The Hindu Business Line : The role of information

Information is the prime mover of any market, especially a volatile one such as commodities. It is the sentiment among players that drives the market; and information impacts sentiment. Indeed, information is the key to understanding the dynamics of the market, and is the prime mover of both physical and futures segments.

There is no formal definition of `information' but suffice it to say it is anything that moves the market. Numerous factors impact the commodity market, such as weather, output, consumption, stocks, quality, import, export, government policies, taxes, currency, freight rate and so on. Their causative factors need to be included too. Indeed, real or expected changes in these factors would affect commodity prices.

The Indian commodity business is growing at a rapid pace. Rising incomes and population growth are driving up its volumes. Expanding output, rising demand, shortage/surplus, rising export/import volumes — all these lead to price volatility and price risk.

Sources, nature of info

There is a need to systematically collect, collate and analyse information so as to be able to take an informed decision about commodity trading. Market participants need information that is timely and useful. The usual sources of information are trade and industry associations; reports of experts, consultants and analysts; specialised trade and industry journals; publications of research bodies and forecasters; and government publications. The Internet has now become an easily accessible source of a large variety of information.

It may be instructive to list the characteristics of information. There is already too much of information overload. We need to check whether the information at hand meets the following characteristics: Is it accurate/reliable? Is it timely? Is it objective? Is it exhaustive? Is it accessible? And is it usable/useful?

We need to test if publicly available information in our country serves the purpose. Look at crop estimates. A critical piece of information for the market is the size of the crop, and, of course, quality. Estimation of crop size is tricky business. Estimates of crop size released by the government from time to time vary and, therefore, are less reliable. There are times when government and trade estimates vary significantly. If we looked at the timeliness of data, it is tardy. For instance, the statistics of foreign trade issued by the Directorate-General of Commercial Intelligence and Statistics. The data are published several months after trade has taken place. The time lag between actual trade and its reporting reduces the timeliness and importance of the information.

Accessibility

What about accessibility? The government is the repository of a lot of information on factors that impact the market — rainfall, acreage, input supplies, prices, and so on. There is a well-established network of information collection and huge sums are spent in collecting information.

However, few have ready access to the information. Often, government publishes the information after considerable delay as result of which it has little value. There is need for the government to share information in a timely manner for the benefit of the market. Otherwise, there could be wild speculation and motivated/uninformed private estimates doing the rounds.

US — an excellent example

An excellent example of information sharing is provided by the US Department of Agriculture. Every month, exhaustive data/reports are published on set dates. The reports cover major commodities such as grains, oilseeds, cotton and so on. Occasional reports on other commodities appear too. These are uploaded on the Internet and available to everyone.

If we were to test publicly available information in India for requisite characteristics, we may feel disappointed. Both accuracy and reliability are suspect. Often, it is not timely. Accessibility is extremely limited. As for utility, information may be partially useful. For instance, the satellite (Insat) picture on weather would be more useful to farmers and commodity market participants with area-specific analysis and interpretation.

As a nation, we need to strengthen our system of data collection, collation, analysis and dissemination. Primary data relating to acreage, production, yield and quality at the appropriate time are hard to come by. Given that most agricultural commodities are seasonal and regional in nature whereas consumption is year-round, a continuous flow of information about developments on farm and in the market is essential. In its absence, guesstimates and speculative disinformation will distort the market.

`Soft infrastructure' — that is, data and their flow — is as important to the market as solid infrastructure such as warehouses and roads.

More Stories on : Commodity Markets | Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page