on the concrete study of feasibility on a case-to-case basis. It, however, noted that all agricultural commodities are not suitable for futures trading and came up with a set of characteristics for identifying commodities for which futures trade may be allowed. First, it includes commodities that possess suitable demand and supply conditions such that mean volume and marketable surplus is large. Second, the price of the commodity should be volatile to necessitate hedging through futures trading and a demand for hedging activities would be required as the spot market actors face price risk. Third, the concerned commodity should be free from government regulations (or other bodies) imposing restrictions on supply, distribution and price of the commodity. Fourth, the commodity should be homogeneous or alternatively it must be possible to specify a standard grade and to measure deviations from that grade. This condition is necessary for futures exchanges to deal with standardised contracts. Last, the commodity should be storable. In the absence of these conditions, arbitrage would not be possible and there would be no relationship between spot and futures markets (Expert Committee 2008; Periasamy and Satish 2014).

As part of the development of commodity exchanges, in 2008, the commission (FMC) issued guidelines on the establishment of new national multi-commodity exchanges. In 2009, the Indian Commodity Exchange (ICEX) was recognised as the fourth national commodity exchange. Subsequently, the fifth national commodity exchange, that is, the Ahmedabad Commodity Exchange (ACE) was recognised in 2010. Following this, the sixth national commodity exchange, the Universal Commodity Exchange (UCE) was recognised in 2012 (Forward Markets Commission 2013). In 2014, the Government of India appointed the Kolamkar Committee to suggest steps for fulfilling the objectives of price discovery and risk management of commodity futures markets. The committee’s findings suggest that futures market is performing relatively well on price discovery and poor on hedging. Therefore, it recommended policies to improve hedging and reduce price risk. Subsequently, the Ministry of Finance proposed to merge the FMC with the Securities and Exchange Board of India in the 2015–16 Union Budget. The merger is expected to solve the problems of inadequate manpower, research and the monitoring capabilities of the FMC to have a strong regulation (Lingareddy 2015). Subsequently, the government has also taken an interest in improving commodity exchanges by encouraging more commodities to participate in futures trading.

Determinants of Traders’ Participation

According to economic theory, commodity futures market is expected to provide price discovery and risk mitigation. Price discovery is the process of determining the price of a commodity based on supply and demand factors. The theory of futures markets implies that continuous auctions ensure uninterrupted supply of commodities throughout the year as opposed to seasonal supply and consequent price variations in spot markets. Therefore, futures market is considered to be a market-driven mechanism for price stabilisation, particularly in seasonal agricultural commodities with a higher geographical concentration of production (Sahadevan 2014). The expectations theory hypothesises that the current futures market price is a consensus forecast of the spot market price in the future. The efficiency of the futures market is usually examined by testing the unbiasedness of futures market price as a predictor of the future spot market price (Sahadevan 2002). Studies on futures markets by and large use “efficiency hypothesis” to analyse price discovery and risk management functions of commodity futures markets (Karande 2006; Elumalai et al 2009; Sahadevan 2002, 2008; Nath and Lingareddy 2008).

In any market, the presence of asymmetric information leads to inefficiencies in functions. This is due to the differential information available with different market participants (Perrakis and Nabil 1998). The availability and accessibility of information related to futures and spot market prices is important to the stakeholders to make decisions on production and marketing of their farm produce (Elumalai et al 2009; Expert Committee 2008). Availability of and access to information, although necessary, is not sufficient for stakeholders to benefit from futures markets. They need practical knowledge, capital base and financial literacy to benefit from futures markets. Also, mere transmission of price information may not be enough. The targeted population needs to be explained its use as well as how to interpret it (Expert Committee 2008).

