A Study of the Price Differences Between the Lean Season and the Arrival Season of a Commodity

Futures benefit to the farmers A Study of the price differences between the lean season and the arrival season of a commodity A Summer Project Report Submitted By Harish Ramesh Summer Trainee, NCDEX Ltd. 1 CERTIFICATE This is to certify that the project report titled “Study of the price differences between the lean season and the arrival season of a commodity and the seasonality of the commodity to understand the impact of futures trading on the commodity” done by Harish Ramesh for “National Commodity and Derivatives Exchange Limited”, Mumbai is genuine and an original piece of work.

This has been carried out as a summer internship project from April 02, 2012 to June 02, 2012 under our supervision and guidance for the partial fulfillment of the Masters Programme in Business Administration at the Bombay Stock Exchange Institute Limited (BIL), Mumbai. Place: Mumbai Date: 01/06/2012 Dhruv Keshan Deputy Manager, NCDEX Ltd, Mumbai 2 ACKNOWLEDGEMENTS I take this opportunity to thank all the people who have given me their help and support during the course of this project which has helped complete the project.

I would like to thank Mr. J. Sampath (Chief Compliance Officer, NCDEX Ltd. Mumbai) for providing me an opportunity to work on this project. I also take this opportunity to express my gratitude towards Mr. Avinash Mohan (Vice president, Market Intelligence, NCDEX Ltd.

, Mumbai) whose encouragement helped me to achieve the desired results during different phases of the project. I am also extremely thankful to Mr. Dhruv keshan (Deputy Manager, Market Intelligence, NCDEX Ltd, Mumbai) for guiding me at all stages of the project and whose insight into the project helped me achieve the desired result at the end of the project. Harish Ramesh MBA FM (2011-13)

Bombay Stock Exchange Institute Limited 3 CONTENTS Certificate……………………………………………………………………………………………………………………2 Acknowledgement………………………………………………………………………………………………………3 Abstract………………………………………………………………………………………………………………………. 5 Chapter 1: Introduction and Background…………………………………………………………………….

. 6 Chapter 2: Research Layout and Design………………………………………………………………………12 Chapter 3: Research Findings………………………………………………………………………………………16 Chapter 4: Analysis of Information……………………………………………………………………………… 18 Chapter 5: Conclusion ………………………………………………………………….

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…. 9 ANNEXURE 1 ………………………………………………………………………………………………………………30 ANNEXURE 2 ………………………………………………………………………………………………………………35 ANNEXURE 3 ………………………………………………………………………………………………………………40 4 Abstract This project has been taken up as part of a summer internship with NCDEX Ltd. The project aims at understanding whether futures trading benefit the farmers.

The above mentioned aim is the hypothesis of the project and the project is done as an attempt to prove this hypothesis. To understand the benefits of futures trading, the project focuses on analyzing the price data for 10 agricultural commodities taken as a sample for the study.

The price data for these commodities vary in accordance with the crop calendar, and this projects aims at analyzing the price data according to the lean and arrival season in the crop calendar of the crops considered. The project aims to show that the difference in the prices between the lean and the arrival season has decreased in order to enunciate the benefits of the futures trading to the farmers. The study also aims at understanding the relationship between the difference in the price data and the total availability of the crops.

The study attempts at understanding the relationship between the crop seasonality and the price seasonality of the crops considered.

It also aims at studying the anomalies, if any, that exists in the price data after the analysis and offers to provide an explanation for the above mentioned anomalies. The path adopted for this project can be divided into three phases: 1. Data Collection 2. Data Analysis 3. Observations and Conclusions In the first phase, a list of agricultural commodities was chosen and the price data for these commodities for a test period of the last eight years, i. .

2004-2012 was collected. The data showcasing the import, export, production, and opening stock of the commodities was also collected in order to ascertain the total availability of the commodity. After collecting the above mentioned data, the seasonal index of the commodities for each month was found out using the 13 month moving average method. After finding the seasonal index, the price with the seasonal index was compared with the price without the seasonal index. The daily difference between the lean season and the arrival season was found out from the price data of the crops.

This difference was compared with the total availability of the crop for the particular year After the analyses of the data collected, the observations are noted and an explanation is given for any of the anomalies observed.

5 Chapter 1: Introduction The rationale behind choosing this project is to primarily study the impact of futures trading on the prices of the commodities. In the past few years the futures trading has come in for a lot of criticism from many quarters who have blamed it for the woes of the economy with reference to the impact it has had on raising the inflation of the agricultural commodities.

This project through the analysis of the price data of agricultural commodities aims to show the positive impact that the futures trading has had on the crops chosen and in turn on the farmers who cultivate the crops. The agriculture commodities whose price data is made use of in this project are as follows: ? Barley ? Maize ? Castor Seed ? Guar Seed ? Mustard Seed ? Turmeric ? Pepper ? Jeera ? Sugar ? Soy Bean Let us have a brief look at the commodities chosen BARLEY Barley is an annual cereal crop consumed as a major food and feed.

