Article

Indian Agri-Commodities Journal of Operations

and Strategic Planning
Markets: A Review of 4(1) 97­–118, 2021
© 2021 International Management
Transition Toward Institute, Kolkata
https://doi.org/10.1177/2516600X211015510
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DOI: 10.1177/2516600X211015510
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Minakshi Kar1

Abstract
By using indications given by the commodity markets, farmers, growers, or
producers can minimize the price risk and avoid a supply gut. The consumers
of the output can minimize the price risk and ensure that the demand pressure
is appropriately capped. It was in this backdrop that farmers and food grain
merchants initiated futures markets in agri-commodities. This article has been
successful in documenting the evolution of agri-commodities futures markets in
India and their regulatory framework. It also captures the transition toward agri-
commodities futures by engaging in a comprehensive survey of extant literature.
The market growth analysis indicates that the transition toward agri-commodities
futures markets has enabled price discovery and better price risk management.
While ensuring price risk mitigation and remunerative returns, these markets
also contribute to scaling down the downside risks associated with agricultural
lending and, thereby, facilitate the flow of credit to agriculture. Further, they also
hold a key role not only in reinvigorating the spot markets but also in triggering
the diversified growth of Indian agriculture in line with the consumption pattern.
Thus, enabling policies need to be put in place to strengthen the agri-commodities
futures markets by streamlining the supply chain.

Keywords
Agri-commodities, commodity markets, futures, price discovery, risk management

1 Department of Commerce, Dyal Singh College, University of Delhi, New Delhi, Delhi, India.

Corresponding author:
Minakshi Kar, Department of Commerce, Dyal Singh College, University of Delhi, Lodi road,
New Delhi, Delhi 110003, India.
E-mail: minakshi.du@gmail.com
98 Journal of Operations and Strategic Planning 4(1)

Introduction
Agriculture and allied sector continue to play an important role in India as they
ensure food security of about 1.3 billion people, employing more than 50% of the
workforce, and make a contribution of about 15.4% (GoI, 2018) to the country’s
gross domestic product. The developments in the sphere of Indian agriculture led
to the growth of Indian agri-commodities market. India is the largest consumer of
commodities such as precious metals (bullions and silver), metals (copper, zinc,
lead, etc.), and agricultural products (cotton, pepper, maize, wheat, sugar, coffee,
dairy products, chili, etc.). The existence of commodity markets can be considered
as old as Indian history itself. Broadly, commodity markets including agricultural
commodities exist in two forms—spot markets and exchange-based markets. In
spot markets, the payment and delivery are immediate, and therefore, all transactions
are over-the-counter (OTC) transactions, whereas ‘futures’ are standardized
financial contracts for the respective commodities traded in the exchanges.
Agricultural producers are prone to several risks such as price, crop and
weather/climatic variations, and a number of other natural disasters, which could
affect their anticipated income very badly and could have negative effects on the
standard of living, ability to build capital, and facility to access credit and repay
debts. The uncertainty of commodity prices leaves a farmer open to the risk of
receiving a price lower than the expected price for his yield. Often, the price
farmers get for their produce at the marketplace does not even cover their
investment in farming operations. On the other hand, big farmers are affected
equally badly when prices are not attractive or crash at the marketplace. Hence, a
way out of this vicious cycle must be found and that is where the commodity
markets come in. By using indications given by the commodity markets, farmers,
growers, or producers can minimize the price risk and avoid a supply gut. The
consumers of the output can minimize the price risk and ensure that the demand
pressure is appropriately capped. It was in this backdrop that farmers and food
grain merchants in Chicago initiated negotiations for supply of grains at a future
date in exchange for cash at a price mutually agreed upon. It is believed that
commodity futures have existed in India for thousands of years.
In this context, this article attempts to documents the evolution of agri-
commodities futures markets in India and their regulatory framework. Secondly,
a structured survey of extant literature has been conducted to capture the transition
toward futures. The third objective is to find out the recent trends and developments
in Indian agri-commodities futures trading. In order to achieve these objectives, a
comprehensive survey of extant literature has been conducted in the first place.
Thereafter, content analysis has been applied to focus on the research constructs.
Furthermore, secondary data have been extracted from operative Indian
commodity exchanges and survey of Indian economy to present the trend analysis
of agri-commodities future trading. This article is organized in five sections
including introduction and conclusion. The second section depicts the evolution
and regulatory framework of agri-commodities markets in India. The third section
presents a structured review of literature. The fourth section captures the recent
developments of Indian agri-commodities futures trading. The last section
presents the discussion and conclusion.
Kar 99

Evolution and Regulatory Framework of Futures Markets

The origin of futures trading is traced to Japan in the seventeenth century, and the
Dojima Rice Exchange in Osaka, Japan, is said to be the world’s first organized
futures exchange where trading started in 1710. On April 3, 1848, the Chicago
Board of Trade (CBOT) was established by 83 merchants to facilitate trade in spot
produce and forward contracts. It was only in 1865 that standardized futures
contracts were introduced. The Chicago Produce Exchange was established in
1874 and the Chicago Butter and Egg Board in 1898. In 1919, it was reorganized
to enable future trading and was renamed Chicago Mercantile Exchange. The
primary aim of the Exchange is to bring a large number of buyers and sellers on
the same platform for spot price discovery and to make sure that the commodity
bought and sold on the Exchange is delivered on time without the counterparty
risks to the traders.

