NEW DELHI (Commodity Online): India pepper futures market have been manipulated and a cartel has been indulging in insider trading causing huge suffering to farmers, according to Associated Chamber of Commerce and Industry (ASSOCHAM).

ASSOCHAM has urged the market regulator, Forward Markets Commission to investigate the anomalous price changes and trade behavior found in pepper futures between June 2011 and March 2012.

The chamber Secretary General D.S. Rawat while releasing the study said, “the commodity exchanges must develop a regular system of monitoring price and trading behavior of commodities in order to avoid such episodes in future as even the cases of suicides have come to notice”.

The chamber study observed that the average price of black pepper Rs. 7,181 per quintal in 2004-05, which almost doubled in 5 years reaching Rs. 13,748 in 2009 – 10. However, in 2010 – 11, the average price stood at Rs. 20231 per quintal and rose further to Rs. 32,803 per quintal in 2011 – 12, with maximum being Rs. 39,200 per quintal.

The maximum price went up from Rs. 25.053 per quintal in Rs. 2010 – 11 to Rs. 45,005 per quintal in 2011 – 12. The price fluctuation in 2011 – 12 is also extremely high with a price range (different between maximum prices) of Rs. 19,563 for the year, as compared to the range being less that Rs. 6,000 till 2009 – 10.

Black pepper futures market exhibits average price changes (returns) and volatility in 2011 – 12, which is within the range of figures recorded in market history while, average price and returns have been stable, volatility has slightly gone up in 2011 – 12 compared to 2012 – 2011.

In 2011 – 12, there is no significant variation in skewness and kurtosis figures compared to previous two years. The distribution of price changes / returns continues to be leptokurtic suggesting informational inefficiency which may possibly be exploited by insider traders.

The trading volume has remained static in 2011 – 12, while open interest has improved marginally compared to 2012 – 11 figures.

In 2011 – 12, seven structural breaks are observed in pepper futures price changes / returns viz., 23-06-2011, 28-06-2012, 21-12-2011, 27-12-2012, 27-02-2012, 21-03-2011 and 26-03-212. The number of structural breaks is unusually large, in this case.

Despite observed price distortions in 2011 – 12, black pepper futures and spot prices apparently exhibit a long-run equilibrium relationship as confirmed by the Johansen multivariate co-integration tests.

Further, bivariate volatility spillovers are empirically confirmed between futures and sport market. This implies that high volatility in futures market drives high volatility in spot market vice-versa.

Reversed destabilization effect is observed. Spot market volatility tends to affect futures market trading activity. The results may be explained by the fact that spot market is not well-organised and lacks transparency.

Mr. Rawat said, pepper futures market recorded highest annualized returns of 52.37 percent in 2006 – 07 and the lowest annualized returns of -16.95 percent in 2008 – 09. It achieved highest and lowest annualized volatility of 36 percent and 18 percent in 2006 – 07 and 2005 – 06, respectively. The futures returns generally exhibit skewness with not consistency in signs. They are also, generally, leptokurtic. The return distributions exhibit normality in 2007 – 08 and 2009 – 10.