There are two important factors that determine market participation. The first factor is the hedging performance of futures contracts, and the second is the stakeholders’ perception about futures trading (Sahadevan 2007). The hedging performance is measured by the convergence of markets. The convergence between futures and spot market prices shows that futures market is efficient with regard to price discovery and hedges against the spot market price variability (Sahadevan 2007). A study conducted by Sahadevan (2008) reveals that almost all the respondents in the farmers’ survey carry negative perceptions about futures markets. Most of them cited the lack of information about the functioning of the market as the reason for not using futures markets (Sahadevan 2008; Kumar 2010). It can be assumed that the pitfalls of the futures markets have received much greater publicity than their benefits primarily because of the negative perception created by the lack of political consensus on the need for futures markets (Kabra 2007). The experience with futures trading in guar seed, mentha oil and castor seed shows how important the existence of an active spot market is to promote futures markets (Sahadevan 2007). Moreover, another study (IIMB 2008) reveals that less than 2% of farmers reported that they are aware of futures markets, let alone participate in it.A majority of farmers in this study also reported that their primary source of information on price was fellow farmers and the primary source of marketing was village traders and brokers. It is too naive to expect farmers with less than 60% literacy and villages with less than 3% internet penetration to keep track of screen-based futures markets prices and benefit from it (IIMB 2008). Apart from this, the study also surveyed a sample of traders and processors. Although a majority of them reported awareness about futures markets, less than half participated in it. Of these, an overwhelming majority participated as speculators, with a minuscule minority participating in hedging (IIMB 2008).

Spot market traders play a key role in commodity trading by intermediating between farmers and consumers (Hameedu 2014). Considering the importance of spot market traders in the supply chain, studying their role in futures market participation is important (Kumar 2010; MCX 2008; Vijayshankar and Krishnamoorthy 2012). Like farmers, spot market traders also require a mechanism to manage commodity price instability (Kumar 2010). Studies on spot market traders’ participation in commodity futures markets in the Indian context are very few (Kumar 2010; MCX 2008; Francis 2013). In her study of soybean traders’ experiences with futures markets in mandis of Madhya Pradesh, Kumar (2010) argued that despite traders’ knowledge about agricultural markets and their everyday participation in physical markets, their participation in futures markets is found to be negligible. The study raised the question that even when traders cannot participate, what would be the position of farmers in access to such markets in whose name futures trading is justified? Another study conducted by MCX (2008) shows that traders’ participation in potato and mentha oil is low but higher than farmers. In the case of pepper, traders’ participation in
futures markets was found to be relatively higher compared to farmers (Francis 2013). Studies have also pointed out that dominant traders in local mandis exert significant control on prices of crops in the physical market in the presence of regional-level commodity futures exchanges of gur in Hapur in Uttar Pradesh, pepper in Kochi and jute in Kolkata (Patnaik 2007; Raipuria 2002b).

It is important to study the key stakeholder, that is, traders’ participation in commodity futures markets and their role in spot market and futures market trading, since a large part of the discourse is concerned with whether futures markets influence spot prices of agricultural commodities in India.

Traders’ Profile

A survey of pepper and rubber traders was undertaken to study their use of and participation in the commodity futures markets. Kerala was chosen for this study as it has a monopoly in the production of rubber and pepper. A sample of 50 traders was selected for rubber and pepper each from the Meenachil taluk of Kottayam district and the Adimali (Mannamkandam) and Idukki blocks of Idukki district respectively. These locations are highly concentrated in the production and marketing of these two crops. Though small traders constitute the highest share in both rubber and pepper trading in India, it is understood from discussions with farmers and traders that large traders tend to participate more in futures markets trading in both these commodities. In order to avoid bias in selection, an equal number of traders have been selected from each category (local traders, medium traders, large traders and exporters/wholesalers/terminal traders) to study their participation in commodity futures trading. The rubber sample traders include local/village traders, medium traders, large traders and wholesalers/company agents/exporters.1 Similarly, pepper sample traders include local/village traders, medium traders, large traders and wholesalers/exporters.2 Apart from the traders’ survey, information was also collected from commodity futures exchange branches and franchises in both the rubber and pepper study areas to explore the details of the functioning of futures markets exchanges and their participants.

