LIST OF TABLES

TABLE 4.2.1: RESPONDENTS EXPERIENCE IN TRADING BUSINESS ..................................................... 13 TABLE 4.2.2: NO OF RESPONDENTS DEALING IN AGRICULTURE COMMODITY MARKET .............. 14 TABLE 4.2.3: INCREASE IN VOLUME OF TRADE OVER LAST YEAR .................................................... 15 TABLE 4.2.4: IMPROVEMENT IN NO OF CLIENTS .................................................................................... 16 TABLE 4.2.5: INVESTORS TRADING IN AGRICULTURE COMMODITIES WITH PROPER KNOWLEDGE ................................................................................................................................................................ 17 TABLE 4.2.6: AGRI-COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL INVESTORS ................................................................................................................................................................ 18 TABLE 4.2.7: REASONS FOR INVESTING IN SPECIFIC COMMODITIES ................................................. 20 TABLE 4.2.8: RESPONDENTS OPINION ON FUTURES COMMODITY TRADING AND ITS IMPACT ON FOOD PRICE VOLATILITY .................................................................................................................. 22 TABLE 4.2.9: NO OF RESPONDENTS DEMANDING GOVERNMENT INTERVENTION TO CONTROL FOOD PRICES........................................................................................................................................ 23 TABLE 4.2.10: NO OF RESPONDENTS DEMANDING BAN ON AGRICULTURE COMMODITY TRADING TO REDUCE FOOD PRICE VOLATILITY ............................................................................................ 24 TABLE 4.2.11: REASONS FOR CONTINUOUS FOOD PRICE INCREASE .................................................. 26 TABLE 4.2.12: PERFORMANCE OF AGRICULTURE COMMODITY MARKET ........................................ 27 TABLE 4.2.13: RESPONDENTS RATING ON THEIR INVESTORS BEHAVIOR IN SPECULATION ANGLE ................................................................................................................................................................ 28 TABLE 4.2.14: SHOWING AGRICULTURE COMMODITY FUTURE PRICES INFLUENCE ON SPOT PRICE ................................................................................................................................................................ 30 TABLE 4.2.15: BENEFICIARIES OF COMMODITY TRADING ................................................................... 31 TABLE 4.2.16: SUCCESS RATIO OF AGRICULTURE COMMODITY TRADING ...................................... 32 TABLE 4.2.17: CALCULATION OF BETA AND VOLATILITY OF SUGAR................................................ 34 TABLE 4.2.18: CALCULATION OF BETA AND VOLATILITY OF WHEAT ............................................... 36 TABLE 4.2.19: CALCULATION OF BETA AND VOLATILITY OF ALMOND ............................................ 38 TABLE 4.2.20: CALCULATION OF BETA AND VOLATILITY OF CARDAMOM...................................... 40 TABLE 4.2.21: SUMMARY OF BETA AND VOLATILITY ANALYSIS ....................................................... 41 TABLE 4.2.22: OBSERVED VALUES............................................................................................................ 42 TABLE 4.2.23: EXPECTED VALUES ............................................................................................................ 42 TABLE 4.2.24: CALCULATION OF CHI-SQUARE ....................................................................................... 43

LIST OF FIGURES
FIGURE 4.2.1: RESPONDENTS EXPERIENCE IN TRADING BUSINESS ................................................... 13 FIGURE 4.2.2: NO OF RESPONDENTS DEALING IN AGRICULTURE COMMODITY MARKET ............. 14 FIGURE 4.2.3: INCREASE IN VOLUME OF TRADE OVER LAST YEAR ................................................... 15

FIGURE 4.2.4: IMPROVEMENT IN NO OF CLIENTS .................................................................................. 16 FIGURE 4.2.5: INVESTORS TRADING IN AGRICULTURE COMMODITIES WITH PROPER KNOWLEDGE ................................................................................................................................................................ 17 FIGURE 4.2.6: AGRICULTURE COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL INVESTORS ........................................................................................................................................... 19 FIGURE 4.2.7: REASONS FOR INVESTING IN SPECIFIC COMMODITIES ............................................... 20 FIGURE 4.2.8: AGRICULTURE COMMODITY WISE PREFERENCES BY RESPONDENTS...................... 21 FIGURE 4.2.9: RESPONDENTS OPINION ON FUTURES COMMODITY TRADING AND ITS IMPACT ON FOOD PRICE VOLATILITY .................................................................................................................. 22 FIGURE 4.2.10: NO OF RESPONDENTS DEMANDING GOVERNMENT INTERVENTION TO CONTROL FOOD PRICES........................................................................................................................................ 23 FIGURE 4.2.11: NO OF RESPONDENTS DEMANDING BAN ON AGRICULTURE COMMODITY TRADING TO REDUCE FOOD PRICE VOLATILITY ............................................................................................ 25 FIGURE 4.2.12: REASONS FOR CONTINUOUS FOOD PRICE INCREASE: ............................................... 26 FIGURE 4.2.13: PERFORMANCE OF AGRICULTURE COMMODITY MARKET ....................................... 27 FIGURE 4.2.14: RESPONDENTS RATING ON THEIR INVESTORS BEHAVIOR IN SPECULATION ANGLE ................................................................................................................................................................ 29 FIGURE 4.2.15: SHOWING AGRICULTURE COMMODITY FUTURE PRICES INFLUENCE ON SPOT PRICE ................................................................................................................................................................ 30 FIGURE 4.2.16: BENEFICIARIES OF COMMODITY TRADING.................................................................. 31 FIGURE 4.2.17: SUCCESS RATIO OF AGRICULTURE COMMODITY TRADING ..................................... 33 FIGURE 4.2.18: FUTURE AND SPOT PRICES OF SUGAR........................................................................... 34 FIGURE 4.2.19: FUTURE AND SPOT PRICES OF WHEAT .......................................................................... 35 FIGURE 4.2.20: FUTURE AND SPOT PRICES OF ALMOND ....................................................................... 37 FIGURE 4.2.21: FUTURE AND SPOT PRICES OF CARDAMOM ................................................................. 39

CHAPTER 1 - INTRODUCTION

RESEARCH BACKGROUND

Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other than actionable claims, money and securities.