Pre-Independence Period
Organized trading in commodity futures in India was reported to have started in
the latter part of the nineteenth century at Bombay Cotton Trade Association Ltd
(established in 1875). Following cotton, derivatives trading started in oilseeds in
Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur
(1913), and in Bullion in Bombay (1920) (Mukherjee, 2011). However, many
feared that derivatives fueled unnecessary speculation in essential commodities
and were detrimental to the healthy functioning of the markets for the underlying
commodities and, hence, to the farmers. With a view to restricting speculative
activity in cotton market, the Government of Bombay prohibited options business
in cotton in 1939. Later, in 1943, forward trading was prohibited in oilseeds and
some other commodities including food grains, spices, vegetable oils, sugar, and
cloth (Seilan, 2010). There were no uniform guidelines or regulations, and trade
was dependent on mutual trust and social control. In 1947, the Bombay Forward
Contracts Control Act was enacted by the Bombay State for facilitation of trade.

Postindependence Period
The legal framework for organizing forward trading and the recognition of
Exchanges was only provided after the adoption of the Constitution followed by
a central legislation called Forward Contracts (Regulation) Act 1952. Through a
notification issued on June 27, 1969, by exercising the powers conferred upon
the central government by the Securities Contracts Regulation Act 1956, forward
trade was prohibited in a large number of commodities, leaving only seven
commodities open for forward trade. This resulted in a decline in traded volumes
on stock markets and led to the evolution of an informal system of forward
trading by the Bombay Stock Exchange in 1972. However, this created payment
crises quite often. In the 1980s, the futures trading in some commodities such as
100 Journal of Operations and Strategic Planning 4(1)

potato, castor seed, and gur (jaggery) was permitted. In 1992, futures trading in
hessian was permitted. Then came the relief in the form of recommendations
from the Kabra Committee in 19941. There were a number of other expert
committees, including the Shroff Committee, Dantwala Committee, and the
Khusro Committee, which laid the foundation for the revival of futures trading.
Thereafter, in April 1999, futures trading in various edible oilseed complexes
was permitted, and in May 2001, futures trading in sugar was permitted. Another
landmark development came in the year 2000 when the national agricultural
policy was announced in July. It recognized the positive role of forward and
futures market in price discovery and price risk management. This has also
expressed support for commodity futures. The Expert Committee (Guru
Committee) on Strengthening and Developing Agricultural Marketing (Govt. of
India (GOI), 2001) emphasized ‘the need for and role of futures trading in price
risk management and in marketing of agricultural produce.’
Physical trading of agricultural commodities in India falls under the jurisdiction
of the state governments. Each state has its own Agricultural Produce Market
Committee (APMC) Act to regulate physical trading of commodities. The APMC
Act requires buyers and sellers to assemble at designated places known as
regulated market yards. Each regulated market yard is governed by a market
committee, which is expected to facilitate competitive price discovery for farmers.
Once a state government declares a particular area to be part of a market committee,
all wholesale trading in that area has to be undertaken at the designated regulated
market yard only. The failure of APMCs to provide a competitive market has been
highlighted in the report titled ‘Final Report of Committee State Ministers,
In-Charge of Agricultural Marketing to Promote Reforms’ (2013).
Forward Markets Commission (FMC) used to be the regulatory body to
regulate commodity futures trade and control the activities of commodity
exchanges similar to how Securities Exchange Board of India (SEBI) regulates
the functions of capital market. However, the commodity derivatives market in
India has now come under the regulation of SEBI following merger of FMC with
it since 2015. Currently, both futures and options are permitted in the Indian
commodity derivatives markets. Derivatives trading is permitted in 91 notified
commodities, of which derivatives contracts for around 40 commodities are
presently offered for trading by the commodity derivatives exchanges. At present,
there are 6 national commodity exchanges2 and 23 regional commodity specific
exchanges operating in Indian commodity futures market. Subsequently, SEBI
has implemented a slew of advancements within the commodity market space3.

Review of Literature
An understanding of futures markets is illustrated by Sharon (2005) wherein he
categorized commodity futures into three types, that is, agricultural commodity,
energy commodity, and metal commodity, while giving a detailed description on
the basis of how it affects commodity futures. It also explains the variation in
basis across commodities and reasons for the same. Using commodity futures to
Kar 101

hedge the commodity price risk helps in avoiding uncertainty of future cash flows
and facilitates locking in the price. In other words, it helps in minimizing the price
risk, but not completely avoiding the losses. Sometimes the unhedged position
may provide better results than the hedged one. Commodity futures allow both the
producers and consumers of agricultural products to manage the price risk that
might arise due to various factors. Having experienced agricultural liberalization
which has facilitated commodity trading, India is still away from achieving the
benefits of commodity markets. In order to develop the commodity market, it is
necessary to understand the constraints involved in better development of
commodity trading and find out ways of dealing with them. In this backdrop, an
attempt has been made to present a review of extant literature in a structured
manner for the Indian agri-commodities market to pinpoint the understanding and
focus on the market and the constraints. This has been achieved through a content
analysis of the available literature and presented in the form of tables under three
categories: (a) growth and development, (b) perception and awareness, and (c)
price discovery.