Basically a grass crop, it belongs to the family of Poaceae, and is considered to be the fourth most-important crop in the world after wheat, maize and rice.

This crop has been commercially grown for 10,000 years now. The crop originated in the Middle East and in the lands of modern-day Ethiopia. As a wild grass it was used as feed for animals during early periods, but with the progress of civilization it was domesticated. The European rulers introduced this crop to the new world in the 16th and 17th century. Currently, it is used as food, feed and for the preparation of alcoholic beverages.

Barley is planted as a winter or summer crop in different countries. In the colder regions, barley is planted in April or May as a summer crop; in the warmer regions, barley is planted between mid6 September to November. In India, it is mostly cultivated as a Rabi crop. Sowing normally takes place between October and December. Harvesting starts from end-March until mid-April in the northern states, whereas in the central and southern states, harvesting takes place from February to May.

The market arrivals start from March onwards. In India, the crop duration of barley is 120-150 days.

MAIZE Maize is one of the most important cereals of the world and provides more human food than any other cereal. Maize is of American origin having been domesticated about 7000 years ago. Maize provides nutrients for humans and animals and serves as a basic raw material for the production of starch, oil and protein, alcoholic beverages, food sweeteners and, more recently, fuel. Maize is high yielding, easy to process, readily digested, and costs less than other cereals.

It is also a versatile crop, allowing it to grow across a range of agro ecological zones.

Every part of the maize plant has economic value: the grain, leaves, stalk, tassel, and cob can all be used to produce a large variety of food and nonfood products. India is the fifth largest producer of maize in the world contributing 3% of the global production. In India, maize is grown in all the seasons i. e.

, kharif, Rabi and summer. Of these three seasons, nearly 90% of the production is from kharif season, 7-8% during Rabi season and remaining 1-2% during summer season. Since the maize is rain dependent, it is mainly grown during kharif season. CASTOR SEED Castor plant (Ricinus communis) is grown in arid and semi-arid regions.

It is cultivated in 30 different countries on commercial scale, of which India, China, Brazil, Russia, Thailand, Ethiopia and Philippines are major castor seed growing countries which accounts about 88% of the world’s production.

In India it is a kharif crop, sowing in July-August and arrivals from December onwards till March. Gujarat is the chief producing state, having a share of 86% of domestic production, followed by Andhra Pradesh and Rajasthan. Bag packed of castor seed contains 75kg by weight. Castor is a non-edible oilseed crop; basically a cash crop, with average 46% oil recovery.

Castor oil (extracted from castor seed) and its derivatives have vast and varied applications in the manufacturing of soaps, lubricants, hydraulic and brake fluids, paints, dyes, coatings, inks, cold resistant plastics, waxes and polishes, nylon, pharmaceuticals and perfumes.

Castor oil is the largest vegetable oil exported out of India. India is the biggest exporter of castor oil holding about 70% share of the international trade in this commodity followed by China & Brazil. GUAR SEED Guar or cluster bean is believed to have originated in Africa but is been grown throughout southern Asia since ancient times as a vegetable and fodder crop.

Guar has been cultivated in India and Pakistan for ages for use of its tender pods as fresh vegetables and other parts of the plants to be used as cattle feed. The plant is extremely drought? resistant, being able to absorb efficiently all ground water. It grows therefore easily in those semi? arid regions where less hardy crops perish.

The major world supplier of guar seed are India, Pakistan and United States. 7 Guar is a crop of semi arid–sub tropical areas spread over the North and North West of India and East and South East of Pakistan. Guar is grown in arid zones of Rajasthan, some parts of Gujarat, Haryana, and Madhya Pradesh.

Jodhpur City in the North Western state of Rajasthan in India is the most important processing centre of Guar Gum and contributes approximately 40% of the world’s Guar Gum supply. This crop is a drought-tolerant, warm-weather, deep-rooted summer-growing annual legume. It grows well in soils of low fertility in the arid and semi-arid areas of the tropics and subtropics where the rainfall is summer-dominant.

In India, the sowing season for guar seed is end of July and it is harvested during November. It is usually 90 days crop. Guar is a rain fed monsoon crop, which requires 8-15 inch of rain in 3-4 spell. For effective guar ultivation, the crop needs two rainfalls before sowing, one rainfall when the crop buds out and another when the crop comes up well and blossoming starts. Then it requires plenty of sunshine and dry weather to come up really well.

During harvesting period it again needs good sunshine in order to dry up and become usable for industries. Mustard Seed Mustard Seed (Brassica Sp. )/ Rapeseed is the third leading source of vegetable oil in the world after soybean and oil palm, and also the world’s second leading source of protein meal, although only one fifth of the production of the leading soybean meal. Brassica juncea L. rai) was originally introduced from China into north-eastern India, from where it has extended into Afghanistan via Punjab. Eastern Afghanistan, together with the adjoining north-western India is one of the independent centres of origin of brown sarson (Brassica campestris var.

brown sarson). The primary use of mustard seed is for extracting oil while the seeds are also used as condiment in pickles, meat and salad dressings. Mustard seed can also be milled into mustard flour and used as an ingredient in processed foods, such as salad dressings and soups. The seeds when crushed yield around 27-33% of oil.