In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and cotton, oilseeds, oils and oilcakes; raw jute and jute goods; sugar; potatoes and onions; coffee and tea; rubber and spices etc.

The commodity market is a market where forwards, futures and options contracts are traded on commodities. Commodity markets have registered a remarkable growth in recent years. The stage is now set for banks to trade in commodity futures. This could help producers of agricultural products bankers and other participants of the commodity markets. Banks have started acknowledging the commodity derivatives market.

In the present global economic scenario, due to various factors such as inflation, political factors, natural factors, the variations in prices of all commodities are a natural phenomenon. So, from the point of the cultivators of the commodity (in case of agricultural products) or dealers in the metals, there is a genuine need for them, an instrument with which they can hedge their risks. Thus, a commodity future is one of the most important derivative securities. With this they will be able to reduce risks. Consequently, the speculators who play an important part, in determining the price also come in the picture. Thus with the help of their speculative expertise, it can also be a very lucrative investment opportunity.

IDENTIFIED PROBLEM

The purpose of this project is to study how commodity future trading induces price instability in food products by performing technical analysis and as well as considering the perception of brokers and investors. NEED FOR STUDY

Food is an essential item for every human being without that no one can survive in the world for long time. We have witnessed a steep rise in many food items in past few months due to various national and global cues. For e.g. recently, we have noticed a sharp increase in onion prices wherein the price of the onions went up to Rs.85/Kg. But for India, where around 42 percent of the population lives on less than Rs.100 per day cant digest these kinds of price instabilities. Many people and hotels stopped using onion related dishes for few days that time.

Some economists and political parties in India claimed that commodity trading by speculators can be one of the reasons for these kinds of prices instabilities and even they started forcing the central government to take some stringent actions against the online commodity trading and also they wanted some of the items to be banned from commodity trading.

Due to the pressure from opposition parties on 7 May, 2008, the Indian Government announced the ban on futures trading in four agricultural commodities chickpea, potato, rubber and soy oil. In the months that followed, whether or not futures trading contributed to the increase in prices was a hotly debated subject. The main purpose of this project is to examine how the commodity trading affects the food prices and to find out whether the government ban is really required to control the price or not. Also this study will measure the effectiveness of the previous bans imposed by the central government. PRIMARY OBJECTIVES

The purpose of this project is to study how commodity future trading induces price instability in food products by performing technical analysis and as well as considering the perception of brokers and investors. SECONDARY OBJECTIVES

Following are the secondary objectives of this study.

To know how brokers and investors investment patterns and activities affects the instability of food prices.

To know why the government has banned some of the food items from trading and the stated purpose of the ban.

To ascertain whether or not the Government is taking the right measures to solve the prevailing food crisis and control inflation.

More specifically, to find out whether the ban on futures trading is logical by studying the price movements in the spot market and the futures market to see if theres a clear cause and effect relationship between the two, and by determining the components of inflation.

DELIVERABLES

Following are the deliverables out of this project, Reasons and factors causing food price instability. Price trends of Sugar, Wheat, Almond and Cardamom. Necessity of government intervention. Measuring the effectiveness of government ban on certain food items in commodity trading. Summary of recommendations to control the price instability.

CHAPTER 2 - LITERATURE SURVEY

REVIEW OF LITERATURE

A number of reports, newspaper articles and journals were perused. The Abhijit Sen Committee, constituted to examine the subject, only said that a cause and effect relationship between future and spot prices cant be established conclusively.

The committee had commissioned a study by the Indian Institute of Management, Bangalore (IIMB) to study the impact of Futures Trading in some important agricultural commodities. This

and some other recent academic studies have been considered in detail by the Committee in view of the evidence above that inflation did increase in some commodities after introduction of futures trading and that spot price volatility did not decline as unambiguously as claimed by the Commodity Exchanges. Going beyond before and after futures comparisons of changes in trend growth of spot prices and their variability, these studies attempt to examine how spot price movements are related to futures markets activity and outcomes, and also to assess the efficiency of futures markets regarding price discovery and risk management.

According to HSBC reports, food constitutes 60 per cent of the consumer price basket in India. In effect, an increase in food prices leads to an increase in other prices as well.

In UNs report on right to food found that the number of signs indicates that a significant portion of the price spike was due to the emergence of a speculative bubble. Prices for a number of commodities fluctuated too wildly within such limited time-frames for such price behavior to have been a result of movements in supply and demand: wheat prices, for instance, rose by 46% between January 10 and February 26, 2008, fell back almost completely by May 19, increased again by 21% until early June, and began falling again from August20. The 2008 food price crisis was unique in that it was possibly the first price crisis that occurred in an economic environment characterized by massive amounts of novel forms of speculation in commodity derivative markets.

The particular area of concern is speculation in derivatives based on food commodities. A study conducted by Lehman Brothers just before its bankruptcy revealed that the volume of index fund speculation increased by 1,900% between 2003 and March 200821. Morgan Stanley estimated that the number of outstanding contracts in maize futures increased from 500,000 in 2003 to almost 2.5 million in 2008. Holdings in commodity index funds ballooned from US$ 13 billion in 2003 to US$ 317 billion by 2008.

RESEARCH GAP

There are various research documents available in this same area but those are either prepared using technical analysis or questionnaire. But this study is done considering both the inputs and this is something missing in the existing literature. This purpose of this project is to cover this research gap.

INTRODUCTION

CHAPTER 3 METHODOLOGY

Methodology states that how the research studies should be undertaken. This includes the design specifications, sources of data, methods of primary data collection, methods used for collecting secondary data etc. Mainly secondary data has been used here for the study. Secondary data consists of collecting information from various financial sites. It includes the records and reports of research experts. For analysis and interpretation statistical tools are used. PRIMARY DATA

Primary data are those which the researcher collects directly by himself. In this project work, primary data is collected by giving questionnaires. Respondents were given Questionnaires and data were collected. SECONDARY DATA

Secondary data are those, which are got through reviewing primary data. The various secondary data used in this work includes

1. Internet 2. Periodicals 3. Journals 4. Books related to Commodity Market etc. SAMPLE DESIGN

Sample design covers the method of selection, the sample structure and plans for analysing and interpreting the results. Sample designs can vary from simple to complex and depend on the type of information required and the way the sample is selected. Sample design affects the size of the sample and the way in which analysis is carried out. In simple terms the more precision the market researcher requires, the more complex will be the design and the larger the sample size. Convenient sampling method will be used for collecting primary data for this study. CONVENIENT SAMPLING

Researcher focuses on selected few commodities to study the topic Convenience Sampling is being used. Under Convenience Sampling the researcher will be taking sampling according to his or her convenience. SAMPLE AREA:

Chennai city is the sample area for this project. TARGET RESPONDENTS

The following commodity trading agencies will form as the population of the study.