Growth and Development

Systemic changes brought about by liberalization, global economic recovery,
growing awareness about derivatives trading and their ability to reduce the
underlying risk, etc., have caused a revolutionary change in the commodity
market. However, as compared to global commodity derivatives markets, the
Indian commodity market is still in a developing stage because of various lags
between the policies, poor implementation process, lack of awareness, and the
improper impact of various reforms. It has been reported that commodity
derivatives trading in India has come out of the state of hibernation in the last few
years and is progressing (Bannerjee, 2006). Gupta (2011) found that starting from
the time it was reintroduced, the commodity derivative market has been growing
at a fast pace and promises a solid growth potential of this market. The actual
growth pattern will depend upon the efficiency of the regulatory mechanism and
attitude of the policymakers. Indian futures markets have achieved a sizeable
growth due to removal of ban from commodity trading (Srivastava & Saini, 2009).
Dummu TR (2007) found that after the government removed protection from
various commodities, there has been a massive progress in trading activity and
trading volume in Indian commodity futures market. A large number of studies
have supported the fact that commodity derivative market played a significant
role in price risk management.
According to Ahuja (2006), Indian commodity markets have made great
progress since 2003 with increased number of modern commodity exchanges,
transparency, and increase in volume of trading. This scaling up had occurred due
to the role played by market forces, dissemination of information, and the active
encouragement of government by positive policy interventions in the commodity
derivative. Bhattacharya (2007) stated that features like significant risk returns
and potential of diversification have made commodities popular as an asset class.
102 Journal of Operations and Strategic Planning 4(1)

Lakhsmi (2007) pointed out that the futures market in commodities has achieved
multifold growth in turnover in a short time and listed several factors that need to
be considered for making commodity market an efficient instrument for risk
management and price discovery. According to Lamon Rutten, managing director
and chief exceutive officer of MCX, ‘a beginning towards transforming the Indian
commodities sector has been made, from its current status of being a “price taker”,
with lead being taken by the national online commodity futures exchanges’
(Lamon, 2011). These exchanges are offering the benefits of liberalization and
globalization directly to the industry and consumers by empowering them to
influence the global prices of commodities they deal in. Moreover, a study by
Kaur and Rao (2010) pointed out that Indian commodity derivative market has
witnessed phenomenal growth in few years by achieving almost 50 times growth
in market, whereas Kapil and Kapil (2010) found an unstructured market
expansion in Indian commodity markets, in spite of high demand for commodities
in both derivative and spot markets (see Table 1).

Table 1. Content Analysis of the Review of Literature: Growth and Development.

Serial Name of the Year of
Number Author Publication Major Findings of the Study
1 Acharya 1996 Based on the report of the Royal Commis-
sion on Agriculture (1928), they commented
at length on the defects prevailing in the
agricultural marketing sector.
2 Rangarajan 1997 Post-harvest losses are more in case of fruits
and vegetables.
3 Wader and 2003 Three major sets of interdependent policies
Murthy and programs were pursued for the
development of agricultural marketing in
India since independence, i.e., the creation of
infrastructure (both physical and institution-
al), the implementation of price stabilization
policy, and the approach to foreign trade in
agricultural products.
4 Bannerjee 2006 Indian commodity market has emerged as an
alternative investment avenue.
5 Ahuja et al. 2006 Dual role of market and government has
increased the volume and value of
commodity trade.
6 Bhattacharya 2007 Significant risk returns feature and diversi-
fication potentials have made commodities
popular as an asset class.
7 Lakhsmi 2007 Exponential growth in commodity futures
market.
8 Srivastava and 2009 Found a high potential for future growth of
Saini Indian commodity futures market as India is
one of the top producers of agricultural com-
modities.
(Table 1 continued)
Kar 103

(Table 1 continued)
Serial Name of the Year of
Number Author Publication Major Findings of the Study
9 Dummu TR 2007 Significant increase in commodity derivative
trading and market.
10 Kapil and 2010 An unstructured expansion in Indian com-
Kapil modity market, in spite of high demand for
commodities in both derivative and spot
markets. Participation of non-professional
people made commodity trading a risky
venture and they add volatility factor to the
market.
11 Kaur and Rao 2010 Tested the market efficiency of agricultural
commodities and found phenomenal growth.
12 Gupta 2011 The commodity derivative market is thriv-
ing and the current trend shows the strong
growth potential of the market.
Source: The author’s.

Perception and Awareness

In a significant revelation, Pitawalla (2007) states that ‘small mandi traders across
the country are the biggest users of commodity futures and not agri-business
majors.’ This indicates the awareness of local stakeholders for wider participation.
The first surge of contracts has come from the traditional traders operating out of
the 7000 odd Mandis across the country. Furthermore, Patnaik (2007) described
how in local Mandis, dominant traders exerted significant control on prices of the
physical crop in regional-level futures exchanges. He also explained that ‘futures
market is a powerful instrument to reduce the market power of (local trading)
families.’ As various participants buy and sell a commodity, they bring information
and expectations about the market they may possess to the price. Raipuria (2002)
found markets in a given commodity were restricted to the region in which it was
grown and traded. This made the trade amenable to local price manipulation by
Mandi traders who were the main participants in the exchange. However, Kumar
(2010) found very little evidence of participation of Mandi traders on these
exchanges. At the same time, it is known that their knowledge about agrarian
markets and their everyday participation in physical market activities makes them
important players in India’s agricultural production system.
According to Patnaik (2007), technology is expected to help create a
‘transparent, electronic exchange with nationwide access’ which aggregates
market information across hundreds of Mandis in the country and, thus, disperses
power to many more people. Information at the Mandi level was usually limited
to local, sometimes regional, supply and demand. Chakrabarti and Nath (2009)
posit that technology deployment is only a means to an end, and success in the
future will depend on meeting the foundational value propositions on which
investor participation is premised. Mukhopadhyay et al. (2008) found commodities
futures market are active in business development and to create market awareness.
104 Journal of Operations and Strategic Planning 4(1)

