Preface Agriculture Commodity Market though not new in India, certainly needs extra attention for country’s agriculture intensive economic background. The book intends to know the stage of development of alternative marketing methods in the best interest of farmers as well as look into the interest of other stake holders in agriculture produce value chain. Worldwide commodity market has helped the farmers in realizing better prices and the same has not been the case of farmers in India. The government in power should take every step to popularize the concept of commodity market not only among the farmers, but also among other stake holders like traders, government officials, bankers etc. in process as it is found that absolutely a huge percentage of the stake holders are either ignorant or afraid of using the commodity market because of lack of conceptual clarity and other operational difficulties especially lack of infrastructure facilities like scientific warehousing facility, grading and standardization facility, connectivity, financing etc. In this context, I have great pleasure in presenting the first edition of “Agricultural Commodity Futures Market” in the hands of my esteemed readers. The book in its present form contributes to better understanding of commodity market and imparts a sense of enthusiasm in the process. I hope it will motivate others to do further research to popularize this alternative marketing channel. The book consists of 7 chapters and is presented in a systematic and reader friendly manner. Clarity of expression and simplicity of description are the hallmark of the book. The book covers the market profile and physical market structure of cotton, turmeric, and castor seed, the commodity futures market in India, awareness about commodity market, analysis of benefits of commodity market etc. In writing this book, I have to refer to and draw from standard publications on the subject. I sincerely acknowledge my thanks to the authors of those publications. I wish to express my heartiest gratitude to Dr. Anil Kumar Swain, Retired Senior Reader, P.G. Department of Commerce, Utkal University, Mr. Kailash Chandra Rout, GM, OSAM Board, Dr. D.C. Pradhan Prof. & Head, Agri Economics, OUAT, BBSR, who extended their help, guidance and suggestion and without their help it was not possible for me to complete this book.

1.1. Prologue In present era, agriculture is a cause of global concern in the context of price volatility with a rising trend growing concerns for food security and resultant trade restrictions, global economic conditions in the recent past, the forecasted rate of reduction of growth of agricultural land over the next two decades, increasing mismatches between supply of agricultural products in relation to growing demand and the climatic changes which are wielding pressures on agricultural production. Thus, enhancing agriculture production and productivity have emerged as a global challenge. India, with 2.4 per cent of the world’s geographical area, is the largest producer of pulses, tea, and milk and second largest producer of fruits, vegetables, wheat, rice, groundnut and sugarcane in the world but supports about 16.2 per cent of the world’s population. Coupled with small scale land holdings and deep rooted poverty in rural areas, the magnitude and dimensions of challenges for agriculture policy-makers have increased manifold. So far as the agriculture sector in Odisha is concerned, it contributes only 15.6 percent in 2013-14 towards State Gross Domestic Product (SGDP), but provides employment and sustenance to more than 60 percent of the total workforce of the State. In this sense, the agriculture sector is still the mainstay of the economy of Odisha. According to the Economic Survey 2013-14 of Odisha, despite wide annual variations in its growth, the agriculture sector had grown at a rate of 12.72 per cent in 2012-13. However, a negative growth of 3.53 percent is anticipated during 2013-14 due to cyclonic storm Phailin and flash floods in the State in October 2013. The real per capita income of Odisha was Rs. 25,891 in 2013-14 which was around 65 per cent of All-India real per capita income of Rs.39, 961. According to the 68th round of National Sample Survey Organization (NSSO), the monthly per capita consumer expenditure (MPCE) for rural and urban Odisha is below the respective national averages. In the food and non-food consumption behaviour, an average Indian spends more than an average person in Odisha. In short, the above parameters pinpoint that the State of Odisha has been lagging behind the national economy & highlights the necessity of achieving higher growth on a sustainable manner across the sectors particularly the agriculture sector in order to uplift the society from underdevelopment & poverty. Though the contribution of agriculture to Net State Domestic Product (NSDP) has declined, the percentage of workforce engaged in agriculture has remained somewhat unchanged. This implies that there has been an overcrowding in agriculture without any noticeable increase in production.

2.1. Introduction There are few studies on the performance and efficiency of Indian commodity derivatives market. Despite a considerable amount of empirical literature, there is no general consensus on whether or not the markets are efficient. As far as the role of futures contract in agricultural commodity is concerned, several studies have been attempted to examine their contribution towards agricultural development of any state and/or country. This chapter presents the review of existing literature on the concerned topic based on interrelationship among the spot and futures market in agricultural sector, role of futures market in discovering spot prices, futures market and commodity price volatility etc.

3.1. Introduction This chapter intends to examine the economic importance of cotton, turmeric and castor seed in the agricultural economy of Odisha. Given the fact that Odisha is one of the major producing states of the country for these three crops, their physical markets have national level relevance in terms of determining prices. The chapter presents a brief profile of the agricultural economy of Odisha with a focus on these three crops and their supply conditions including cropping season, pattern, area under cultivation and productivity. Secondly, it tries to investigate the market structure, supply chain and marketing practices in cotton, turmeric and castor seed based on the data obtained from the secondary sources. Indian economy is agro-based and agriculture is its mainstay as it constitutes the backbone of the rural livelihood security system. Agriculture has been and still continues to be the life line of the Indian economy since economic security is essentially predicted upon the agricultural and allied sectors. The agriculture sector encompasses crop production, animal husbandry, fisheries, agri-business, etc. Crop production depends upon crucial inputs such as good seeds, fertilizers, pesticides, irrigation, human labour, machinery and management. As the largest private enterprise in India, agriculture supports more than 60% of the population, contributes nearly 19% to India’s Gross Domestic Product (GDP) and 11% to the total exports. Around 51% of the geographical area in India is already under cultivation as compared to 11% of the world average1. Agriculture is also a social sector where non-trading concerns like food and nutritional security, employment and income generation, poverty alleviation, ecological and environmental concerns play a significant role.