Angel broking

India Infoline

BMA wealth creators

Sharekhan Geojit BNP Paribas securities Ltd

SAMPLE SIZE:

Sample size of 50 stock brokers is used for this study.

One year future and spot prices of Sugar, Wheat, Almond and Cardamom traded in MCX exchange would be used as a secondary data for this study.

The spot prices of the above said commodities would be collected from the Multi Commodity Exchange (MCX) website, and graphs were made using monthly averages of the daily closing prices. For futures prices, the closing price of futures contracts with three-month expiry cycles were used, and the data was sourced from the MCX website.

The influence of future trading on spot price will be found by plotting their prices on the chart. If the spot price of the commodity follows the future price then it means that the future price influences the spot price. HYPOTHESIS

H0: Future trading impacts agriculture commodity prices H1: Future trading doesnt impact agriculture commodity prices TOOLS USED FOR DATA COLLECTIONS

The tool used for data collections are, Questionnaire A questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents.

The questionnaire used for this study is given in Appendix A http://www.mcxindia.com website for collecting agriculture commodity market data. TOOLS USED FOR DATA ANALYSIS

The following tools are used for performing data analysis, IBM SPSS Package Microsoft Excel

CHAPTER 4 DATA ANALYSIS AND INTERPRETATION

FRAMEWORK OF DATA ANALYSIS

The tests used for data analysis are

PERCENTAGE ANALYSIS

Percentage analysis is the method to represent raw streams of data as a percentage (a part in 100 - percent) for better understanding of collected data. GRAPHICAL METHOD

Bar graphs A bar chart depicts numbers by height or length of its rectangular bars. It makes numbers easy to read and understand. Bar charts are very useful to,

Compare the size of several items at one time. To track changes overtime. To indicate the composition of several items overtime. To show the relative size of components of a whole.

Pie charts

A pie chart is used to show the relative of parts of a whole. It uses segment of circle to indicate percentage of a total. The whole circle represent 100 percent, the segment of circle represents each items percentage of the total. Pie charts are effective ways to show percentage or to compare one segment with another.

BETA & VOLATILITY BETA: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Beta ( ) can be represented by,

(or) Where, x = rate of return of the agriculture commodity y = rate of return of the agriculture commodity market VOLATILITY A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns

from that same security or market index. Commonly, the higher the volatility, the riskier the security.

CHI-SQARE DISTRIBUTION

At the outset, we should know that the chi-square distribution has only one parameter called the degrees of freedom (df) as is the case with the t-distribution. The shape of a particular chisquare distribution depends on the number of degrees of freedom. CHI-SQUARE DISTRIBUTION PROPERTIES The properties of the chi-square distribution are given below: Chi-square is non-negative in value: it is either zero or positively valued. It is not symmetrical: it is skewed to the right. There are many chi-square distributions. As with the t-distribution, there is a different chi-square distribution for each degree-of-freedom value. If we know the degrees of freedom and the area in the right tail of a chi-square distribution, we can find the value of chi-square from the table

GOODNESS-OF-FIT TEST We shall consider the goodness-of-fit test as the first application of chi-square . This test is a test of the agreement between a hypothetical and a sample distribution, A number of times we find that the results obtained in samples are not consistent with the theoretical results expected according to the rules of probability. For example, theory says that when we toss a fair coin 100 times, we should expect 50 heads and 50 tails, but in reality we may not find this result; either heads or tails may be more than 50 and thus they may seldom equal. Before we take up an example, we give below the procedure involved in the chi-square test.

PROCEDURE FOR CONDUCTING CHI-SQUARE TEST

State the null hypothesis. Which is usually as follows: the sample distribution agrees with the hypothetical or theoretical distribution.

Calculation the number in each category on the assumption that the null hypothesis is correct. Thus, for each observation, we shall have observed frequency and expected frequency

Determine the level of significance Calculate the chi-square by using the following formula

Chi-square formula and degrees of freedom table

Determine the number of degrees of freedom . For the specified level of significance and the degrees of freedom, find the critical or theoretical value of x^2

Compare the calculated value of x^2 with the theoretical value and determine the region of rejection. In the case the calculated value of x^2 is less than the theoretical(or critical) , the null hypothesisi is accepted . If on the other hand , the calculated value of x^2 is greater than the theoretical value, the null hypothesis is rejected.

ANALYSIS AND INTERPRETATION OF DATA

Table 1: Showing respondents experience in business Source: Qn# 1 from questionnaire

Statistics N Valid Missing 50 0

RESPONDENTS EXPERIENCE IN TRADING BUSINESS Cumulative Percent 24.0 96.0 100.0

Frequency Valid Less than 1 year 1- 5 years More than 5 years Total 12 36 2 50

Percent 24.0 72.0 4.0 100.0

Valid Percent 24.0 72.0 4.0 100.0

Table 4.2.1: Respondents experience in trading business

Graph 1:
Figure 4.2.1: Respondents experience in trading business

Analysis: From the above data, it is clear that 72% of the respondents are having more 1 year and less than 5 years of experience. This is particularly important as there are views are going to be important deciding factor of the Questionnaire.