The traders’ survey is aimed at exploring the traders’ awareness of and participation in the futures markets and their role in spot market trading. Considering traders’ access to market and information, it is expected that traders will be participating more in the futures market compared to farmers and thereby information is likely to pass to the spot market. In this background, the objective of this paper is to identify the categories of rubber and pepper traders who participate in the futures market and the factors that make their participation possible as well as the major barriers to futures markets participation. This analysis would be supplemented by information gathered from the brokers, clients and other investors of the commodity futures exchanges located in the study area.

The following section deals with traders’ awareness and participation in the futures markets of rubber and pepper. The analysis emphasises factors like education, size and networking which affect participation in the futures market.

Traders’ Familiarity with Futures Markets

It is important to note that irrespective of type, 96% of rubber traders are aware about futures markets whereas in the case of pepper, the share of the sample respondents who are aware of futures markets was slightly less at 90% (Table 1).

It was also found that two out of the total pepper traders and three out of the total rubber traders in the study area are owners of commodity exchange franchises. Except a few local traders and medium-scale traders, all other traders are aware about futures markets in both rubber and pepper trades (Table 2).

Traders’ Participation in the Futures Market

Out of traders who are aware, 50% of the rubber traders participated in the futures markets whereas 8.3% of the rubber traders participated and discontinued futures trading due to certain reasons. It was reported that traders who discontinued trading find it difficult to manage both spot and futures market trading concurrently due to the speculative nature of futures trading, unpredictable prices and lack of information. The details of the barriers to sustained participation are discussed in the latter sections of this paper. The remaining 41.7% of rubber traders who are aware did not participate in the futures market (Table 3).

In the case of pepper, although a majority of the traders are aware of futures markets, only 35.6% of them participated in futures markets trading. Pepper traders’ participation is relatively less compared to rubber traders’ participation. About 11.1% of the traders participated earlier and stopped trading for reasons similar to the ones pointed out by the rubber traders. The remaining 53.3% of the traders never participated in the futures markets but they are aware of futures market (Table 4, p 47).

Despite higher liquidity in pepper, pepper traders’ participation is low compared to rubber traders. This might imply higher participation of other stakeholders (that is, other than farmers and traders) as the margin amount required for pepper futures trading is high compared to rubber. It is therefore essential to understand why some traders participate in futures markets and others do not, the types of traders who participate and the factors that influence their participation and non-participation.

Futures Market Participation across Trader Types

In order to understand traders’ participation in futures markets across different types, the percentage of participants in each category of traders has been taken. From our sample of rubber traders, 25% of the local traders, 42% of the medium traders, 58% of the large traders and 75% of the exporters or agents to the tyre companies participated in rubber futures trading (Table 5).

This clearly indicates that large traders tend to participate in futures markets compared to small traders. While this is to be expected, it is interesting to know that majority of the traders who participated in the futures markets are also engaged in various other businesses like real estate, wood business and stock market trading. These traders engage in intra-day trading and long-term trading. This shows that large farmers have risk absorbing capacity and good capital base to manage futures trading. It is understood from the survey that large traders are able to manage the margin money required for futures trading and manage losses incurred from the trading because they are engaged in other businesses. This is not the case with the small traders. It is important to note that some of the pepper traders experienced huge loss from futures trading and hence decided not to participate in futures markets.

A similar exercise was done for pepper traders’ participation in the futures markets. If we look at the pepper traders’ participation, we can see that 67% of exporters, 42% of large traders, 18% of medium traders and 10% of local traders who are aware about futures market, participate in the pepper futures trading (Table 6).

Pepper traders’ participation in futures market is relatively low compared to the rubber traders. Pepper is a crop that yields produce once a year, and January to April is the harvest season. Pepper traders reported that many of them are not interested in futures trading as pepper is a seasonal crop and they get a fairly good price during the off-season when demand for pepper is also high. Also, the margin required for futures markets trading is much higher for pepper compared to rubber. Some of the pepper traders also reported that margin adjustment for the futures markets trading is difficult for them during the off-season because their procurement and spot markets trading is less during the off-season. In the case of rubber, except for few months in the summer (March to May), tapping is done throughout the year. Rubber traders have also reported the problem of managing margin money.