The awareness factor is further validated by Shunmugham (2007). He pointed out

that efficiency of the price discovery of a commodity would depend upon the
credibility and completeness of the information than flows about the fundamentals
of the commodities in the market. In a seminal work, Fafchamps et al. (2006)
revealed that accessibility of market is an important factor influencing farmers to
take their produce to market. It is estimated that a 10% increase in the market
access index will reduce the probability of farm gate sale by 0.03% in Odisha.
These results suggest that improvement in marketing facility and in better road
connectivity (including a decrease in distance to market) will induce farmers to
sell their produce more in the market than on the farm gate. This study also found
out that, farmers primarily depend on their peers for production and marketing
information needs. Agricultural officers and traders are other important sources of
market information and spreading awareness. A study by Sarangi (2009) on
Odisha found that price information is disseminated at notice boards of Sakhigopal,
Junagarh Attabira RMCs, while prices are not disseminated at Angul, Kendrapada,
and Tikabali regulate market communities (RMCs). Vaswani et al.’s (2011) study
revealed that a trader fixes the price at the gate of the market based on individual
negotiation as there is no intermediation by the market commitee. Singh (2007)
concluded that in spite of new developments in commodity trading, the lack of
efficient and modern infrastructural facilities has accounted for major bottlenecks
in disseminating information and, thus, acts as a deterrent for growth of Indian
commodity exchanges (see Table 2).

Table 2. Content Analysis of the Review of Literature: Perception and Awareness.

Serial Name of Year of
Number Author Publication Major Findings of the Study
1 Raipuria 2002 Markets of commodity are restricted to the region
where it was grown and traded leads to local price
manipulation by Mandi traders.
2 Fafchamps 2006 Accessibility of market is an important factor in-
et al. fluencing farmers to take their produce to market.
It is estimated that a 10% increase in the market
access index will reduce the probability of farm
gate sale by 0.03% in Odisha.
3 Pitawalla 2007 The biggest users of commodity futures are not
agri-business majors but small mandi traders
across the country.
4 Patnaik 2007 (i) Described how dominant traders in local
mandis exerted significant control on prices of the
physical crop in regional-level futures exchanges.
(ii) Futures market is a powerful tool to break
the market power of local trading families and its
technological role is very important
(iii) Technology is expected to help create a “trans-
parent, electronic exchange with nationwide ac-
cess” which aggregates market information across
hundreds of Mandis in the country.
(Table 2 continued)
Kar 105

(Table 2 continued)
Serial Name of Year of
Number Author Publication Major Findings of the Study
5 Singh 2007 The lack of efficient and modern infrastructural
facilities has accounted for major bottlenecks
in disseminating information and, thus, acts as a
deterrent for the growth of Indian commodity
exchanges.
6 Shunmu- 2007 Efficiency of the price discovery of a commodity
gham would depend upon the credibility and complete-
ness of the information than flows about the
fundamentals of the commodities in the market.
To be credible, the market should assimilate all the
available information after adjusting for the source
and its likely bias.
7 Mukho- 2008 In order to facilitate business development and to
padhyay create market awareness, they developed an index
et al. by using weighted geometric mean of the price
relatives as the index, weights were selected on
the basis of percentage contribution of contracts
and value of physical market. Commodity trad-
ing market had considered this index as an ideal
investment tool for the protection of risk of both
buyers and sellers.
8 Chakrab- 2009 Technology deployment is only a means to an end.
arti and
Nath
9 Sarangi 2009 In case of Odisha-regulated markets, price
information is disseminated at notice boards of
Sakhigopal and Junagarh Attabira RMCs, while
prices are not disseminated at Angul, Kendrapada,
and Tikabali RMCs.
10 Kumar 2010 Found very little evidence of participation of
Mandi traders on these exchanges.
11 Vaswani 2011 Traders fix the price at the gate of the market
et al. which is based on distorted auction or indi-
vidual negotiation. There is no grievance redressal
mechanism put in place.
Source: The author’s.