Table 2: Showing the no of respondents dealing in agriculture commodity market Source: Qn# 2 from questionnaire Statistics N Valid Missing 50 0

NO OF RESPONDENTS DEALING IN AGRICULTURE COMMODITY MARKET Valid Percent 88.0 12.0 100.0 Cumulative Percent 88.0 100.0

Frequency Valid Yes No Total 44 6 50

Percent 88.0 12.0 100.0

Table 4.2.2: No of respondents dealing in agriculture commodity market

Graph 2:
Figure 4.2.2: No of respondents dealing in agriculture commodity market

Analysis:

It is clear from the above table that more than 75% of respondents are dealing with agriculture commodity market which is more required for conducting this study. Table 3: Showing increase volume of trade over last year Source: Qn# 3 from questionnaire Statistics N Valid Missing 50 0

INCREASE IN VOLUME OF TRADE OVER LAST YEAR Cumulative Percent 86.0 100.0

Frequency Percent Valid Percent Valid Yes No Total Graph 3: 43 7 50 86.0 14.0 100.0 86.0 14.0 100.0

Table 4.2.3: Increase in volume of trade over last year

Figure 4.2.3: Increase in volume of trade over last year

Analysis: It is clear from the above table that there is definite increase in the volume of trade due to increase in number of investors. Table 4: Showing improvement in number of clients Source: Qn# 4 from questionnaire Statistics N Valid Missing 50 0

IMPROVEMENT IN NO OF CLIENTS Cumulative Percent 96.0 100.0

Frequency Percent Valid Percent Valid Yes No Total Graph 4: 48 2 50 96.0 4.0 100.0 96.0 4.0 100.0

Table 4.2.4: Improvement in no of clients

Figure 4.2.4: Improvement in no of clients

Analysis: Most of the respondents have mentioned that there is an increase in number of the client which means that there are more possibilities for the market speculation as some these clients would trade in speculation angle.

Table 5: Showing investors knowledge about agriculture commodity market Source: Qn# 5 from questionnaire Statistics N Valid Missing 50 0

INVESTORS TRADING IN AGRICULTURE COMMODITIES WITH PROPER KNOWLEDGE Frequency Percent Valid Percent Valid Yes No Total Graph 5:
Figure 4.2.5: Investors trading in agriculture commodities with proper knowledge

Cumulative Percent 42.0 100.0

21 29 50

42.0 58.0 100.0

42.0 58.0 100.0

Table 4.2.5: Investors trading in agriculture commodities with proper knowledge

Analysis: Knowledge about the financial sector have grown tremendously in the last few years, thanks to the structural changes in the market, and the economy is now ripe. Once India has skills in the core markets, capabilities in commodities can be easily applied into unexpected areas. From the above we can make out there is a mixed opinion regarding investors knowledge on commodity market. Table 6: Showing agriculture commodity market is a safe investment avenue for retail investors Source: Qn# 6 from questionnaire Statistics

Valid Missing

50 0

AGRICULTURE COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL INVESTORS Frequency Percent Valid Percent Valid Yes No Total 28 22 50 56.0 44.0 100.0 56.0 44.0 100.0 Cumulative Percent 56.0 100.0

Table 4.2.6: Agri-commodity market is safe investment avenue for retail investors

Graph 6:
Figure 4.2.6: Agriculture commodity market is safe investment avenue for retail investors

Analysis: Leverage is very important to the commodities markets. Unlike, the stock market where you might have to invest Rs.10, 000 to leverage Rs.10, 000. A commodities trader can leverage tens of thousands of rupees worth of a commodity. Also unlike stocks, Commodities have intrinsic value and will not go bankrupt. From the above table it is clear that 56% of respondents are telling that it is a safe for Investment Avenue. And 44% are telling that not safe for investment.

Table 7: Showing reasons why brokers prefers to invest in specific agriculture commodities Source: Qn# 7 from questionnaire Statistics N Valid 50

Missing

REASONS FOR INVESTING IN SPECIFIC AGRICULTURE COMMODITIES Frequency Valid More no of investors Low risk High rate of return Any other Total Graph 7: 17 9 20 4 50 Percent 34.0 18.0 40.0 8.0 100.0 Valid Percent 34.0 18.0 40.0 8.0 100.0 Cumulative Percent 34.0 52.0 92.0 100.0

Table 4.2.7: Reasons for investing in specific commodities

Figure 4.2.7: Reasons for investing in specific commodities

Analysis: Most of the respondents mentioned that they prefer agriculture commodity trading because of their high rate of return and involvement of more no of investors. Table 8: Showing agriculture commodity wise preferences by respondents Source: Qn# 8 from questionnaire Statistics N Valid Missing 50 0

Graph 8:

Figure 4.2.8: Agriculture commodity wise preferences by respondents

Analysis:

Most of the respondents mentioned that they prefer to invest in cardamom or sugar as they would yield higher rate of return for them. Table 9: Showing respondents opinion on futures commodity trading and its impact on food price volatility Source: Qn# 9 from questionnaire Statistics N Valid Missing 50 0

RESPONDENTS OPINION ON FUTURES COMMODITY TRADING AND ITS IMPACT ON FOOD PRICE VOLATILITY Frequency Percent Valid Percent Valid Yes No Total 38 12 50 76.0 24.0 100.0 76.0 24.0 100.0 Cumulative Percent 76.0 100.0

Table 4.2.8: Respondents opinion on futures commodity trading and its impact on food price volatility

Graph 9:
Figure 4.2.9: Respondents opinion on futures commodity trading and its impact on food price volatility

Analysis:

Most of the respondents mentioned that commodity trading is one of the main reasons for causing food price volatility.

Table 10: Showing no of respondents demanding for governments intervention to control the volatility of food prices Source: Qn# 10 from questionnaire Statistics N Valid Missing 50 0

NO OF RESPONDENTS DEMANDING GOVERNMENT INTERVENTION TO CONTROL FOOD PRICES Cumulative Percent 80.0 100.0

Frequency Percent Valid Percent Valid Yes No Total 40 10 50 80.0 20.0 100.0 80.0 20.0 100.0

Table 4.2.9: No of respondents demanding government intervention to control food prices

Graph 10:
Figure 4.2.10: No of respondents demanding government intervention to control food prices

Analysis:

Most of the respondents mentioned that government intervention is required to control food price volatility. Table 11: Showing respondents thinking on banning agriculture commodity trading to reduce food price volatility Source: Qn# 11 from questionnaire Statistics N Valid 50

Missing

NO OF RESPONDENTS DEMANDING BAN ON AGRICULTURE COMMODITY TRADING TO REDUCE FOOD PRICE VOLATILITY

Frequency Percent Valid Percent Yes Valid No Total 37 13 50 74.0 26.0 100.0 74.0 26.0 100.0

Cumulative Percent 74.0 100.0

Table 4.2.10: No of respondents demanding ban on agriculture commodity trading to reduce food price volatility

Graph 11:

Figure 4.2.11: No of respondents demanding ban on agriculture commodity trading to reduce food price volatility

Analysis:

74% of the respondents mentioned that commodity trading should be banned in order to reduce food price volatility and this is no surprise as the government banned trading on Sugar some time during year 2008.