4.1 Introduction The present chapter starts with a brief description about the history of commodity futures market and emergence of commodity futures market in India. There after it highlights various functions of commodity futures market and their impact on farmers and various other stake holders in the supply chain. Finally, it tries to evaluate the utility of futures from the platform of commodity exchanges especially from MCX and NCDEX of India. A simple definition of a commodity is a physical substance that can be extracted directly from the environment, processed and sold commercially. Natural resource is another term often used to describe commodities which occur naturally in or on the ground. Commodities fall into three main categories such as energy, metals and agriculture. As commodities can be sold, they have a price which is governed by supply and demand. Compared to many manufactured items, for example flat screen TVs, the question of supply and demand is paramount to how commodities are priced. The commodities that have always been a part of our day-to-day existence are also one of the finest investment avenues available. The wheat in our bread, the cotton in our clothes, our gold jewels, the oil that runs our vehicles etc are all traded across the world in major exchanges. Commodities can be traded on either spot markets, or in the form of futures. Spot markets are those in which the commodity is traded immediately in exchange for cash or some other good. In the form of futures (or options), what is traded is not the goods itself, but a contract to buy or sell the commodity for a certain price by a stated date in the future. Over the ages, commodities have been the basis for trade and industry. They have prompted commerce, encouraged exploration and altered the histories of nations. Today, they play a very important role in the world economy with billions of dollars of these commodities traded each day on exchanges across the world. Commodities today have become an attractive investment vehicle. In the current investment scenario, it is increasingly getting difficult for individuals and institutions to create a well-balanced investment portfolio. With uncertainty in interest ratio, it is tough for the investor to beat the ever-rising inflation. Averse to being over exposed to equity markets, the investors are left with limited choices… well no more!

5.1. Introduction This chapter deals with the sample survey conducted on cotton, turmeric and castor seed farmers and RMC traders and Officials and recorded the awareness level about futures, user status, the reason for not using futures and perception about futures. The research work was planned to understand the level of awareness of agri-commodity futures market among the farmers, RMC traders and Officials of Odisha. The methodology adopted for the awareness assessment was to collect related answers to the questions which helped to evaluate the level of awareness among the beneficiaries i.e. farmers, RMC traders and officials. Quantitative and qualitative data was collected from sample respondents. The study has been completed by collecting data from farmers, RMC traders and officials of Kalahandi and Kandhamal districts which are the highest producers of three sample commodities i.e. cotton, castor seed and turmeric in Odisha. The research was conducted with 150 farmers (50 each for cotton, turmeric and castor seed), 30 RMC traders and 30 RMC officials of Kalahandi and Kandhamal districts of Odisha. The profile of sample farmers is depicted below.

6.1. Introduction This chapter deals with the sample survey conducted on cotton, turmeric and castor seed farmers and recorded various benefits observed by them by using Futures market as a platform for price information. Further, it tries to examine the price discovery efficiency of commodity futures market with the help of secondary data. It is often believed that future price is a forecast of the price of a commodity during the maturity month of its futures contracts. It is far from true. The futures price of a commodity traded at an exchange market is not so much determined by the anticipated supply of and demand for that commodity in the maturity month of its futures contracts as by the cost of carrying the commodity till the maturity of such contract. That means the spot and future prices of any commodity are always determined by the same basic forces of the present and prospective demand and supply. The difference between the two prices represents merely the cost of carrying the commodity from the present to the future. Such cost may be positive or negative depending on whether the current (not the future) supplies are abundant or scarce respectively when the price of futures contracts of any commodity is in reality relied upon by the physical market functionaries in that commodity as a “reference” price for executing their forward transactions in either the domestic or export market, that price may deem to be “discovered” in the true sense. The application of such reference price for transacting a forward transaction in the physical market in that commodity, in fact facilitates the use of the same future contract for managing price risk for such forward transaction. Hence, the price discovery and price risk management are the two sides of the same coin and efficiency of price discovery is directly related to the price risk management. A commodity exchange or a derivative market is not a mechanism for controlling prices. An efficient futures market is one that discovers prices and provides effective mechanism for managing price risk arising from unavoidable price variations owing to shifts in demand and supply schedule. Prices are determined by the basic demand and supply forces and not the market. Markets reflect the supply and demand conditions from time to time through variation in prices.

7.1. Summary of Findings This study dealing with the examination of various advantages of commodity futures market to farmers, RMC traders and RMC officials along with the level of awareness about this market among these selected beneficiaries is presented in brief. This chapter summarizes the findings. It begins with the interpretation of the significant findings derived from both secondary and primary analysis. This is followed by suggestions, the section on major contributions of the present study to the existing body of knowledge, on the role of commodity futures market in agricultural development of the state.

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