It was noted that in the case of both rubber and pepper, large traders are also engaged in futures trading of other agricultural commodities (other than rubber and pepper) and non-agricultural commodities such as cardamom, crude oil and gold. It was found that in most cases, futures markets transactions are settled through opposite transactions (buying and selling). The survey shows that among the participants, 21% and 19% of rubber and pepper traders respectively, delivered their produce through warehouses. The rest of the traders were not delivering their produce through warehouses (Table 7).

These traders settle their contracts (buying and selling) by making an opposite transaction (exchange of contracts) before the maturity of the contract. This practice increases speculation in the commodity futures markets. The reported reasons for not delivering their produce through warehouses include lack of adequate storage facilities, transportation cost and difficulty in meeting the quantity and quality standards of the produce. Based on the traders’ survey we can categorise the spot market traders into two categories. First, there are the traders who trade only in spot markets. Second, there are traders who trade in both spot and futures markets. In our analysis, the focus is on the second category of traders who are active in both futures and spot markets. The traders can also be further divided based on their gains from futures trading. They are of two types: traders who benefit mainly from spot market trading, and traders who benefit from both spot and futures markets.

Traders’ Education and Futures Market Participation

Previous studies have highlighted the importance of financial literacy and education of the participants in their awareness and participation in commodity futures markets (Kumar 2010; Expert Committee 2008; Securities and Exchange Commission 2012). Whether traders’ education and financial literacy has any relation to their awareness and participation in the futures markets was looked into. As Table 8 (p 49) shows, there is a positive association between education levels and levels of participation. A greater share of participants have tertiary educational qualification. The data shows that 50% of rubber traders who participated in the futures markets have college degrees, 33% of them have completed their 12th standard and the remaining 17% have completed secondary schooling. If we look at pepper traders, 37.5% are degree holders, 50% of them have passed their 12th standard and the rest 12.5% have completed secondary schooling.

This indicates that education also plays a role in futures markets participation as a majority of the participants have higher educational qualifications compared to other participant traders in the case of both rubber and pepper. However, clearly it is not the only factor that drives participation. Financial literacy and knowledge about other markets are also very important for their participation. This includes detailed knowledge about operation of futures trading, reading numbers produced in the futures trading terminal, determining the factors that affect commodity prices, and updated information about the foreign commodity exchanges and trading. The traders who are not participating in the futures markets of either rubber or pepper seem to be lacking this knowledge.

In order to understand the functioning of commodity exchanges and participation (other than farmers and traders) in the commodity futures markets, participants and staff of commodity exchange branches and franchises located in both rubber and pepper study areas were interviewed. The details are discussed below.

Exchanges and Franchises in Rubber Trade

I visited some of the braches and franchises of commodity exchanges located in the study areas of Meenachil and Kanjirappally taluks of the Kottayam district to understand the nature of various participants, their motives, trading practices and methods. These taluks are chosen because traders’ survey was also conducted in the same taluks. This supplements the inputs received from traders regarding the functioning and participation in futures markets.

The participants of the commodity exchanges that I visited are mostly rubber traders, dealers, farmers, business people, retired government employees and college students in both the branches and franchises. On an average, about 50 to 100 clients trade in different commodities in each branch/franchise; out of that, an average of about 10 to 20 clients are active who are present daily at the exchanges. The remaining clients are infrequent visitors and trade through brokers. Pepper, rubber and cardamom are the major agricultural commodities and gold and crude oil are the two non-agricultural commodities traded in these exchanges and franchises in rubber area. As observed farmers’ participation in the commodity futures trading is relatively low compared to other participants. This is a common trend in all exchanges or franchises across all commodities. A majority of participants are traders. The other participants such as students, retired government employees and businessmen are not directly related to the crops as either farmers or traders. The average percentages of participants of these branches and franchises are given below (Table 9).