Rapeseed oil has been used for centuries as a crop for a variety of uses.

It was initially burned as oil in lamps by our ancestors in Asia and Europe, and later was discovered as cooking oil which people used to cook a number of items. The oilcake is mostly used as cattle feed. The mustard crop grows well in areas having 25 to 40 cm of rainfall. Sarson and toria are preferred in low-rainfall areas, whereas raya and toria are grown in medium and high-rainfall areas, respectively. The mustard thrives best in light to heavy loams.

In India, mustard seed is basically a Rabi crop.

It’s sowing start in the month of October and continues till end of December. Mustard seed is mainly grown in North West parts of India. Rajasthan and Uttar Pradesh are the major Mustard Seed producing States in the country. The production from Rajasthan is highly monsoon dependent.

The other significant producers are Madhya Pradesh, Haryana, Gujarat, West Bengal and Assam. 8 TURMERIC Turmeric (Curcuma longa) belongs to the Zingiberaceae family. The commercial part of the plant is its rhizome. It grows in light black, black clayey loams and red soils in irrigated and rain fed conditions with temperature ranging between 20 to 30 degrees.

The crop cannot stand water logging or alkalinity.

Turmeric is used to flavour and to colour foodstuffs. It is used in cosmetics and in medicines. Turmeric is ready for harvesting in 7-9 months. Sowings start from may end and extend till august whereas arrivals start from December and extend up to March. , arrivals start from February and extend up to May.

Turmeric is a seasonal and annual kharif crop. In major producing states of India India has the lion share in production, consumption and export of turmeric in the world. It accounts for 78 per cent of the world output and 60 per cent of world exports.

Indian turmeric is considered the best in the world market because of its high curcumin content. In India, it is cultivated in the states of Andhra Pradesh, Maharashtra, Orissa, Tamil Nadu, West Bengal, Karnataka and Kerala.

PEPPER Black pepper (Piper nigrum) is a flowering vine in the family Piperaceae. Hot and pungent black pepper is one of the most popular spices in the world. The fruit, when dried, is approximately 5 mm in diameter. Black pepper is used for both its flavour and medicinal properties. In India harvesting starts from December and extends till March whereas the arrivals in the physical markets start from February.

World pepper production is around 2.

6 MT to 3. 1 MT per year. Vietnam is the world’s largest producer and exporter of pepper, producing almost one-third of the world’s Pepper crop. Other major producers include India (19%), Brazil (13%), Indonesia (9%), Malaysia (8%), Sri Lanka (6%), China (6%), and Thailand (4%). India produces about 50. 000 MT of pepper every year with Kerala & Karnataka accounting to more than 95% of the domestic production.

Indian pepper is traded at a premium in international markets owing to its superior quality. India holds the Supreme position in the world Pepper market because of its elebrated varieties `Malabar Garbled’ and `Tellicherry extra bold’. The finest Indian pepper is grown in the monsoon forests of the Malabar Coast in Kerala. JEERA Cumin (Cuminum cyminum) is a flowering plant from the family Apiaceae. The plant is 15 to 50 cm in height.

Its fruit is of commercial importance and is elongated, ovoid, 3-6 mm long. Cumin seed is used in perfumery and as flavouring agent in a variety of cuisines. In India, Jeera is sown from October to November and harvested in February. Fresh crop generally reaches the markets during March.

The plant thrives on rich, well-drained sandy loam soil with day time temperatures of around 30 degrees.

Cumin crop takes about 110-115 days to reach maturity. Unjha in Gujarat is the main trading centre for Jeera in the country. Jeera is a tropical plant and grown in cooler regions which is best suited for sandy soil. It is grown from the seed. It requires less water and more cold for its better growth with ideal temperature of 25 to 30 9 degree. High humidity during flowering & fruit set, causes fungal diseases in this crop.

It is harvested after seed turns in slight brown color.

It is further dried under sunlight till 10% moisture content. It is cultivated in different seasons in these major producing countries. In India, it is cultivated in Rabi season. Sowing takes place in Octo – Nov and harvested in Feb – Mar. Arrivals extend till May – June across major mandis.

In other major producing countries like Turkey and Syria, it is sown after completion of season in India. India is largest producer of Jeera in the world and contributes more than 70% of total output. Output has gradually increased in the last few years with increased yield. SUGAR

Sugarcane is the main sugar producing crop that contributes nearly 75% to the total sugar pool at the global level. It, Saccharum spp.

Complex, is the prime source of sugar in India. Sugar is a commodity of mass consumption and the cheapest source of energy in India, supplying around 10% of the daily calorie intake. India is the second largest producer of sugar, falling marginally behind Brazil, and also the largest consumer of sugar in the world, with the demand nearly equaling the supply in most cases. Depending upon the variety and sowing time it takes about 12 to 18 months to mature.

