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The IUP Journal of Financial Risk Management
The Impact of Future Trading on Volatility in Agriculture Commodity: A Case of Pepper
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Black pepper is known as a flowering vine in the family Piperaceae. While Vietnam is the largest producer and exporter of pepper in the world, producing almost one-third of the world’s pepper crop, India produces 19% of the world’s demand for pepper. In India, Kerala and Karnataka account for more than 95% of the pepper production. Indian pepper is of superior quality and is traded at a premium rate in international markets. In the present paper, spot returns of pepper volatility is modeled as a GARCH(1, 1) process using data from 2004 to 2013. GARCH(1, 1) model is used to study the relationship between spot volatility and unexpected futures trading activity, while Granger causality test is used for examining the causality flows from Unexpected Traded Volume (UTV) to spot volatility and unexpected open interest to spot price return. Therefore, whenever there is high unexpected fluctuation in the level of futures trading volume, the volatility of spot prices increases, indicating the destabilizing impact of futures trading. The augmented GARCH model reports positive relationship between UTV and spot returns volatility. The study obsoletes presence of excessive speculation manipulated trading which is a concern for regulators, genuine hedgers and government. Regulators need to take steps for checking speculation in pepper future market. Fluctuation in spot price is due to unexpected trading of hedgers.

 
 
 

More than 25 spices are commercially grown in India. In world, India is the largest producer, consumer and exporter of spices. India dominates in the global markets in spice sector. Out of the total production of spices about 90% is consumed in the country to meet the domestic demand and only 10% is exported (Peter and Nybe, 2006). Central Statistical Organization (CSO) has estimated the value of production of all spices to be 142.15 bn during TE 2002-03, which is around 4% to the total value of agricultural output. The contribution of black pepper alone was 6.36 bn. Although spices are grown in almost all the states in India, Kerala is the single largest spice-producing state in terms of value, next to Andhra Pradesh.

In fact, Kerala contributes 97% of the total black pepper production in the country. Black pepper popularly known as ‘King of Spices’ or ‘Black Gold’, is a perennial vine. Historically, it has been one of the highly tradable commodities; its domestic price, production as well as profitability of the growers are highly influenced by its international price. During the recent past, the price of black pepper nosedived on account of international pressure. The domestic price had plunged down to only 74/kg in 2003-04 from a peak of 215/kg in 1999-2000. This has affected the bottom line of its growers very badly. The present study is therefore undertaken with the aim to examine the reason for price volatility of pepper.

 
 
 

Financial Risk Management Journal, Future Trading, Volatility, Agriculture Commodity, Unexpected Traded Volume (UTV), Central Statistical Organization (CSO), Literature Review, Government National Mortgage Association (GNMA), Pepper.