We inferred that lower participation of farmers and higher participation of traders are confirmed by the information/data received from the exchanges. The participation of members other than commodity stakeholders is also higher. Though these inferences are based on a small sample, they provide the pattern and this may not be the same case with the state as a whole.

Exchanges and Franchises in Pepper Trade

Compared to the case of rubber in Kottayam district, commodity exchanges (branches and franchises) located in the study areas of the Idukki district are less in number. The commodity exchange franchises or branches in the pepper study region are also not as crowded as in the case of rubber. Pepper and cardamom are the main agricultural commodities in which futures contracts were made by the clients at these commodity exchanges and gold and crude oil are the major non-agricultural commodities. Similar to the case of rubber, farmers’ participation is also meagre in the case of pepper. Traders and business people are the main categories of participants in these exchange branches and franchises (Table 10).

In the exchanges, clients either trade on their own or with the help of brokers. There are clients who trade through making telephone calls to the brokers and asking them about futures market price details. Brokers inform the clients about variations in futures market prices and finally they decide to make a particular transaction. In the beginning of commodity futures exchanges, some of the branches/franchises closed down due to the lack of adequate participation. The non-commodity stakeholders (business people, students, government employees and others) also engage in futures market trading of commodities.

Traders’ Advantages over Farmers

We found from the survey that although education is an essential requirement for futures markets trading, it is not sufficient to participate and gain benefits from futures markets trading. A good financial position, access to additional information, risk-taking capacity and networking with other participants are the other conditions that appear to be essential to a sustained participation in the futures market. Since traders are already engaged in spot market trading and other businesses, it is easy for them to arrange money for adjusting margin money required for futures trading (70% of rubber traders and 60% of pepper traders are engaged in other businesses). It is also evident from the discussions with rubber and pepper farmers that large traders are better networked with other stakeholders of futures markets compared to farmers and small traders. Risk-taking ability too is relatively high among large traders compared to farmers and small traders, as they are able to offset risks in commodities and businesses with others.

Traders have reported that futures markets trading is difficult without understanding market trends, external factors such as international commodity exchanges and futures trading, trends in international commodity prices, international economic conditions and networks with other participants.3 It therefore requires learning over a period of time. Both rubber and pepper traders have responded that trading by themselves and trading networks with others help them to understand the logic behind the futures market trading and to take better decisions regarding the buying and selling in the futures and spot markets. Their experiences have also shown that trading by themselves helps them to know positions taken (buying and selling) in the futures market which can be learnt only by trial and error. Trader respondents who have attended training programmes are of the opinion that it is difficult to get this experience from such trainings, workshops and capacity-building programmes. Most importantly, traders have to take risks by participating in futures markets several times to get such experiences which may not be possible for farmers and small traders.

Having discussed the traders’ advantages over farmers in futures market participation, in the next section, we will discuss the important observations from the traders’ survey.

The survey shows that out of the traders participating in the futures markets, a few of them are also farmers (42% and 50% of rubber and pepper traders respectively). They have reported that farming is only a secondary source of income. Apart from trading and farming as mentioned earlier they are also engaged in other businesses like real estate, land transactions and wood businesses, etc. The rest of the traders are not engaged in farming but are engaged in similar businesses (Table 11).

This indicates that traders’ alternative source of income is also a driving factor for futures markets participation suggesting once again that diverse income sources help the traders offset risks in one economic activity with another.

