The Commodity Futures Volatility and Macroeconomic Fundamentals - The Case of Oil and Oilseed Commodities in India

Abstract

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.  

Keywords

• Food Price Volatility,Agricultural Commodities,Futures Price Volatility,Spot Price Volatility,Macroeconomic

References

1. Ali, J. and K. Bardhan (2011). Efficiency in agricultural commodity futures markets in India: Evidence from cointegration and causality test. Agricultural Finance Review, 71 (2), 162- 178.
2. Attie, A.P. and S.K. Roache (2009). Inflation Hedging for Long-term Investors. IMF Working Paper No. 09/90. Washington DC: IMF.
3. Bose, S. (2008). Commodity Futures Market in India: A Study of Trends in the Notional Multi Commodity Indices. Money & Finance, ICRA Bulletin, 3 (3), 125-158.
4. Breeden, D.T. (1980). Consumption Risk in Futures Markets. The Journal of Finance, 35 (2), 503-520.
5. Chand, R. (2010). Understanding the Nature and Causes of Food Inflation. Economic and Political Weekly, 45 (9), 10-13.
6. Conceicao, P. and R.U. Mendoza (2009). Anatomy of the Global Food Crisis. Third World Quarterly, 3, 1–6.
7. Cootner, P.H. (1960) Returns to Speculators: Telser versus Keynes. Journal of Political Economy, 68 (4), 396-404.
8. Donmez, A. and E. Magrini (2013). Agricultural Commodity Price Volatility and Its Macroeconomic Determinants: A GARCH-MIDAS Approach. JRC Working Papers JRC84138, Joint Research Centre (Seville site). https://ec.europa.eu/jrc/en/publication/ eur-scientific-and-technical-research-reports/agricultural-commodity-price-volatility-an d-its-macroeconomic-determinants-garch-midas (accessed September 26, 2018).

9. Dusak, K. (1973). Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums. Journal of Political Economy, 81 (6), 1387-1406.International Econometric Review (IER) 49
10. Easwaran, S.R. and P. Ramasundaram (2008). Whether the Commodity Futures in Agriculture Are Efficient in Price Discovery? – An Econometric Analysis. Agriculture Economics Research Review, 21, 337-344.
11. Elumalai, K., N. Rangasamy and R.K. Sharma (2009). Futures Market in Indian Agriculture and Its Impact on Production and Prices. Indian Journal of Agricultural Economics, 64 (3), 315-323. http://www.environmentportal.in/files/Price%20discovery.pdf (accessed September 26, 2018).
12. Fleming, J., B. Ostdiek and R.E. Whaley (1996). Trading Costs and The Relative Rates of Price Discovery in Stock, Futures, and Options Markets. Journal of Futures Markets, 16, 353- 387.
13. Hayo, B., A.M. Kutan and M. Neuenkirch (2012). Communication Matters: US Monetary Policy and Commodity Price Volatility. Economic Letters, 117 (1), 247-249.
14. Hazuka, T.B. (1984). Consumption Betas and Backwardation in Commodity Markets. The Journal of Finance, 39 (3), 647-655.
15. Kabra, N.K. (2007). Commodity Futures in India. Economic & Political Weekly, 42 (13), 1163- 1170.
16. Kaldor, N. (1939). Speculation and Economic Stability. Review of Economic Studies, 7, 1-27. Karande, K. (2006). A Study of Castorseed Futures Market in India. Doctoral Dissertation submitted to the Indira Gandhi Institute of Development Research, Mumbai, Available at: http://www.ssrn.com/abstract=983342 (accessed December 26, 2013).
17. Leibtag, E. (2008). Corn Prices Near Record High, but What about Food Costs, Amber Waves. U.S. Department of Agriculture, 11–15, 2008.
18. Lokare, S.M. (2007). Commodity Derivatives and Price Risk Management: An Empirical Anecdote from India. Reserve Bank of India, Occasional Papers, 28, (2), 27-77.
19. Manera, M., M. Nicolini and I. Vignati (2013). Futures Price Volatility in Commodities Markets: The Role of Short Term vs. Long Term Speculation. USAEE Working Paper (13-128). https://ssrn.com/abstract=2277355 (accessed September 26, 2018). Ministry of Consumer Affairs (2008). Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices. New Delhi: Ministry of Consumer Affairs, Food and Public Distribution, Government of India. Available at: http:// www.indiaenvironmentportal.org.in/files/file/Abhijit%20Sen%20Report.pdf (accessed September 26, 2018).
20. Mishra, P. and D. Roy (2011). Explaining Inflation in India: The Role of Food Prices. Mimeo. Washington DC: IMF and IFFPRI.
21. Moosa, I.A. (1996). An Econometric Model of Price Determination in the Crude Oil Futures Markets. In Proceedings of the Economic Society Australasian Meeting, ed. M. McAleer, P. Miller and K. Leong, 3, 373-402, University of Western Australia, Perth.Joarder-The Commodity Futures Volatility and Macroeconomic Fundamentals – … in India 50
22. Morgan, C.W. (2001). Commodity Futures Markets in LDCs: A Review and Prospects. Progress in Development Studies, 1 (2), 139-150.
23. Mukherjee, K. (2011). Impact of Futures Trading on Indian Agricultural Commodity Market. http://ssrn.com/abstract=1763910 (accessed January 26, 2014).
24. Naik, G. and S. Jain (2002). Indian Agricultural Commodity Futures Markets – A Performance Survey. Economic & Political Weekly, 37 (30), 3161-73.
25. Nair, R.N. and L.M. Eapen (2012). Food Price Inflation in India (2008 to 2010): A Commoditywise Analysis of the Causal Factors. Economic and Political Weekly, 47 (20), 46-54.
26. Nair, S.R. (2013). Making Sense of Persistently High Inflation in India. Economic & Political Weekly, 48 (42), 13-16.
27. Nath, G.C. and T. Lingareddy (2007). Commodity derivatives contributing for rise or fall in Risk. http://www.igidr.ac.in/conf/money/mfc_10/Golaka%20C%20Nath_submission_5 7.pdf (accessed March, 2014).
28. Ranjan, N. (2005). Role of Commodity Exchanges, Futures & Options - A Case Study on Soya Oil. Occasional paper 46, Department of Economic Analysis and Research, NABARD. Roache, S.K. (2010). What Explains the Rise in Food Price Volatility. IMF Working Paper 10- 129.
29. Sabnavis, M. and S. Jain (2007). Working of Commodity Futures Market. Economic & Political Weekly, 42 (18), 1641-43.
30. Sahi, G.S. (2007). Influence of Commodity Derivatives on Volatility of Underlying Asset. ICFAI Journal of Derivatives Market, 4 (3), 26-39.
31. Sahi, G.S. and G. Raizada (2006). Commodity Futures Market Efficiency in India and Effect on Inflation. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=949161 (accessed November, 2013).
32. Sen, S. and M. Paul (2010). Trading In India’s Commodity Future Markets. Institute for Studies in Industrial Development, Working Paper, 2010/03.
33. Von Braun, J. and M. Torero (2009). Exploring the Price Spike. Choices, 24, 16–21. Working, H. (1948). Theory of The Inverse Carrying Charge in Futures Markets. Journal of Farm Economics, 30, 1-28. Working, H. (1949). The Theory of the price of Storage. American Economic Review, 39, 1254- 1262.
34. Zheng, Y., H.W. Kinnucan and H. Thompson (2008). News and Volatility of Food Prices. Applied Economics, 40, 1629–1635.