Table 12: Showing reasons for continuous increase in agriculture food price by respondents Source: Qn# 12 from questionnaire Statistics N Valid 50

Missing

REASONS FOR CONTINUOUS FOOD PRICE INCREASE Frequency Percent Valid Volume of production is less Increased earning power Usage of commodity items in making bio-fuel Inflation Others Total Graph 12: 9 14 2 21 4 50 18.0 28.0 4.0 42.0 8.0 100.0 Valid Percent 18.0 28.0 4.0 42.0 8.0 100.0 Cumulative Percent 18.0 46.0 50.0 92.0 100.0

Table 4.2.11: Reasons for continuous food price increase

Figure 4.2.12: Reasons for continuous food price increase:

Analysis:

Most of the respondents mentioned that inflation is the most important reason for the continuous increase in the food price.

Table 13: Showing the performance of agriculture commodity market by respondents Source: Qn# 13 from questionnaire Statistics

Valid Missing

50 0

PERFORMANCE OF AGRICULTURE COMMODITY MARKET

Frequency Valid Highly volatile Volatile Stable Unstable Total Graph 13: 31 14 4 1 50

Percent 62.0 28.0 8.0 2.0 100.0

Valid Percent 62.0 28.0 8.0 2.0 100.0

Cumulative Percent 62.0 90.0 98.0 100.0

Table 4.2.12: Performance of agriculture commodity market

Figure 4.2.13: Performance of agriculture commodity market

Analysis: Most of the respondents mentioned that agriculture commodity market is highly volatile in nature.

Table 14: Showing investors behavior in speculation angle by respondents Source: Qn# 14 from questionnaire Statistics N Valid Missing 50 0

RESONDENTS RATING ON THEIR INVESTORS BEHAVIOUR I N SPECULATION ANGLE

Frequency Percent Valid Percent Valid 1 25% 26% - 50% 51% - 75% 76% - 100% Total 7 22 19 2 50 14.0 44.0 38.0 4.0 100.0 14.0 44.0 38.0 4.0 100.0

Cumulative Percent 14.0 58.0 96.0 100.0

Table 4.2.13: Respondents rating on their investors behavior in speculation angle

Graph 14:
Figure 4.2.14: Respondents rating on their investors behavior in speculation angle

Analysis: From the above histogram chart, it is clear that most of the investors are trading in the agriculture commodity market in speculation angle. Table 15: Showing agriculture commodity future prices influence on spot price by respondents Source: Qn# 15 from questionnaire Statistics N Valid Missing 50 0

SHOWING AGRICULTURE COMMODITY FUTURE PRICES INFLUENCE ON SPOT PRICE

Cumulative Frequency Percent Valid Percent Valid Yes No Total 43 7 50 86.0 14.0 100.0 86.0 14.0 100.0 Percent 86.0 100.0

Table 4.2.14: Showing agriculture commodity future prices influence on spot price

Graph 15:

Figure 4.2.15: Showing agriculture commodity future prices influence on spot price

Analysis: From the above pie chart, it is clear that future price influences the spot price and this is further even proved in the secondary data analysis part of this project.

Table 16: Showing respondents opinion on who is more benefitted out of agriculture commodity trading Source: Qn# 16 from questionnaire Statistics N Valid Missing 50 0

SHOWING BENIFICIERIES OF COMMODITY TRADING

Frequency Valid Farmers Investors Trading Organizations Retailers Total Graph 16: 2 28 9 11 50

Percent 4.0 56.0 18.0 22.0 100.0

Valid Percent 4.0 56.0 18.0 22.0 100.0

Cumulative Percent 4.0 60.0 78.0 100.0

Table 4.2.15: Beneficiaries of commodity trading

Figure 4.2.16: Beneficiaries of commodity trading

Analysis: The above histogram chart shows that commodity investor is the one who is more benefited out of the trading. Table 17: Showing success ration of agriculture commodity trading by respondents Source: Qn# 17 from questionnaire Statistics N Valid Missing 50 0

SUCCESS RATIO OF AGRICULTURE COMMODITY TRADING

Frequency Valid 0-25% 26-50% 16 22

Percent 32.0 44.0

Valid Percent 32.0 44.0

Cumulative Percent 32.0 76.0

51-75% 76-100% Total

11 1 50

22.0 2.0 100.0

22.0 2.0 100.0

98.0 100.0

Table 4.2.16: Success ratio of agriculture commodity trading

Graph 17:
Figure 4.2.17: Success ratio of agriculture commodity trading

Analysis: The above histogram chart shows that the success ratio of the commodity trading lies in between 25% to 50% but still more investors are participating in the commodity trading year by year and it gives a indication that these investors might be doing the trading in speculation angle.