Price Discovery
Figuerola-Ferretti and Gonzalo (2010) concluded that futures markets contribute
to the organization of economic activity in two important ways: first, futures
markets facilitate price discovery, and second, they offer mode of risk transfer and
hedging. Through application of different methodologies, many scholars such as
Tan and Lim (2001), Daigler (1990) and Tse (1999) have studied one market’s
dominant role on the other for the purpose of price discovery. According to United
106 Journal of Operations and Strategic Planning 4(1)

Nations Conference on Trade and Development (UNCTAD) (2008) report,

policymakers and regulators, especially in emerging markets, have been
increasingly looking at the establishment of ‘indigenous’ commodity exchanges
in their domestic markets, providing local price discovery and accessible trading
and risk management instruments for commodity chain participants with the
support of the broader financial and investment communities. This is further
elaborated by several authors where it was propounded that price discovery is
highly useful to all segments of the economy, as a producer gets an idea of the
price likely to prevail at a future point of time and, therefore, can decide between
various competing commodities and choose the best that suits him, whereas a
consumer simply gets an idea of the price at which the commodity will be available
in the future, thus helping him in buying decisions. In their seminal work, Garbade
and Silber (1983) concluded that risk transfer and price discovery are considered
as two major contributions of futures market toward organization of economic
activity. Another revelation by Zhong et al. (2004) stated that in case of efficient
markets, new information is assimilated simultaneously into futures and cash
markets. One can come to a logical conclusion that financial market pricing theory
states that market efficiency is a function of how fast and how much information
is reflected in prices. The study by Zapata et al. (2005) suggests that the rate at
which prices exhibit market information is equal to the rate at which this
information is disseminated to market participants. Thomas and Karande (2001)
investigated the castor seed futures market traded on the regional exchanges in
Ahmedabad and Mumbai for the presence of price discovery process and
concluded that each regional market reacted differently to information in the price
discovery of castor seed. They found that although there was no lead–lag
relationship found between the spot and futures market in Ahmedabad market, the
futures market in Mumbai dominated the spot market heavily. Kumar (2004)
employed the Johansen cointegration technique and concluded that futures market
was unable to incorporate information from the spot market, whereas Sahi and
Raizada (2006) found the dependence of commodity future market on spot market
for price determination. By employing the cointegration test to examine the
linkages between Indian castor seeds futures and spot market, Lokare (2007)
found cointegration of commodity future and spot prices revealing the right
direction of achieving the improved operational efficiency at a slow rate. Mahalik
et al. (2009) also supported the notion that commodity future market is efficient
for price discovery in the case of agricultural commodities. Roy (2008) investigated
32 wheat futures contracts in India and concluded that wheat futures markets are
well cointegrated with their spot markets. They also observed bidirectional
causality in majority of the wheat futures contracts. This is further validated by
Iyer and Pillai (2010) who used two-regime threshold vector autoregression
(TVAR) for six commodities to investigate whether futures markets play a
dominant role in the price discovery process. Shihabudheen and Padhi (2010)
studied six Indian commodities, that is, castor seed, jeera, sugar, gold, silver, and
crude oil, for price discovery mechanism and volatility spill overs effect and
concluded that futures price acts as an efficient price discovery vehicle for five of
the six commodities except for sugar. They also concluded that volatility spill
Kar 107

over from futures market to spot market exists for five of the six commodities
except sugar. Pavabutr and Chaihetphon (2010) demonstrated that futures prices
of both standard and mini contracts lead spot price. The study of Srinivasan and
Ibrahm (2012) explored that spot markets of MCXCOMDEX, MCXAGRI,
MCXENERGY, and MCXMETAL serve as effective price discovery vehicles.
Furthermore, volatility spill overs to futures from spot market are dominant in
case of all MCX commodity markets. Chakrabarty and Sarkar (2010) confirmed
the cointegration between commodity futures and commodity spot market indices.
They emphasized that with the information of any one index, hedging can be done
on other commodity indices. Samal et al. (2015) studied the turmeric futures from
NCDEX and concluded that futures markets of turmeric help to discover prices in
the spot markets.
Karande (2007) proved that commodity futures market performs the function
of price discovery and has proven beneficial to spot market by reducing the spot
price volatility. The same is also validated by Sinha and Bhuniya (2011). Shah
(2007) found that the liquidity is essential for a futures market to function
efficiently and to facilitate better price discovery, especially when there are huge
agribusinesses trying to hedge on the markets. On the same line, Kaur and Rao
(2009) found commodity future and spot prices had tracked each other closely in
some agri-commodities, and no significant volatility in the prices of future and
spot contracts of those agricultural commodities has been noticed in it. Kumar and
Pandey (2013) found that the comparative advantage enjoyed by the futures
market in disseminating information, leading to an accurate price discovery and
risk management, may help in successfully developing the underlying commodity
market in India. Furthermore, this study identified that there are speculators in the
commodity market also, but there is nothing wrong in it; rather, speculators help
toward price discovery along with hedgers and arbitrageurs. On the other hand, by
allowing wider participation through dissemination of information, these
exchanges discourage cartelization on the part of local traders and associations.
Commodity derivative trading provides better risk management along with price
discovery, as Sahoo and Kumar (2009) did not find any evidence supporting the
fact that future market causes higher inflation.
Sahadevan (2002) indicated the inefficiency of commodity future market in
terms of providing hedge against price risk by observing the difference between
future and spot prices. This study identified several factors such as lack of
participation of trading members, low market depth, and thin volume with
government’s interference in commodity markets as major hindrances for
inefficient price risk management. The same is validated by Nath and Lingareddy
(2008) where they found that during period of excess liquidity, price volatility of
largely traded commodities such as urad, chana, and wheat were increased by
futures trading. Salvadi and Ramasundaram (2008) also found that commodity
futures market could not provide an efficient hedge against the price risk. The
results showed that agricultural commodity futures market was inefficient in
terms of price discovery due to the non-integration of spot and futures the market.
Factors such as non-awareness among farmers of future market, thin volume, lack
of effective participation of members infrequent trading, and low market depth
108 Journal of Operations and Strategic Planning 4(1)