In general January to March is the period of planting and November to March is the period of harvesting.

In some states sugarcane, is grown around the year. Crushing usually begins within a month after the harvesting begins and continues throughout the year. Sugar comes in three forms: Large crystals (L-grade), Medium crystals (M-grade) and Small crystals (S grade). India is the largest consumer and second largest producer of sugar in World. Sugar is produced in 115 countries.

It is extracted from different raw materials, sugarcane and sugar beet.

Sugarcane is cultivated under tropical climates, while sugar beet is grown in temperate regions. Of the 115 sugar producing countries, 67 produce sugar from cane only, 39 from beet only and 9 from both cane and beet. Brazil, India, Thailand, Australia and Cuba are the largest sugarcane producer. Other beet sugar producing countries include the US, Turkey, Ukraine, Poland and Russia. The Central Government fixes the Fair and Remunerative Price (FRP) for sugarcane.

Some of the State Governments announce State Advised Prices (SAPs) for sugarcane, generally higher than the FRP.

Ministry of Food and Consumer Affairs, every month give monthly quota for sugar mills to release amount of sugar for sale for that particular month. Mills’ have to sell 10% of the quota to government for PDS (Public Distribution system) known as Levy Quota and rest for sale in the open market as Non Levy Quota. Government controls over import and export of sugar under Open General License (OGL) and Advance License Scheme (ALS). SOY BEAN Soybean, the “GOLDEN BEAN” of 21st century is a legume crop, is widely used as an oilseed. It is the single largest oilseed grown in the world and grows in varied agro? limatic conditions.

It has emerged as one of the important commercial crop in many countries. Due to its world wide popularity, the 10 international trade of Soybean is spread globally. Several countries such as Japan, China, Indonesia, Philippines and European countries are importing Soybean to supplement their domestic requirement for human consumption and cattle feed. The widely traded forms of soybeans are Mature Soybeans, Soy Oil and Soy Meal. Soybean grows well in warm and moist climate. A temperature of 26.

5 to 30°C appears to be the optimum for most of the soybean varieties.

Soil temperatures of 15. 5°C or above favor rapid germination and vigorous seedling growth. The minimum temperature for effective growth is about 10°C. A lower temperature tends to delay the flowering. Day length is the key factor in most of the soybean varieties as they are short day plant and are sensitive to photo? periods.

Most of the varieties will flower and mature quickly if grown under condition where the day length is less than 14 hours provided that temperatures are also favorable. The time of planting is a very important consideration in soybean.

Soybean is basically a summer crop, as it needs a hot and humid climate to grow. It is a bush like green plant which borne the soy seeds. The soybean plant usually needs 2 months to get mature.

When the seeds start to get mature, the leaves of the plant start to fall. This is the stage when the harvesting of this crop is done. 11 Chapter 2: Research Layout and Design This chapter explains the objectives of the research and the project layout. The project layout explains the step wise path as well the methodology adopted to do the research.

This chapter also looks into explaining briefly some of the terms associated with the project. The primary objective of this project as explained in the abstract is to understand the positive impact that futures trading has had on the prices of the commodities.

The layout of the research that has been done for the project is as follows: ? Collect information regarding the arrival period and the lean period of the commodities chosen ? Collect information regarding the import, export, production and closing stock of the commodities chosen for the same period April 2005 to March 2012. Collect information regarding the price data of the commodities chosen. The time period for which the price data of the commodities is collected is from April 2005 to March 2012. ? Analyze the price difference between the lean season and the arrival season of the commodities for each year by comparing it with the total stock availability for that particular year. ? Find the price seasonality of the crops by finding the seasonal index of the crops for the time period chosen using the 13 month moving average method.

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Compare the price data with the price without seasonality to ascertain the relationship between the price seasonality and the crop seasonality. ? Finally, note the observations and provide explanation for the observations made. Some of the important terms that need to be understood with regards to this project are as follows: Spot In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for settlement (payment and delivery) on the spot date, which is normally two business days after the trade date. The settlement price (or rate) is called spot price (or spot rate).

A spot contract is in contrast with a forward contract or futures contract where contract terms are agreed now but delivery and payment will occur at a future date.

A simple example: tomatoes are cheap in July and will be expensive in January, you can’t buy them in July and take delivery in January, since they will spoil before you can take advantage of January’s high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market’s expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes 12

The current price at which a particular commodity can be bought or sold at a specified time and place. A commodity’s spot price is regarded as the explicit value of the security at any given time in the marketplace.

The disadvantage of the spot contract can be summed as follows: Price uncertainty which makes it difficult to predict the market accurately Lack of effective mechanism to eliminate the price risk which arises due to demand and supply variations and uncertainties in the economic and market conditions Futures Contract Futures contract have evolved out of forward contracts and are exchange traded versions of forward contracts.

