India was averse to the futures market in the pre-liberalisation era. The castor seed is a widely exported commodity from India. The futures contracts in castor seed have increased the market participation. The effect of these futures contracts on the stability of the price and the utility of the futures in hedging the risk has to be understood clearly by producers or traders before hedging in the futures contracts.

For an empirical study, the daily spot and future prices of castor seed are taken for two-time period's viz the recent year from 08/16/99 to 08/14/00 and the year before from 08/06/98 to 08/7/99 and the correlation factor is measured among them. The spot variety taken is Castor seed Madras Small in Mumbai market and the futures prices are of BOOE.

Standard deviation and coefficient of variation are measured in the said two time periods to measure the volatility in the prices. The following table below shows the standard deviation, average price, coefficient of variation, and correlation factor (between the domestic spot and futures prices) for two different time periods.

The correlation in the initial one-year was 0.74. This points out at that time the castor market was inmature and inefficient in price discovery. The correlation has improved in the recent year to 0.96, indicating the futures market has acted as efficient medium for better price discovery, and the ready market has been following it closely.

The producers and traders are now able to realize better prices for their produce. This has also acted as a benchmark price for the exporters and importers. The market is still maturing for acting as an efficient hedging medium for the producers and at the same time is working to ensure liquidity, by attracting speculators.

Price stability has been improved as shown by low standard deviation and coefficient of variation in spot prices in the recent one year as compared to the preceding year. The high volatility as required by any futures market to operate efficiently, has remained almost unchanged in the recent year.This can be mainly attributed to the participation of speculators and the gradual evolution and acceptance of the futures trading among the producing and trading community. The speculative arbitrage opportunity has been avoided by high correlation among the futures exchanges.

This is a healthy picture, indicating the castor futures are moving towards an efficient market mechanism. Therefore, the castor seed futures has been largely successful in helping the farmers, traders and exporters in the country associated with the castor industry for better price realization and risk management.

If the direction is same in spot and future prices, market participants can hedge by taking opposite positions in the spot and future markets (for example, buying in spot and selling in futures). To take such positions, the seasonality factor should be known clearly.

A seasonality study has been done based on a continuous contract of Castor seed futures in BOOE and Castor seed Madras Small prices in the local market of Mumbai, for a period from 6th August'98 to 14th August'00. Out of the 568 data points on which the study has been conducted, 277 days showed Backwardation situation whereas 291 days showed Contango phase.

But significanty, the backwardation average is much higher as compared to the Contango average. It should be noted that castor is mainly a Kharif crop sown in June to August and harvested in the month of October - November. It has been observed, from July there is a tendency in the market to turn backward and it continues till January. During this time, the spot prices run higher than the futures and there is a tendency of buying in the futures and selling in the physical market.

This usually occurs when the demand and future supplies of the commodity are both high. The period between February and June is the lean period when there is not much supply and demand of castor seed in the local markets. This is the Contango period when the spot prices are lower than the futures and producers go to the futures exchanges to realize better price by hedging their crop than sell in the ready market.

Producer selling acts as a resistance for the prices to improve. This is quite the opposite of the backwardation phenomenon when hedging pressure is low and prices escalate in the futures exchanges with the proportionate increase in demand.

The hedge efficiency of castor seed future has been calculated at 61.12%, assuming zero carrying cost. It means that, in case of a long hedger approximately 61 % times hedging will be effective, whereas 39 % times it will not. In case of short hedgers it is just the opposite.

To conclude it can be stated that the castor seed futures have played an efficient role in price discovery and ensuring price stability. Its role has been significant in facilitating producers and traders in hedging against price fluctuations in castor seed market.