CALCULATION OF BETA AND VOLATILITY SUGAR

Figure 4.2.18: Future and spot prices of sugar

Calculation of Beta and Volatility of Sugar using Microsoft Excel

Date 31-Mar-11 15-Mar-11 1-Mar-11 14-Feb-11 1-Feb-11 14-Jan-11 3-Jan-11 Sugar Spot Price(Rs.) 2690 2827 2925 2933 2999 3073 3282 MCX Agri Future Index 2533.03 2773.25 2897.74 2962.86 2775.81 2810.75 2863.14 Sugar % -4.85% -3.35% -0.27% -2.20% -2.41% -6.37% Market % -8.66% -4.30% -2.20% 6.74% -1.24% -1.83%

Beta Standard Deviation Mean

0.128645 187.3079 2961.286

Table 4.2.17: Calculation of Beta and Volatility of Sugar

Inference: Since the beta value is less than 1 sugar is less volatile for the duration of Mar10 to Mar11

WHEAT
Figure 4.2.19: Future and spot prices of wheat

Calculation of Beta and Volatility of Wheat using Microsoft Excel

Wheat Spot Price(Rs.) 1186 1205.4 1365.9 1365.9 1365.9 1326.1 1326.1 1326.1 1326.1 1287.5 1287.5 1287.5 1250 1265 1265 1265 1265 1265 1265 1226.4 MCX Agri Future Index 2533.03 2773.25 2897.74 2962.86 2775.81 2810.75 2863.14 2716.53 2762.58 2710.06 2618.54 2478.52 2335.4 2171.63 2192.81 2352.66 2292.86 2205.42 2184.47 2129.15

Date 31-Mar-11 15-Mar-11 1-Mar-11 14-Feb-11 1-Feb-11 14-Jan-11 3-Jan-11 15-Dec-10 1-Dec-10 15-Nov-10 1-Nov-10 15-Oct-10 1-Oct-10 15-Sep-10 1-Sep-10 16-Aug-10 2-Aug-10 15-Jul-10 1-Jul-10 15-Jun-10

Wheat % -1.61% -11.75% 0.00% 0.00% 3.00% 0.00% 0.00% 0.00% 3.00% 0.00% 0.00% 3.00% -1.19% 0.00% 0.00% 0.00% 0.00% 0.00% 3.15% 3.00%

Market % -8.66% -4.30% -2.20% 6.74% -1.24% -1.83% 5.40% -1.67% 1.94% 3.50% 5.65% 6.13% 7.54% -0.97% -6.79% 2.61% 3.96% 0.96% 2.60% -1.87%

1-Jun-10 17-May-10 3-May-10 15-Apr-10 1-Apr-10 15-Mar-10 2-Mar-10 Beta Standard Deviation Mean

1190.7 1156 1160 1150 1151.1 1173 1184 0.191772 69.47486 1255.081

2169.83 2117.85 2150.09 2158.28 2189.29 2143.18 2130.3

3.00% -0.34% 0.87% -0.10% -1.87% -0.93%

2.45% -1.50% -0.38% -1.42% 2.15% 0.60%

Table 4.2.18: Calculation of Beta and Volatility of Wheat

Inference: Since the beta value is less than 1 wheat is less volatile for the duration of Mar10 to Mar11 ALMOND
Figure 4.2.20: Future and spot prices of almond

Calculation of Beta and Volatility of Almond using Microsoft Excel

Date 31-Mar-11 15-Mar-11 1-Mar-11 14-Feb-11 1-Feb-11 14-Jan-11 3-Jan-11 15-Dec-10 1-Dec-10 15-Nov-10 1-Nov-10 15-Oct-10 1-Oct-10 15-Sep-10 1-Sep-10 Almond Future Price(Rs.) 338.75 338.75 338.75 338.75 349.25 349.25 349.25 343.5 343.5 343.5 305 329.75 350 339 337.75 MCX Agri Future Index 2533.03 2773.25 2897.74 2962.86 2775.81 2810.75 2863.14 2716.53 2762.58 2710.06 2618.54 2478.52 2335.4 2171.63 2192.81 Almond % 0.00% 0.00% 0.00% -3.01% 0.00% 0.00% 1.67% 0.00% 0.00% 12.62% -7.51% -5.79% 3.24% 0.37% 0.37% Market % -8.66% -4.30% -2.20% 6.74% -1.24% -1.83% 5.40% -1.67% 1.94% 3.50% 5.65% 6.13% 7.54% -0.97% -6.79%

16-Aug-10 2-Aug-10 15-Jul-10 1-Jul-10 15-Jun-10 1-Jun-10 17-May-10 3-May-10 15-Apr-10 1-Apr-10 15-Mar-10 2-Mar-10

336.5 328.75 315 338.5 321.75 337.5 351.25 358.75 376.5 399.25 387 364

2352.66 2292.86 2205.42 2184.47 2129.15 2169.83 2117.85 2150.09 2158.28 2189.29 2143.18 2130.3

2.36% 4.37% -6.94% 5.21% -4.67% -3.91% -2.09% -4.71% -5.70% 3.17% 6.32%

2.61% 3.96% 0.96% 2.60% -1.87% 2.45% -1.50% -0.38% -1.42% 2.15% 0.60%

Beta Standard Deviation Mean

0.078826 19.92872 344.7963

Table 4.2.19: Calculation of Beta and Volatility of Almond

Inference: Since the beta value is less than 1 almond is less volatile for the duration of Mar10 to Mar11

CARDAMOM

Figure 4.2.21: Future and spot prices of cardamom

Calculation of Beta and Volatility of Cardamom using Microsoft Excel

Cardamom Spot Price(Rs.) 1083.3 1113.6 1128.1 1337.9 1456.5 MCX Agri Future Index 2533.03 2773.25 2897.74 2962.86 2775.81 Cardamom % -2.72% -1.29% -15.68% -8.14% -10.06%

Date 31-Mar-11 15-Mar-11 1-Mar-11 14-Feb-11 1-Feb-11

Market % -8.66% -4.30% -2.20% 6.74% -1.24%

14-Jan-11 3-Jan-11 15-Dec-10 1-Dec-10 15-Nov-10 1-Nov-10 15-Oct-10 1-Oct-10 15-Sep-10 1-Sep-10 16-Aug-10 2-Aug-10 15-Jul-10 1-Jul-10 15-Jun-10 1-Jun-10 17-May-10 3-May-10 15-Apr-10 1-Apr-10 15-Mar-10 2-Mar-10

1619.4 1662.4 1313.8 1246.4 981.6 902.3 978.1 1010.8 1046.5 1235.9 1141.8 1216 1353.3 1448.8 1690 1492.9 1457.9 1367.3 1309.2 1297.1 1233.1 1119.3

2810.75 2863.14 2716.53 2762.58 2710.06 2618.54 2478.52 2335.4 2171.63 2192.81 2352.66 2292.86 2205.42 2184.47 2129.15 2169.83 2117.85 2150.09 2158.28 2189.29 2143.18 2130.3

