Food price inflation results in uncertainty in the food markets and reduces real income as food covers a relatively large share of the households' expenditures in the LDCs. As price of food commodities are primarily governed by the underlying demand and supply conditions, we have analyzed the association of futures price volatility with the underlying macroeconomic variables. A strong association of futures price volatility with the underlying macro variables will imply that futures market operates based on the implications of the macroeconomic policies and are not merely driven by speculative motive. The association between futures price and the macroeconomic variables will help in developing policies aimed at stabilizing food prices. For our study we have considered the five major oil and oilseed contracts traded on National Commodity and Derivatives Exchange. We have considered the nearest three month contracts traded on the exchange. In our study we observe that Gross Domestic Product (GDP) and Index of Industrial Production (IIP) growth rate have significant impact on futures price volatility. We have also found a significant relation between futures price volatility and inflation. These findings have important implications for commodity production decision making, commodity hedging and commodity price forecasting.
In India, government intervention in the agricultural derivatives market has not allowed the market to grow and become an important tool of risk management. It has always been argued that the farmers and consumers of crops in India primarily operate in the spot market, and their expectations about the future market conditions are likely to be reflected in the spot price movements. If the farmers and consumers of the crops do not participate in the derivatives market, it is not expected to work as an efficient tool of information dissemination on the underlying commodity. We analysed the role played by the futures market in the price discovery process in this article. To test whether the futures or spot market in India plays a dominant role in information dissemination, we have done a regression analysis considering the lagged futures and spot price volatility as explanatory variables. We consider the major oil and oilseed contracts traded on National Commodity and Derivatives Exchange. As the uses of many of the oilseeds are related, we have tried to analyse the interlinkages among the market for different commodities. Our results clearly show that information on relevant futures market volatilities help significantly to assess the volatility in the spot markets. This linkage can be leveraged to manage the spot market risks better.
JEL: G10, G13, G14
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