Growth, variability and supply response of the futures traded commodities in India

With the liberalisation of the economy and the signing of WTO Agreement on Agriculture, the government has started withdrawing selectively its intervention in the agriculture sector. Expecting that increasing role of market forces could lead to higher price risks, the government has been encouraging futures trading in many agricultural commodities to provide an alternative risk management mechanism for the participants. At present, pepper, castor, potato, turmeric, hessian, sacking, coffee, cotton, soybean and gur are traded in futures markets. Since India holds a leading position in the production and acreage of these cash crops, many of them having high potential for export earnings, futures trading can play a significant role in their growth. This paper examines the growth, variability and supply response of these crops in order to assess how important futures trading is for these crops in terms of risk management and price discovery and to examine ways by which futures trading of these commodities can be strengthened. The results indicate that all futures traded commodities have high price risk. The farmers' decision regarding allocation of land for these commodities except for pepper, coffee and turmeric, is influenced by their prices. It is suggested that the duration of the contracts maturing during and immediately after harvest may be extended to include planting time decision in the case of seasonal crops.