-2.59% 26.53% 5.41% 26.98% 8.79% -7.75% -3.24% -3.41% -15.32% 8.24% -6.10% -10.15% -6.59% -14.27% 13.20% 2.40% 6.63% 4.44% 0.93% 5.19% 10.17%

-1.83% 5.40% -1.67% 1.94% 3.50% 5.65% 6.13% 7.54% -0.97% -6.79% 2.61% 3.96% 0.96% 2.60% -1.87% 2.45% -1.50% -0.38% -1.42% 2.15% 0.60%

Beta Standard Deviation Mean

-0.02401 212.5525 1268.27

Table 4.2.20: Calculation of Beta and Volatility of Cardamom

Inference: Negative Beta value indicates that the Commodity return moves in the opposite direction to the Index return. A Commodity with negative beta of -1 would provide a return on 10 % if the Index return declines by 10% and vice versa. But usually the negative beta value can be seen rare in the market.

ANALYIS: Summary of Beta and Volatility Analysis

Commodity item Sugar Wheat Almond Cardamom

Beta 0.1286 0.1918 0.0788 -0.024

Volatility(S.D) 187.3079 69.47486 19.92872 212.5525

Inference Commodity item is highly volatile than the market Commodity item is less volatile than the market Commodity item is less volatile than the market Rate of return of commodity item moves in opposite to the rate of return of the market

Table 4.2.21: Summary of Beta and Volatility Analysis

It is evident from the above graphs that spot prices are influenced by future price of that particular agriculture commodity. For e.g. Cardamom had highly volatile future price movement and it influenced a similar price movement in the spot market also.

All agriculture commodity items except cardamom were less volatile than the agriculture commodity market. The technical analysis on sugar is conducted only for 3 months as it was banned for trading. During 2008-10 time periods, sugar was the most preferred commodity item among the investors and brokers but after the government ban and future probable actions on regulating sugar trading, changed investors and brokers perception and now they prefer to invest in cardamom compared to sugar and this was clearly shown in our survey analysis also.

CHI-SQUARE ANALYSIS
HYPOTHESIS

H0: Future trading impacts agriculture commodity prices H1: Future trading doesnt impact agriculture commodity prices Verify the above result with the help of at 5 per cent level of significance. Observed Values: Criteria Future trading causes price volatility(Q9) Yes 38 No 12 Total 50

Future trading influences spot price(Q15) Total

Table 4.2.22: Observed Values

43 81

7 19

50 100

Expected Values: Criteria Future trading causes price volatility: A Future trading influences spot price: a Total
Table 4.2.23: Expected Values

Yes: B 40.5 40.5 81

No: b 9.5 9.5 19

Total 50 50 100

Calculation of Chi-Square Group AB Ab aB ab Observed frequency(Oij) 38 12 43 7 Expected frequency(Eij) 40.5 9.5 40.5 9.5 (Oij Eij) -2.5 2.5 2.5 -2.5 (Oij Eij) 2 6.25 6.25 6.25 6.25 (Oij - Eij)2/Eij 0.154320988 0.657894737 0.154320988 0.657894737

Table 4.2.24: Calculation of Chi-Square

= ((Oij - Eij)2 /Eij )

= 1.624

Degrees of freedom in this case = (r -1) (c-1) = (2 -1) (2-1) = 1

The table value of for 1 degree of freedom at 5 per cent level of significance is 3.841. The calculated
value of is much lower than this table value and hence the result of the experiment support the hypothesis.

We can, thus, conclude that future trading impacts the agriculture commodity prices.

CHAPTER 5 CONCLUSIONS

SUMMARY OF FINDINGS 72% of the respondents had 1 5 years of trading experience and 4% respondents had more than 5 years of trading experience. 88% of the respondents were dealing in agriculture commodity market 86% of the respondents mentioned that there trading volume increased over the last year. This indicates that more volumes are now participating in the agriculture commodity trading. 96% of the respondents mentioned that there was a improvement in no of clients over the last year. 58%of the respondents mentioned that their investors dont possess proper knowledge in agriculture commodity market. This shows that most of the investors just do trading only in their speculation angle. 56% of the respondents mentioned that agriculture commodity market is safe investment avenue for retail investors. 40% of the respondents mentioned that they invest in agriculture commodity market for their higher rate of return. 34% of the respondents mentioned that they invest in agriculture commodity market because of the participation of more no of investors.

Most of the respondents mentioned that they prefer to invest in cardamom or sugar as they would yield higher rate of return for them.

76% of the respondents mentioned that commodity trading is one of the main reasons for causing food price volatility.

80% of the respondents mentioned that government intervention is required to control food price volatility.

74% of the respondents mentioned that commodity trading should be banned in order to reduce food price volatility and this is no surprise as the government banned trading on Sugar some time during year 2008.

42% of the respondents mentioned that inflation is the most important reason for the continuous increase in the food price. 28% of the respondents mentioned that increased earning power is one of the main reasons for the continuous food price increase.

62% of the respondents mentioned that agriculture commodity market is highly volatile in nature.

44% of the investors are trading in the agriculture commodity market in speculation angle.

86% of the respondents mentioned that future price is influencing the spot price. 56% of the respondents mentioned that investors are more benefitted out of the agriculture commodity trading.

44% of the respondents mentioned that the agriculture commodity trading success ratio is somewhere between 25% - 50%

The dependency graph between future and spot prices showed that spot price is influenced by future price

Beta and volatility of the considered food items showed that market moved better than the price of the agriculture items. It implies that commodity trading doesnt influence increase in food price but it is responsible for causing instability in the food prices.

Chi-square analysis concluded that future price impacts the agriculture commodity prices. Government ban on food items are not really recommended as sugar price had a considerable increase even during the ban period 2008-10. In other words, government ban on sugar didnt help in bringing down the price of the same.

SUGGESTIONS & RECOMMENDATIONS

Spot prices and futures prices are interdependent. While the futures market provides indications to the spot markets on the direction in which prices will move in the future, the futures prices are determined on the basis of the conditions in the spot markets. Speculation may drive prices further up, but a speculator expects prices to rise due to the market conditions, and doesnt arbitrarily bet on a price rise.