attributed to the market imperfection. Ali and Gupta (2007) analyzed the
effectiveness of commodity futures market which proved the existence of
volatility in both spot and future prices of commodities. Nath and Lingareddy
(2008) emphasized that trading in commodity futures contributed to an increase in
inflation, as results showed that during the time period of future trading, the spot
price of selected commodities and their volatilities had reported a remarkable
increase. This is in line with the recent findings of Gupta et al. (2018) stating that
future market leads to volatility in the spot market. Some studies have stated that
future prices are independent and past prices have no role in the contribution of
future price prediction. This is further validated by Chandrasekhar (2006). He
found that as the speculation begins, there is the risk of prices being manipulated
to move in one direction for significant periods of time, resulting in losses for
some and gains for the other. Patnaik (2007) elaborated how in local mandis,
dominant traders exerted substantial control over prices of the physical crop in
regional-level futures exchanges. Furthermore, Kar’s (2018) cointegration results
do not confirm the existence of long-run relationship between spot and futures
prices. It is, thus, implied that it is unlikely that futures prices serve as market
expectations of subsequent spot prices of selected agri-commodities in India, and
they do not help in price discovery process. Table 3 depicts the summary of
content analysis of the review of literature. (see Table 3)

Table 3. Content Analysis of the Review of Literature: Price Discovery.

Serial Name of Year of
Number Author Publication Major Findings of the Study
1 Garbade and 1983 Used daily spot and futures prices for four
Silber storable agricultural commodities to under-
stand the price discovery process in stor-
able agricultural commodities. Although their
findings were not clear enough for oats, they
did conclude that spot markets are dominated
by futures market prices in the case of orange
juice, wheat, and corn.
2 Daigler 1990 Through application of different methodolo-
gies, many scholars have studied one market’s
dominant role on the other for the purpose of
price discovery.
3 Tse 1999 Concluded that futures market has a dominant
influence on the cash market.
4 Tan and Lim 2001 Concluded that futures market has a dominant
influence on the cash market and the reverse
phenomena.
5 Thomas and 2001 Investigated the castor seed futures market
Karande traded on the regional exchanges in Ahmad-
abad and Mumbai for the presence of price
discovery process and concluded that each
regional market reacted differently to informa-
tion in the price discovery of castor seed.
(Table 3 continued)
Kar 109

(Table 3 continued)
Serial Name of Year of
Number Author Publication Major Findings of the Study
6 Sahadevan 2002 Inefficiency of commodity future market in
terms of providing hedge against price risk by
observing the difference between future and
spot prices. He found many factors such as
lack of participation of trading members, low
market depth, and thin volume with govern-
ment’s interference in commodity markets.
8 Zhong et al. 2004 Propounded that in case of efficient markets,
new information is assimilated simultaneously
into futures and cash markets. One can come
to a logical conclusion that financial market
pricing theory states that market efficiency is
a function of how fast and how much informa-
tion is reflected in prices.
9 Kumar 2004 Employed the Johansen cointegration
technique to examine the price discovery
phenomena of 5 Indian agricultural commodi-
ties futures market and concluded that futures
market was unable to incorporate information
from the spot market and further confirmed
the Indian agricultural commodities futures
markets to be inefficient.
10 Zapata et al. 2005 Found that futures market of sugar leads the
cash market in price discovery mechanism in
the USA.
11 Sahi and 2006 Observed the dependency of commodity
Raizada future market on spot market for price deter-
mination along with increasing inflation.
12 Chan- 2006 The moment speculation begins, there is the
drasekhar risk that prices could be manipulated to move
consistently in one direction for significant
periods of time, inflicting losses on some and
gains for the others.
13 Lokare 2007 Found cointegration of commodity future and
spot prices revealing the right direction of
achieving the improved operational efficiency
at a slow rate.
14 Patnaik 2007 Dominant traders in local Mandis exerted sig-
nificant control on prices of the physical crop
in regional-level futures exchanges.
15 Ali and 2007 Proved volatility in both spot and futures
Gupta prices of commodities.
16 Shah 2007 Liquidity is essential for a futures market to
function efficiently and to facilitate better price
discovery.
(Table 3 continued)
110 Journal of Operations and Strategic Planning 4(1)