Hedging to Speculation

Though commodity futures exchanges were started for the purpose of hedging for the producers and other commodity stakeholders to achieve price discovery in the market, futures markets trading is seen to be more speculative in nature (Sahadevan 2014). The interactions with rubber traders, pepper traders and other participants of the futures markets reveal that hedgers are more of speculators in the futures markets, which harm price discovery and lead to unexpected price fluctuations in commodity prices in both futures and spot markets. This happens when a group of participants takes control over the futures trading and determines the futures market prices. One piece of evidence that suggests speculative activities is the absence of physical disposal of commodities (which are bought and sold in the futures markets) through the warehouses. In most cases, futures markets transactions (buying and selling of commodity contracts) are settled with mere exchange (making opposite transactions) of electronic contracts. This is evidenced in our sample that suggests that 79% and 81% of rubber traders and pepper traders, respectively, are not delivering through warehouses. Moreover, in the absence of physical delivery, the participants buy and sell the contracts by anticipating profitable prices which increases speculation in commodity prices. This further undermines the ultimate objective of price discovery of commodity futures markets.

Price Signals from Futures Markets to Spot Markets

Prior to the introduction of the commodity futures markets, the farmers and traders did not have any sources to know the spot market prices in advance (harvesting/disposal time commodity prices). But, with the introduction of commodity futures exchanges, farmers and traders are able to know the spot market prices in advance using futures markets prices. It was also observed from our research that spot markets traders depend on futures markets prices to decide their spot markets transactions which in turn influence spot markets prices. It was seen from the survey that traders receive a number of messages on their mobiles every day from commodity exchanges regarding the futures markets prices and price changes for all the commodities traded at the commodity futures markets on payment basis. They also report that commodity futures markets trading has changed the traditional way of deciding spot markets prices (purely on the basis of physical demand and supply of commodities) into more of online futures trading, which is highly speculative in nature.

Casino’ Trading

Most of the rubber and pepper traders were busy with online futures markets trading when I approached them to interact and discuss their experiences with futures markets. I noticed that a few traders who were engaged with the online futures trading at the commodity exchange franchises were eagerly looking at the commodity prices in the online trading terminal. They also pointed out that discussions with me during trading time is likely to disturb their concentration in trading. It was peak time in the evening and the online futures markets were about to close. When I had convinced them regarding the purpose of the study, they agreed to share information once the markets had closed for that day.

I happened to meet a few traders who are purely “casino” traders and spend most of their time at the commodity franchises.4 These traders are big traders in the online trading platforms and are high risk takers. They said that they made huge profit out of trading and share their profits and losses between them. The reason for risk-taking is that they are into stock market trading for a long time and have rich experiences in trading. They are not into spot markets trading. They are addicted to trading and they spend little time for their other activities. They spend considerable time watching market news (both domestic and international market news), weather conditions, demand and supply conditions and other economic activities. They also track changes to calculate and predict futures market prices as well as its trends and changes. I observed from my visit to one of the exchange franchises that five traders were sitting in front of the online trading terminal and were discussing about market fluctuations at the global level, futures markets price trends and planning for the positions (buy and sell) to be taken. They also debated over their differences in opinions and predictions about futures markets prices.

Traders’ Constraints

During the survey, both rubber and pepper traders who were participating in the futures markets trading reported some of the constraints they face in using commodity futures markets. Many of the traders who did not participate in the futures markets have a negative perception about the futures market and its outcomes. The main reason for their negative perceptions is that they were informed by their friends and other traders that futures markets is a speculative market handled by big players like dealers, exporters and manufacturers and that they control the market.

The major constraints faced by rubber and pepper traders in using and participating in the commodity futures exchanges are listed below (Table 12).

Among various constraints, lack of networks, difficulty in managing both spots and futures markets simultaneously, lack of technological knowledge (knowledge in using online account, trading terminal and understanding the trading numbers), difficulty in managing margin money and lack of storage facility are the major constraints faced by the traders in their futures market participation.


This paper is an attempt to explore traders’ participation and barriers to participation in the commodity futures markets of rubber and pepper in Kerala in the context of increasing debate over the use and benefits of commodity futures markets in India. The aim of this analysis is to understand the functioning of commodity futures markets at the field level and traders participation in the commodity futures markets. It is interesting to note that irrespective of their participation in the commodity futures trading, rubber and pepper traders depend highly on the futures markets price signals to trade in the spot markets and relate it to the spot markets prices.