In futures contract there is an agreement to buy or sell a specified quantity of financial instrument/commodity in a designated future month at a price agreed upon by the buyer and seller. The contracts have certain standardized specifications with the date and time of expiry of the contract. Types of futures Contracts: The common underlying for which the futures are construed, are: Commodity Futures: Futures in which the underlying asset is a commodity. It can be agricultural commodity like wheat, corn, soybeans, perishable commodities like pork or even precious assets like gold, silver etc.

Financial Futures: Futures in which the underlying asset is financial instruments like money market paper, notes, and bonds.

Currency futures on major convertible currencies like the US Dollar, pound, Euro or Yen. Security futures such as single stock futures and stock index futures. Index Futures: The underlying asset is an index. Most of these contracts are for stock indices. The more famous indices on which futures are traded are S Composite 500, The NYSE Index.

Long Position: The party, who buys the contract, is considered, as assuming a long position in the market with the expectation that price will go up.

Short Position: The party, who sells the contract, assumes a short position. Going short is selling off expecting the price to go down. At the time of the maturity if the delivery price is higher than the spot price the seller makes profit. If the delivery price is less than the spot price at the time of maturity of the contract the seller incurs a loss. The futures price for an asset would be equal to the spot or the cash price at the time of the transaction and the cost of carry.

The cost of carry includes all the costs incurred for carrying the asset forward in 13 time.

Depending upon the commodity the cost of carry takes into account factors including payments and receipts for storage, transport costs, interest payments, dividend receipts, capital appreciation etc. Futures market perform certain important economic functions. They meet the needs of three groups of future market users 1. Those who wish to discover information about the future prices of commodities.

2. Those who wish to speculate 3. Those who wish to hedge The major advantages of future contracts are as follows: 1. Absence of credit risk. At any point of time the maximum credit risk is limited to one day movement in futures prices . High Liquidity: Futures market gives the participants the option to come out of their positions at any time they want.

3. High leverage: Futures are highly leveraged instruments, which attracts large number of market participants who ensure high liquidity at all times. 4. Price stabilization: In times of violent price fluctuations, the futures mechanism enables to reduce the price fluctuations. The major limitations of futures contracts are as follows: 1. Futures are not versatile for hedging strategies due to standardization of commodities.

The limitation is overcome by “options” 2.

Exact hedge is not possible. Futures contracts cannot be tailored to the particular needs of firms and financial institutions. Crop Calendar The crop calendar can be divided into five seasons. They are 1.

Sowing 2. Growing 3. Harvesting 4. Arrival 5. Lean 14 Sowing: Sowing is the process of planting seeds. The months in a crop calendar when this process is carried out is called the sowing season.

Growing: Growing season is the period of each year when crops can be grown. This is determined by the crop selection. Harvesting: Harvest time is the time when the crop is ripe/mature and is ready to be picked/cut/etc.

Harvest time varies with the date the crop was planted and length of time it takes it to grow. Arrival: The fresh stock arrives in the market after the harvesting of crops.

The months during which the fresh stock reaches the market constitutes the arrival season. Lean: After the arrival season and before the sowing comes the lean season when there is very little activity with concern to the crop. The two categories of crops according to their seasonality are: 1. Kharif: Crops are sown at the beginning of the south-west monsoon and harvested at the end of the south-west monsoon. Sowing seasons-May to July Harvesting season-September to October

Important crops: Jowar, bajra, rice, maize, cotton, groundnut, jute, hemp, sugarcane, tobacco, ete.

2. Rabi: Crops need relatively cool climate during the period of growth but warm climate during the germination of their seed and maturation. Sowing season-october-December Harvesting season-February-April Important crops: wheat, barley, gram, linseed, mustard, masoor, pea~ and potatoes. Seasonality Seasonality is the phenomenon that causes crop prices (including cash, futures, basis, option volatility, intramarket, intermarket, and inter-commodity spreads) to behave in a relatively predictable manner, year in and year out.

Generally speaking, there are two major components to crop seasonality: The harvest lows, followed by the post-harvest rally . Sometimes seasonality is a strong element of the pattern of crop consumption (domestic usage as well as exports).

15 Chapter 3: Research Findings The arrival period and the lean period for the crops considered are attached in the annexure 1. The month wise price data of the commodities taken for the time period 2005-2012 is also attached in the annexure 1. The price data of certain commodities for certain months is not provided.

This is due to the fact that there was no futures trading in those commodities during those months. From the figures of the price data it is possible to calculate the month wise seasonal index for the crops using the seasonality tool.

Seasonality Tool It uses monthly price data of a commodity to measure the seasonal pattern in prices. Seasonality is expressed as 12 indexes that represent the ratio of the price each month to the average annual price. There are two methods: The calendar-year seasonal index compares the price in each month to the average over the same calendar year and then averages this ratio over multiple years.

The moving-average seasonal index is similar except that it compares the price in each month to the average over the 13-month period centered on that month. The moving-average price index has the advantage that it is less affected by an upward or downward trend in the prices.