(Table 3 continued)
Serial Name of Year of
Number Author Publication Major Findings of the Study
17 Sinha and 2011 Agricultural commodity derivatives provide an
Bhuniya efficient protection against the price volatility
risk in terms of commodity prices.
18 Karnade 2007 Commodity futures market performs the
function of price discovery and has proven
beneficial to spot market by reducing the spot
price volatility.
19 Roy and 2007 Employed the Johansen cointegration test to
Kumar study the lead–lag relationship between spot
and futures market of wheat in India.
20 Nath and 2008 Found volatility in urad as well as pulses prices
Lingareddy was higher during the period of futures trading
than in the period prior to its introduction as
well as after the ban of futures contracts.
21 Nath and 2008 Futures trade in India has increased the price
Lingareddy volatility of largely traded commodities like
urad, chana, and wheat during period of excess
liquidity. He found an increase in the prices of
commodities that have small market sizes and
scarce deliverable supplies like mentha oil.
22 Salvadi and 2008 Found commodity futures market in India
Ramasunda- failed to provide an efficient hedge against the
ram price risk, particularly in agricultural commodi-
ties.
23 Roy 2008 Wheat futures markets are well cointegrated
with their spot markets; he also observed
bidirectional causality in majority of the wheat
futures contracts.
24 UNCTAD 2008 Policymakers and regulators, especially in
emerging markets, have been increasingly look-
ing at the establishment of ‘indigenous’ com-
modity exchanges in their domestic markets,
providing local price discovery and accessible
trading and risk management instruments for
commodity chain participants.
25 Mukherjee 2011 The result of interdependence between com-
modity future and spot market in agricultural
commodities also supported the relevance of
commodity future trading in Indian commodity
market.
26 Mahalik et al. 2009 Supported the commodity future market as
efficient for price discovery in the case of
agricultural commodities.
(Table 3 continued)
Kar 111

(Table 3 continued)
Serial Name of Year of
Number Author Publication Major Findings of the Study
27 Sahoo and 2009 Found no evidence supporting future market
Kumar leads to higher inflation; rather, results sug-
gested the efficiency of commodity futures
market.
28 Srivastava 2010 Results supported the existence of price dis-
et al. covery process in Indian commodity exchang-
es. Furthermore, a high rate of convergence
of information in case of metals and slow con-
vergence of information in case of agricultural
commodities have been found between the
different markets.
29 Iyer and 2010 Used two-regime TVAR for 6 commodities to
Pillai investigate price discovery process.
30 Chakrabarty 2010 Confirmed the cointegration between com-
and Sarkar modity futures and commodity spot market
indices.
31 Shihabud- 2010 Futures price acts as an efficient price discov-
heen and ery vehicle for 5 of the 6 commodities except
Padhi for sugar. They also concluded that volatility
spillover to spot market from futures market
exists for 5 of the 6 commodities except sugar.
32 Pavabutr and 2010 Investigated the gold futures contracts in
Chaihetphon MCX over the period 2003–2007 for price
discovery by employing VECM to demonstrate
that futures prices of both standard and mini
contracts lead spot price.
33 Srinivasan 2012 Spot markets of MCXCOMDEX, MCXAGRI,
and Ibrahm MCXENERGY, and MCXMETAL serve as
effective price discovery vehicle by employing
VECM and Johansen cointegration technique.
34 Kumar and 2013 Comparative advantage enjoyed by the futures
Pandey market in disseminating information leading to
an accurate price discovery and risk manage-
ment may help in successfully developing the
underlying commodity market in India.
35 Samal et al. 2015 The unidirectional causal relationships ex-
hibited by futures and spot price series imply
that the futures markets of turmeric help to
discover prices in the spot markets.
36 Kar 2018 Applied Johansen VECM to examine relation-
ship between the spot and futures prices.The
cointegration results do not confirm the existence
of long-run relationship between spot and futures
prices.
(Table 3 continued)
112 Journal of Operations and Strategic Planning 4(1)

(Table 3 continued)
Serial Name of Year of
Number Author Publication Major Findings of the Study
37 Gupta et al. 2018 The future market has been unable to engage
sufficient hedging activity. Hence, a causal rela-
tionship exists only for future trading volume
and spot volatility and not for future open
interest and spot volatility.
Source: The author’s.

Trends of Agri-Commodities Futures Trading

Although India has a long history of trade in commodity derivatives, this sector
remained underdeveloped in the past due to government interventions either in
restricting or banning many commodity markets from controlling prices. Among
the commodity exchanges, NCDEX and NMCE are focusing on agricultural
commodities. As on end December 2017, there were 29 agricultural commodities
that were allowed by the SEBI to be traded at various commodity stock exchanges.
Nevertheless, in the calendar year 2017, India’s Guar Seed futures contract had
made it to the top 40 agricultural contracts traded worldwide. The total value of
agri-commodities futures had a steady increasing trend till 2011–2012, as depicted
in Table 4 and Figure 1. Thereafter, the growth momentum began to show a
declining trend till 2014–2015. There was a marginal increase in the value of trade
comprising `56.36 trillion in 2015–2016. The total value of agri-commodities
futures traded in 2018–2019 stood at `65.91 trillion from a high of `155.97 trillion
in 2011–2012 (see Table 4 and Figure 1).
Although agricultural commodities led the initial spurt and constituted the
largest proportion of the total value of trade till 2005–2006 (55.32%), this place
has been taken over by bullion and metals since then. This was partly due to the
stringent regulations, like margins and open interest limits, imposed on agriculture
commodities and the dampening of sentiments due to suspension of trade in some
commodities (Seilan, 2012). The quantity and value of agri-commodities futures

Figure 1. Agricultural Commodities in Futures Markets.