Traders’ participation in the futures markets is more in rubber compared to pepper. Factors like education, income/financial position, trading experiences in the futures
markets and in other financial markets like stock markets influence traders’ participation in futures markets. Lack of networking, risks, difficulty in managing spot and futures markets, lack of adequate technological knowledge and skills are the major constraints faced by the traders in futures markets participation. It was observed that a majority of the traders do not use futures markets for disposing their produce and consider it as an alternative trading mechanism of spot markets trading.


1 The Rubber Producers Society (RPS) is an organisation under the Rubber Board, which collects rubber latex from farmers. We have not included the RPS in the survey because they do not trade in commodity futures markets.

2 In the off season, on an average local traders trade daily 100 kg to 500 kg, medium traders 1 tonne to 5 tonnes, large traders 5 tonnes to 10 tonnes and wholesalers more than 10 tonnes. During the season, on an average local traders trade daily upto 10 tonnes, medium traders 10 tonnes to 50 tonnes, large traders 50 tonnes to 100 tonnes and wholesalers more than 100 tonnes for both rubber and pepper.

3 Non-commodity stakeholders are just investors in the commodity futures market.

4 Casino trading is highly speculative and risky trading.


Aggarwal, N, S Jain and S Thomas (2014): “Do Futures Markets Help in Price Discovery and Risk Management for Commodities in India?” Working Paper-2014-020, Indira Gandhi Institute of Development Research, Mumbai, viewed on 17 October 2018,

Ahuja, L N (2006): “Commodity Derivatives Market in India: Development, Regulation and Future Prospects,” International Research Journal of Finance and Economics, No 2, pp 153–62.

Elumalai K, N Rangasamy and R K Sharma (2009): “Price Discovery in India’s Agricultural Commodity Futures Markets,” Indian Journal of Agricultural Economics, Vol 64, No 3, pp 315–23.

Expert Committee (2008): “Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices,” Ministry of Consumer Affairs, Food and Public Distribution, New Delhi.

Forward Markets Commission (2009): “Annual Report 2009–10,” Ministry of Consumer
Affairs, Food and Public Distribution, Government of India, viewed on 17 October 2018,

— (2013): “Annual Report 2013–14,” Ministry of Consumer Affairs, Food and Public Distribution, Government of India, viewed on 17 October 2018, https://consumeraffairs.nic.

Francis, R (2013): “A Study of Impact of Futures Trading on Spot Prices of Pepper: A Study in Wayanad District of Kerala,” Minor Project Report submitted to the University Grants Commission, New Delhi.

Guru Committee (2001): “Report of the Group on Forward and Futures Markets,” Department of Agriculture & Cooperation, New Delhi.

Hameedu, S (2014): “Supply Chain Analysis of Cardamom in Kerala,” International Journal of Scientific and Research Publications, Vol 4, Issue 3, pp 1–7.

IIMB (2008): “Study on Impact of Futures Trading in Wheat, Sugar, Pulses (such as Urad, Tur and Chana) and Guar seeds on Farmers,” Study commissioned by the Forward Markets Commission and conducted by the Indian Institute of Management, Bangalore.

Kabra, K N (2007): “Commodity Futures in India,” Economic & Political Weekly, Vol 42, No 13,
pp 1163–70.

Kabra Committee (1994): “Report of the Committee on Forward Markets,” Department of Consumers Affairs, Ministry of Agriculture, New Delhi: Government of India.

Karande, K (2006): “A Study of Castor Seed Futures Market in India,” PhD thesis, Indira Gandhi Institute of Development Research, Mumbai, 983342.

Kolamkar Committee (2014): “Report of the Committee to Suggest Steps for Fulfilling the Objectives of Price Discovery and Risk Management of Commodity Derivatives Market,” Department of Economic Affairs, Ministry of Finance, Government of India, New Delhi.

