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Traders’ Participation in Commodity Futures Markets in Kerala
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.
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