For example, an upward trend in the prices will cause the January-February indexes in the calendar-year method to be low and the November-December indexes to be high. Hence movingaverage price index is used as a seasonality tool for this project. Calculation

First calculate the 13 month moving average for each commodity, meaning the average price from six months before to six months after. Then calculate the ratio of the price data for each month to the 13-month moving average. Once the ratio is obtained, calculate the average of all the ratios of same months for the years that are considered for the project. For example, all the April ratios, May ratios etc.

This is the moving-average seasonal index The seasonal index for the commodities chosen is attached in annexure 2. If the moving average index is 1. 15, it means that the monthly prices are generally 15% higher than the annual average.

In contrast, if the moving average index is 0. 81, it means that the monthly prices are 19% below the annual average. The table showing the import, export, production and closing stock statistics for the commodities is also attached in annexure 2 16 From the import, export, production and closing stock data it is possible to calculate the total availability of the commodity for a particular year.

Total Availability = Production + Import + Closing stock (previous year) – Export. There are certain assumptions that are taken into consideration with respect to the data collected Assumptions

The first assumption is that the price data of commodities that could not be collected for certain months on account of no futures trade is considered as zero. The Closing stock, Import and export data of commodities that could not be obtained for certain months is considered as zero The months that are considered to be part of the lean season of the crop calendar for the commodities are months of least activity with regards to the crop and the number of months that cover the arrival season is the same as the number of months that cover the lean season for each crop.

Since it was established that the relationship between the availability and the price differences between the lean season and the arrival season of the crop is non linear this study does not go into studying the relationship between the total availability and the difference in prices. Once all the data is collected the graphical representations of two comparisons are analysed for all the commodities.

They are ? The Price with seasonal index Vs Price without seasonal index and ? The difference in the prices of arrival and the lean season Vs Total availability.

The graphs for the comparisons and their analysis will be covered in the next chapter. 17 CHAPTER 4: ANALYSIS OF INFORMATION As explained earlier, the first step is to analyse the comparison between the price data with seasonal index and the price data without the seasonal index of each crop for the period 2005-2012. The price without seasonal index is found by dividing the price data of the commodity for each month by the seasonal index obtained for each month as explained in the previous chapters. The comparison helps in understanding the relationship between the crop seasonality and the price seasonality.

According to the demand and supply dynamics the price range of the crop in the arrival season should be less than that in the lean season. The data indicating the price without seasonal index is attached in annexure 3. Next comes analyzing the graphical representation of the comparison between the daily difference in the price data for the lean period and the arrival period of the crop and the total availability of the crop for the test period 2005-2012. The graphical representation of both the comparisons for each of the commodities is given below: Guar Seed

The crop seasonality for guar seed suggests that the arrival season for the crop is October to December and the Lean season is from April to June in the crop calendar. As is visible from the above graph the price of the crop in the lean months is more than that in the arrival season. The price without the seasonal index also follows the same trend as the price with seasonal index for all the months except for October 2011 which can be explained because of it being a part of the arrival season and the downfall in the availability of the crop.

8 As you can see from the graph above the trend followed by the difference between the daily prices of the crop in the lean season and the arrival season follows the same trend that is shown by the curve representing the total availability of the commodity except for the last two years 2010-11 and 2011-12 and the first year 2005-06 where the difference takes an opposite turn. According to the supply-demand scenario the price difference should move downwards when the total availability is down and vice versa.

The other noticeable trend that we can observe from the graph above is that the difference has shown an upward trend over the years under analysis. This shows that the prices during the lean season for the crop has gone up which indicates that the farmers are getting benefitted even during the lean season and as the total availability has also gone up over the same period therefore this is the impact that futures trading has had. 19 Turmeric The arrival season for the crop is from January to April and the lean season is from July to October.

The graph above shows that the prices of the commodity are almost comparable in the months within a particular year and the impact of seasonality on the price of the commodity is not of a major concern because it does not make a huge difference to the price of the crop as you can see from the graph. The above graph clearly shows that the prices in the arrival season are far greater than that in the lean season and this does not follow the demand supply dynamics but it also shows that this price difference has been going up in recent years which indicates a rise in the prices in the lean season as compared to the arrival season.

Even when there was a sharp fall in the total availability of the crop in 2009-10 as compared to 2008-09 there was not much change in the difference and the difference did continue on the upward trend which is an indication of the impact of futures trading. 20 Jeera The arrival season for Jeera is from the months of March to May and the lean season is from the months of September to November. As you can see in the graph the seasonality has had a big influence on the prices in April of 2005, 2006, 2007, 2009, 2010 and 2011 as the prices with the seasonal index is lower than those without.

The sharp drop in price of jeera during april 2008 can be attributed to the sharp rise in availability of the crop during that year as shown in the graph. As is seen from the graph, the prices in the arrival season are higher than the prices in the lean season and the curve has a downward slope which means that in this case the prices in the arrival season have been more than that in the lean season and have remained so. 21 Barley The arrival months for the crop are from the months of March to May and the lean months are from the months of September to November.

The graph clearly indicates that the seasonal factors influence the price of the crop during the months of March and April every year. These are also the months which are part of the arrival season for the crop.