Kumar, R (2010): “Mandi Traders and the Dabba: Online Commodity Futures Markets in India,” Economic & Political Weekly, Vol 45, No 31, pp 63–70.

Kumar, M, M D Acharya and M S Babu (2014): “Price Discovery and Volatility Spillovers in Futures and Spot Commodity Markets: Some Indian Evidence,” Journal of Advances in Management Research, Vol 11, No 2, pp 211–26.

Lingareddy, T (2015): “Commodity Futures Trading at the Crossroads,” Economic & Political Weekly, Vol 50, No 24, pp 113–16.

Lokare, S M (2007): “Commodity Derivatives and Price Risk Management: An Empirical Anecdote from India,” Reserve Bank of India Occasional Papers, Vol 28, No 2, pp 27–77.

MCX, (2008): “Enabling Farmers to Leverage Commodity Exchanges,” Final report submitted to Multi Commodity Exchange of India Limited by Cardinal Edge Management Service Limited, Ghaziabad.

Naik, G and S J Kumar (2002): “Indian Agricultural Commodity Futures Markets: A Performance Survey,” Economic & Political Weekly, Vol 37,
No 30, pp 3161–73.

Nath, G C and T Lingareddy (2008): “Impact of Futures Trading on Commodity Prices,” Economic & Political Weekly, Vol 43, No 3, pp 18–23.

Ministry of Agriculture (2000): “National Agricultural Policy Report,” Government of India, New Delhi, viewed on 21 October 2018,

Patnaik, I (2007): “Futures in the Market,” Indian Express, 6 January, viewed on 17 October 2018,

Periasamy, P and R Satish (2014): “Commodity Futures Market and New Initiatives Taken by the Forward Market Commission in India to Regularise and Popularise Commodity Futures Market among the Potential Investors: A Descriptive Study,” Journal of Business and Management, Vol 15, No 6, pp 1–9.

Perrakis, S and K Nabil (1998): “Asymmetric Information in Commodity Futures Markets: Theory and Empirical Evidence,” Journal of Futures Markets, Vol 18, No 7, pp 803–25.

Raipuria, K (2002a): “Futures Trading: ‘Locking in’ Profitable Prices,” Economic & Political Weekly, Vol 37, No 20, pp 1883–85.

— (2002b): “‘Fair Price’ for Commodities: Scope of Price Stabilisation Fund,” Economic & Political Weekly, Vol 37, No 52, pp 5155–56.

Raizada, G and G S Sahi (2006): “Commodity Futures Market Efficiency in India and Effect on Inflation,” Social Science Research Network,

Sahadevan, K G (2002): “Risk Management in Agricultural Commodity Markets: A Study of Some Selected Commodity Futures?” Udyog Pragati (Special Issue on Money and Finance-Part I), Vol 26, No 1, pp 65–74.

— (2008): “Mentha Oil Futures and Farmers,” Economic & Political Weekly, Vol 43, No 4, pp 72–76.

— (2007): “Advantages of Commodity Futures Trading through Electronic Trading Platform for Farmers of Uttar Pradesh: A Study of Potato and Mentha,” Original Final Report of Consulting Submitted to Multi Commodity Exchange of India Limited, February.

— (2014): “Economic Benefits of Futures: Do Speculators Play Spoilsport in Agricultural Commodity Markets?” Economic & Political Weekly, Vol 49, No 52, pp 45–53.

Securities and Exchange Commission (2012): “Study Regarding Financial Literacy among Investors, as Required by Section 917 of the Doff-Frank Wall Street Reform and Consumer Protection Act,” August, viewed on 21 October 2018,

Srinivasan, S (2008): “Futures Trading in Agricultural Commodities: Is the Government Ban on Commodities Trading Logical?”

Vijayshankar, P S and M Krishnamurthy (2012): “Understanding Agricultural Commodity Markets,” Economic & Political Weekly, Vol 47, No 52, pp 34–37.


(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top