Source: The author’s.
Table 4. Agricultural Commodities in Futures Markets.
Traded Contract Quantity (000's Incremental Quantity Incremental Total Value
Year (Lots) Tonnes) Total Value (Trillion Rs) (000's Tonnes) (Trillion Rs)
2006–2007 5,33,22,811 8,12,50,766 22.93 8,12,50,766 22.93
2007–2008 7,25,40,766 8,49,13,789 31.25 16,61,64,555 54.19
2008–2009 11,18,17,391 6,86,93,310 45.86 23,48,57,865 100.06
2009–2010 16,40,26,558 14,41,73,396 63.93 37,90,31,261 163.99
2010–2011 21,27,97,245 18,41,51,739 98.41 56,31,82,999 262.41
2011–2012 38,98,54,613 18,90,54,713 155.97 75,22,37,713 418.38
2012–2013 37,50,45,541 23,93,76,804 148.81 99,16,14,517 567.19
2013–2014 21,42,01,537 13,94,73,363 86.11 1,13,10,87,879 653.30
2014–2015 14,85,75,942 9,66,64,189 51.83 1,22,77,52,068 705.14
2015–2016 23,42,34,439 12,71,80,257 56.34 1,35,49,32,326 761.48
2016–17 22,25,10,543 13,24,07,655 58.65 1,48,73,39,981 820.14
2017–2018 20,59,25,012 12,82,57,237 53.82 1,61,55,97,218 873.97
2018–2019 24,64,49,027 14,04,17,765 65.91 1,75,60,14,984 939.88
Source: Authors constructed based on Annual Vol of Indian Economic Survey and Websites of Indian Commodity Exchanges.
114 Journal of Operations and Strategic Planning 4(1)

traded are shown in Figure1, which implies that maximum quantity was traded in
2012–2013, whereas maximum value of trading was reported in 2011–2012. Most
importantly, the behavior of the quantity and value graph is in the same pattern.
This overall analysis of 13 years of data indicated that an archaic market has
suddenly turned into an organized, service-oriented set-up producing substantial
volumes of trade. This is in line with the findings of several studies which proved
that the futures markets have developed steadily, while the spot markets are still
largely unorganized (Hegde & Madhuri, 2013; ICAR, 2013). The success of the
futures market has ensured toward integration of spot with futures markets, and
accordingly, the launch of electronic national spot markets for agro-products had
become a reality in 2017. Being in a time zone that falls in the gap left by the
major commodity exchanges in the USA, Europe, and Japan has also worked in
India’s favor because commodity business by its very nature is a 24/7 business.

Discussion and Conclusion

Both agricultural commodities and agricultural marketing in India are in the
domain of states. Most of the states have enacted APMC Act to provide for
regulation of agricultural produce markets. These regulated markets have aided in
resolving some of the issues and problems. However, the rural markets by and
large remained out of their developmental ambit. The agriculture sector needs
well-functioning markets to drive growth, employment, and economic prosperity
in rural areas of the country. There is an urgent need to garner large investments
for the development of post-harvest and cold chain infrastructure nearer to the
farmers’ field that would provide dynamism and efficiency to the marketing
system. According to the APMC Act, farmers cannot sell directly to ultimate
buyers such as processors, exporters, and retailers and, hence, sell their produce
to traders or local aggregators. Processors, exporters, and retailers in turn buy
from local aggregators. This increases the number of intermediaries and leads to
higher costs. Besides these non-value-adding transaction costs, there is a lack of
standardization across the regulated market yards in terms of quality or other
costs. Different state governments levy different taxes on transactions conducted
at these market yards. As a result, the spot prices prevailing at these markets vary
widely for a commodity.
Agricultural commodity futures are market-based instruments for managing
risks and they help in orderly establishment of efficient agricultural markets. They
also serve as a low cost, highly efficient, and transparent mechanism for
discovering prices in the future as they provide a forum for exchanging information
about supply and demand conditions. The hedging and price discovery functions
of future markets promote more efficient production, storage, marketing, and
agro-processing operations. Hence, this helps in improving the overall agricultural
marketing performance. The transition toward, agri-commodities futures markets
has enabled price discovery and better price risk management. While ensuring
price risk mitigation and remunerative returns, these markets also contribute to
scaling down the downside risks associated with agricultural lending and, thereby,
Kar 115

facilitate the flow of credit to agriculture. Besides, through the use of warehouse
receipts, these markets obviate the need for collaterals, the lack of which has
currently impeded the flow of agricultural credit. They also hold a key role not
only in reinvigorating the spot markets but also triggering the diversified growth
of Indian agriculture in line with the consumption pattern. Thus, enabling policies
need to be put in place to strengthen the agri-commodities futures markets by
streamlining the supply chain.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.

Funding
The author received no financial support for the research, authorship, and/or publication of
this article.

Notes
1 It recommended the opening up of futures trading in 17 commodities, excluding wheat,
pulses, non-basmati, rice, tea, coffee, dry chili, maize, vanaspati, and sugar.
2 NCDEX—National Commodity and Derivatives Exchange Limited; NMCE—
Indian Commodity Exchange Limited; MCX—Multi Commodity Exchange of
India Ltd; ACE—Ahmedabad Commodity Exchange; UCX—Universal Commodity
Exchange—is India’s sixth national-level commodity exchange and ICEX—Indian
Commodity Exchange Limited.
3 These include allowing stockbrokers to deal in commodity derivatives, common
broking businesses for equities and commodities, permitting the NSE and BSE to
bring commodity derivatives onto their trading platform, introducing option contracts
in commodities trading, and permitting FPIs to participate in commodity derivatives
contracts traded in stock exchanges subject to certain stipulations and regulations.

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