In this case the difference in the prices has shown an upward movement over the years. This indicates that the price of the commodity in the lean months has increased as compared to the arrival months due to the demand-supply dynamics caused by the increase in the availability of the crop. 22 Pepper

The arrival months for the crop is from January to March and the Lean season is from the months of July to September. As the graph clearly shows us, there has been very little impact of the seasonal factors on the prices except for the month of march every year which is a month when the arrivals are at its peak. The difference in the price has suffered a massive decline in the years under observation.

The graph also shows that in the case of this crop the prices of the crop in the arrival season have increased manifold as compared to the lean season. 3 Soy Bean The arrival months for this crop are from the months of September to December and the lean months are from March to June. The graph indicates that the seasonal factors influence the price of the crop the most during the arrival months of September to November each year. This may be due to the increase in the availability of the crop during these months. The sharp decline in the price of the commodity during the October and November of 2008 can be attributed to the global recession.

The difference as is noticeable from the above graph has sown an upward movement over the years which indicates that the price of the commodity in the lean months has increased as compared to the arrival months.

This shows the positive impact that futures trading has had on the commodity. 24 Maize The arrival months for the crop are from September to November and the lean months are from March to May. The impact of the seasonal factors in bringing down the price is maximum in the m onths of January to March which is a part of the lean season.

In India maize is cultivated both as a kharif crop as well as a rabi crop which is why the seasonal factors influence the crop in the lean season. The difference in prices between the lean season and the arrival season is minimal and the prices in the lean and the arrival season are comparible which makes it beneficial for every one involved in the value chain. 25 Castor Seed The arrival months for this crop are from January to April and the lean months are from July to October.

The prices in this case do not seem to be affected by the seasonal factors as they are almost the same as the price without the seasonal index. The graph shows that the difference in the prices has gone up over the years. This shows that the prices in the lean months have increased to a greater extent when compared to the prices in the arrival months. It is also evident that the difference in the prices is not very high and the prices in the lean and the arrival months are comparible. 26 Sugar The arrival months of the commodity is from September to December and the lean months are from March to June.

The seasonal factors have their impact on the prices in the months of December and January every year of which December is a part of the arrival season. The difference in the prices has witnessed an upward trend over the years. The one interesting feature of this graph is the fact that except for the year 2008-09 after which there was no futures trading in the commodity for a year, the difference follows a similar trend to the availability of the commodity over the entire period. 27 Mustard Seed The arrival season is from the months of February to May and the lean season s from the months of August to November. The graph indicates that the impact of seasonality on the prices is felt mainly in the months of March, April and May every year which can be explained due to the increase in the availability of the stock during these months due to an increase in the availability of the stock. The difference in the prices has seen a negative trend over the years and from the year 2007-08 to the year 2010-11 the difference and the availability do not follow the path that they should follow given the supply demand dynamics.

8 CHAPTER 5: CONCLUSION This study has observed the positive impact that futures trading has had on the commodities by analysing the price differences between the lean and the arrival season of the crops and the impact the seasonal factors have on the price of the crop. The seasonal factors have played a huge role in bringing down the prices in the arrival season and hence helped in reducing the price differences in all the commodities except maize.

In the case of maize the seasonal factors seem to influence the lean season and not the arrival season because it is a crop that is cultivated throughout the year, i. e it is cultivated as a kharif crop as well as a rabi crop. In these analysis’ it was found that futures trading has played a huge role in bringing down these price differences in the case of most of the commodities.

There are however exceptions to this scenario. For instance here also in the case of maize, the price difference has increased and the reason for it has been found to be the nature of cultivation of maize in India.

It is cultivated all throughout the year, ie both as a kharif crop as well as a rabi crop. It has also been understood that studying the availability and the price differences between the lean season months and the arrival season months of the crop is the fundamental basis for analysing the role of futures trading. The availability is also a key part in determining the price of a commodity. The availability of the stock takes into account the total stock produced, the stock imported, the stock exported and the closing stock in the previous year.

Another important conclusion this study has come to is the fact that the price difference between the lean and the arrival season follows the same trend as the total availability in most of the cases. It has also come under observation that knowledge of this data certainly helps the futures trading in these commodities given the fact that it leads to price discovery of the commodity for a future period and helps bring down the differences between the prices in the lean season and the arrival season of the crop. This benefits each and everyone connected to the value chain of the commodity.

The price discovery prior to the lean season is extremely helpful to the farmers who are alerted in case they are required to take action with respect to the crops they sow. The recommendation from my end is with regards to making further forays into understanding the relationship between the availability and the price differences since this study doesn’t look into the impact that availability has on the price difference and vice versa. The results of this study could be of major help in the case of price discovery of crops.