Although futures markets may influence spot prices, banning them will only cause speculation and will take on a new form, which cant be regulated, although the number of participants will probably be lower due to higher risks.

Banning futures is not a logical solution to rising prices. It obstructs the development of a mechanism to regulate the markets and discourage unhealthy speculation. Futures markets should be developed along with spot markets and integrated effectively to bring about greater participation from the producers and consumers of the underlying assets. One may argue that the market mechanism takes time to come into effect and that this isnt an effective solution in the short run. However, commodity prices show that banning futures hasnt been a viable short-run solution either.

According to a report in The Guardian, a World Bank study revealed that bio-fuels had caused global food prices to rise by 75 per cent. Using plant-derived fuels during a food crisis that has pushed 100 million people below the poverty line worldwide will only aggravate the situation further.

In India, the oil price subsidies are not sustainable in the long run because they keep demand artificially high and cause a huge fiscal burden. If the effect of the oil price rises is passed on to the economy, inflation will rise further, as will food prices due to higher transportation costs.

The recent spurt in food prices is believed to be the result of temporary supply shocks. They are expected to ease later this year because higher prices are likely to prompt an increase in supply.

In the short run, subsidized food for the poor is essential. In the long run, the Government must invest more in agriculture to provide better infrastructure rather than implementing misguided schemes like the farm loan waiver. Waste minimization through proper warehousing is the first and most logical step.

The ban on futures trading may not have affected the farmers much, since only a very small number directly participate in the futures market. But the ban didnt control inflation either. Greater integration of the spot and future markets by encouraging higher participation by the farmers is necessary, so that the futures markets perform the function of price discovery more effectively, and the intended beneficiaries are able to use the market to hedge risks. In the absence of integration, the debate about the ban on futures trading becomes irrelevant.

CONCLUSIONS

Following are the important conclusions after carrying out this study.

Technical analysis on the market data and as well as the brokers and investors opinion clearly shows that spot market of the agriculture commodity trading is influenced by the future trading which in turn affects the instability of food prices and this is even concluded during the chisquare analysis.

Most of the brokers and investors felt that government intervention or ban on certain commodity item required to bring down the instability of food prices.

Though the government banned certain food items in the past to control the food prices of certain food item but it didnt really help in bringing down the price of that particular food item in the market.

DIRECTIONS FOR FUTURE RESEARCH

The above conclusion is purely based on the market data and opinion of the brokers and investors and it doesnt consider the following parameters which also can be one of the reasons for the food price instability.

Inflation Monsoon Supply of agriculture products Production of Bio-fuel Increased earning power Increased food consumption

The future research on this topic can be extended by including the above decision parameters in the study to arrive at the better conclusion.

APPENDIX

Questionnaire
A STUDY OF FUTURES TRADING AND ITS IMPACT ON AGRICULTURE COMMODITY PRICES

PERSONAL DETAILS: Name E-Mail ID Contact no : ________________________________________________ : ________________________________________________ : ________________________________________________

As a broker how many years of experience do you have in the trading business (both stock market and commodity market)? Less than 1 year b. 1- 5 years c. More than 5 years

Are you dealing in commodity market?

Yes

b. No

Whether there is increase in volume of trade over last year? Yes b. No

Is there any improvement in no of clients at your company?

Yes

b. No

Investors are trading in commodities with proper knowledge? Yes b. No

Whether commodity market is a safe investment avenue for retail investors? Yes b. No

Give reason why you prefer to invest in specific commodities?

More no of investors Low risk High rate of return Any other

Give Commodity wise preferences on which investors prefers to invest Sugar Wheat

Almond Cardamom

Note: Please specify your preference by mentioning the order in numerals (1, 2, 3 & 4)

According to your opinion, do you think future trading on agriculture commodity is one of the main reasons for commodity price volatility? Yes b. No

Do you think government intervention is required in order to control the volatility of commodity prices?

Yes

b. No

Do you think banning commodity trading will reduce commodity price volatility? Yes b. No

According to your opinion, what could be the reason for continuous food price increase? Volume of production is less Increased earning power Usage of commodity items in making Bio-fuel Inflation Others

Give your opinion about commodity market in India Highly volatile

Volatile Stable Un Stable

According to your experience, could you please rate your investors behavior in speculation angle? 1 25% 26% - 50% 51% - 75% 76% - 100%

Do you think future price of a commodity has an influence on spot price?

Yes

b. No

According to your opinion, who is more benefitted out of commodity trading practice? Farmers Commodity investor Organizations Retailer

What is the success ratio of commodity trade in India as per your opinion? 0 - 25% b. 26 - 50% c. 51 75% d. 76 100%

REFERENCES

Abhijit Sen 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, Government of India Narendar L. Ahuja(2006) Commodity Derivatives Market in India: Development, Regulation and Future Prospects. Internation Research Journal of Finance and Economics, ISSN 14502887, Issue 2. Sandhya Srinivasan(2008) Futures Trading in Agriculture Commodities. Is the government ban on commodities trading logical? Centre for Civil Society. Economic Survey of India (2004-05). Futures Trading in Agricultural Commodities. Ministry of Finance, Government of India International Herald Tribune (2008, May 8). India Extends ban on futures trading to cool prices Olivier de schutter (2010). Food Commodities Speculation and Food Price Crises. United Nations special reporter on the right to food Abraham, T.A. (2008, May 8). India bans rubber, soybean oil futures to cool prices. Bloomberg The Wall Street Journal (2010, Dec 28). Could Another Ban Hit Sugar Futures Trade? Chakravarty, M. & Philipose, M. (2008, April 20). Banning futures will do little. Mint Manglik, J. (2008, April 28). Banning futures trading will not help control commodity prices. Mint Reuters (2011, Feb 3). India's stance on key food trading. Headlines India (2010, Dec 26). Futures trading in sugar to re-start in India Monday. IATP (Institute for Agriculture and Trade Policy). (2008). Commodities Market Speculation: The Risk to Food Security and Agriculture

India Briefing (2011, Jan 4) India Resumes Sugar Futures Trading

Kothari C.R. (2005) Research Methodology, Methods & Techniques. Second Edition