References ? http://agricoop. ic. in/ ? http://www. ncdex. com/ ? http://www.

foodsecurityportal. org/ ? http://www. indexmundi. com/ 29 ANNEXURE 1 TABLE 1 – Arrival Months and Lean Months of the commodities COMMODITY ARRIVAL SEASON LEAN SEASON Turmeric January to April July to October Pepper January to March July to September Jeera March to May September to November Mustard seed February to May August to November Maize September to November March to May Barley March to May September to November Castor Seed January to April July to October Guar Seed October to December April to June

Sugar September to December March to June Soy bean September to December March to June 30 TABLE 2 – Price Data (in INR) Month Guar Seed Turmeric Jeera Apr-04 1098. 55 – – May-04 1065. 66 – June-04 1047.

52 July-04 Barley Pepper Soy bean maize Castor Seed Sugar Mustard Seed – 7514. 71 1824. 73 – – – 362. 19 – – 7522. 67 1767. 41 – – – 368.

59 – – – 7377. 42 1681. 11 – – – 362. 73 1380. 55 2824.

5 – – 7381. 92 1838. 51 – 367. 35 – 385. 82 Aug-04 1373.

87 2835. 55 – – 7075. 18 1892. 8 – 371. 33 – 398.

23 Sep-04 1717. 28 3110. 08 – – 6610. 75 1724. 72 – 389. 7 – 395.

73 Oct-04 1650. 07 3082. 39 – – 6398. 56 1252. 44 – 382. 93 – 393.

98 Nov-04 1637. 25 2965. 21 – – 6168. 01 1250. 48 – 375. 52 – 392.

94 Dec-04 1471. 68 2766. 19 – – 6801. 46 1304. 47 – 339.

62 – 386. 93 Jan-05 1440. 99 2638. 82 7185. 38 – 7057.

83 1272. 98 514. 27 322. 21 – 369. 98 Feb-05 1439. 11 2548.

12 7315. 59 – 6488. 81 1233. 23 509. 45 318.

459 – 353. 96 Mar-05 1456. 06 2372. 52 7777. 32 – 6735.

25 1322. 46 523. 55 330. 008 – 335. 61 Apr-05 1630. 46 2224.

8 7772. 12 – 6769. 09 1325. 21 529. 86 1639. 95 – 1670.

4 May-05 1581. 42 2191. 8 7524. 94 – 6407. 58 1268. 08 522.

61 1573. 56 – 1690. 66 Jun-05 1547. 98 2205. 42 7483. 48 – 6358.

02 1285. 38 539. 11 1636. 84 – 1701. 18 Jul-05 1494.

16 2238. 93 7510. 34 – 6145. 22 1299. 91 575.

45 1657. 02 – 1800. 34 Aug-05 1642. 71 2313. 78 7150.

37 – 6346. 22 1263. 83 595. 93 1600. 68 – 1800. 95 Sep-05 1646. 94 2499. 29 6873. 08 – 6363. 02 1218. 34 574. 74 1535. 95 – 1796. 98 Oct-05 1627. 72 2633. 63 6565. 92 – 6364. 64 1183. 43 553. 54 1425. 53 – 1761. 27 Nov-05 1653. 22 2797. 22 6639. 82 – 6668. 51 1146. 73 541. 65 1433. 61 – 1736. 3 Dec-05 626. 82 2737. 64 6554. 09 – 7292. 06 1129. 61 556. 92 1460. 62 – 1714. 47 Jan-06 1687. 32 2504. 08 6483. 96 – 6898. 15 1188. 22 555. 3 1443. 76 – 1714. 11 31 Feb-06 1705. 94 2361. 95 6237. 38 – 7026. 32 1205. 5 557. 3 1446. 74 – 1707. 75 Mar-06 1698. 87 2201. 61 5954. 99 – 7212. 84 1194. 26 558. 11 1509. 18 – 1621. 94 Apr-06 1870. 55 2097. 86 5817. 66 – 7153. 9 1216. 92 540. 38 1459. 55 – 1630. 94 May-06 2023. 93 2187 6621. 75 – 6994. 48 1323. 63 540. 46 1427. 4 – 1709. 74 Jun-06 1908. 53 2263. 02 6849. 41 – 6938. 46 1260. 08 590. 74 1425. 25 – 1684. 21

Jul-06 1906. 78 2303. 61 7340. 84 – 8196. 36 1263. 15 629. 42 1527. 75 – 1729. 52 Aug-06 1814. 9 2422. 85 8001. 3 – 10459. 02 1261. 81 741. 25 1529. 74 – 1746. 9 Sep-06 1640. 92 2544. 31 8802. 68 – 12832. 25 1238. 81 658. 3 1636. 04 – 1729. 13 Oct-06 1823. 82 2378. 1 8710. 23 – 12445. 17 1212. 91 630. 42 1739. 14 – 1728. 87 Nov-06 1875. 22 2113. 17 8873. 07 – 11104. 97 1353. 35 721. 85 1813. 35 – 1936. 74 Dec-06 1920. 21 2016. 01 8738. 69 860. 69 10205. 74 1364. 84 724. 94 1774. 78 – 1935. 41 Jan-07 1865. 02 1927. 24 9143. 6 825. 82 11409 1399. 62 711. 93