NEW MEDIT N.

2/2011

The Futures Market in Agricultural Products and an

Evaluation of the Attitude of Farmers: A Case Study of
Cotton Producers in Aydin Province in Turkey
Hakan ADANACIOGLU*

(Easwaran and Ramasun-

Jel classification: Q13, Q18

daram, 2008). The hedging

1. Introduction
Producers of agricultural
Abstract
This study evaluates the futures market, well-established in the world but newly and price discovery functions
products permanently face the developing in Turkey, in the context of the agricultural sector. It also presents the of futures markets promote
risk of price and production findings of a survey which shows the attitudes of farmers towards the futures mar- more efficient production, s-
(Parcell and Price, 2000). Pro- ket in agricultural products. This survey was carried out among the cotton farmers torage, marketing and agro-
duction risks arise from factors of Aydın province in Turkey; the study identifies and details the views and opin- processing operations, fi-
such as weather conditions, ge- ions of farmers on the futures market.
When the level of knowledge of cotton farmers about the futures market was ex- nancing, and overall agricul-
netics, insect damage and dis- amined, it was found that 74% of farmers had no knowledge of the market, and the tural marketing performance
eases which impact yields, remaining 26% had very little knowledge. It was found that 90% of these farmers (Shim, 2006). A futures con-
while price risks come from have tendency to use the futures market. The remaining 10% were deterred by wor- tract is a binding agreement
fluctuations in price caused by ries such as their belief that the risk in the futures market was very high, their lack between a seller and a buyer
factors of supply and demand of knowledge on how the commodity futures exchange works, the fact that trade in to make (seller) and to take
futures on the commodity futures exchange was not viewed as real transactions, or
(Riley and Anderson, 2009). At their fear of not being able to fulfil the annual contracts for cotton which they had (buyer) delivery of the under-
the same time, the rise of the with the cooperatives they belonged to. lying commodity (or financial
global free market and varia- instrument) at a specified fu-
Key words: cotton, price risk, cotton futures, futures markets, farmers’ attitudes.
tions in agricultural policies ture date with agreed upon
within countries serve to in- payment terms (Mintert et al.,
crease these risks. The increase
L’objectif de cette étude est d’évaluer les marchés à terme agricoles, déjà bien éta- 1999). Futures and options
Résumé
in variability in price and pro- blis dans le monde, mais en phase de développement actuellement en Turquie. Les contracts have been used at
duction in particular has made résultats d’une enquête, menée auprès des producteurs de coton de la province high volumes in the world for
farmers see the importance of d’Aydin en Turquie, sont présentés pour illustrer leur attitude envers les marchés à many years. 2007 figures in-
risk management (Parcell and terme agricoles, en mettant en évidence leurs opinions et points de vue à ce sujet. dicate that trading volume of
Pierce, 2000). In the context of En examinant le niveau de connaissance des producteurs de coton sur les marchés futures exchanges has ex-
à terme, il a été possible de montrer que 74% d’entre eux n’ont aucune connais-
price risk, there are several sance en la matière alors que les 26% restants ont une connaissance très limitée. ceeded USD 2.2 quadrillions
ways in which risk manage- De plus, 90% de ces producteurs tendent à avoir recours aux opérations à terme. and approximately 15 billions
ment can be achieved. These En revanche, les 10% restants sont freinés par des préoccupations comme la contracts have been traded
include futures and options conviction que les marchés à terme posent un risqué très élevé, leur méconnais- (TurkDex, 2010a). In 2009,
contracts, forward contracts sance du mécanisme d’échange des marchandises par cette voie, le fait que les the total number of futures
opérations à terme ne sont pas considérées comme des transactions réelles, ou
and product insurance. Most of bien leur crainte de ne pas être en mesure de faire face aux contrats annuels sur le and options contracts was
the ways of managing risk coton dans lesquels ils s’engagent avec leurs coopératives d’appartenance. around 17.7 billion, and was
which are currently used to showing a general upward
minimize price risk have been Mots-clés: coton, risqué de prix, contrats à terme sur le coton, marchés à terme, trend (Burghardt and Ac-
attitude des producteurs.
in existence for many years. worth, 2010). However, when
The best known of these risk the number of futures and op-
management methods has a history going back to 1848, and is known tions contract transactions in agricultural products is compared with
as futures contracts. Other means of risk management, forward and the number in other trading categories, it can be seen to be at an in-
insurance products, are used by a smaller number of farmers (Riley sufficient level. Thus, in the first six months of 2010, the
and Anderson, 2009). 582.754.069 transactions (the number of contracts trade) in agricul-
Futures market perform two important functions of price dis- tural products came fourth after the equity index, the individual eq-
covery and price risk management with reference to the given uity and interest rates, and formed only 5.2% of the world total of
commodity. It is highly useful to the segments of economy transactions (11.221.484.660) (Acworth, 2010).
This topic can be said to become all the more important when
it concerns the agricultural sector, which is the locomotive of a
nation’s economy. By means of futures contracts in agricultural
* Department of Agricultural Economics, Faculty of Agriculture at
the Ege University in Bornova-Izmir, Turkey.

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products, it will be possible to set prices for the future, plan pro- tance from the provincial capital. It was considered that cotton
duction, manage risk effectively, have a greater participation in farmers who were located in sub-provinces which were closer to
setting prices, and in setting prices reduce to a minimum the ef- the provincial capital would have a better chance to be able to
fects of seasonal production and consumption factors, and thus a- communicate easily with the neighbouring province of Izmir,
gricultural production can be turned into a vehicle of investment where the Futures and Options Exchange is situated. In this way,
(Cetinkaya, 2006). In the same way that these contracts can help the three sub-provinces of Aydin Central, Kosk and Yenipazar
to reduce the uncertainty of the market in agricultural products, were chosen. Cotton farmers to be interviewed were chosen by
they can be an important means of transferring risk to the indus- judgment sampling, and their number was set at 50.
tries which use products from the agriculture sector as raw mate- The distribution by sub-province of the cotton farmers who
rial (Erbay, 2007). were interviewed was performed according to the relative
This study is important in that it takes an overall view of the fu- weighting of the sub-provinces in cotton production. The result
tures market, which has been part of world trade for many years of this was that 33 cotton farmers were interviewed in Aydin Cen-
but is still in the development stage in Turkey, and evaluates this tral sub-province (Dalama, Armutlu, Karahayit, Godrenli, Bal-
topic with respect to the agricultural sector. In particular, the s- takoy, Kirklar and Alanli), 11 in Yenipazar (Hamzabali), and 6 in
tudy brings a new point of view from other studies because it was Kosk (Ciftlikkoy).
carried out after the futures market came into action in Turkey. In order to assess the views of cotton farmers on the futures
The central importance of the study is that it sets out the findings market, a questionnaire form was prepared in advance of the sur-
obtained by the survey carried out on cotton farmers with the aim vey. The questionnaire form contained a large number of state-
of discovering their attitude towards this system, which has only ments concerning the futures market, and a five-point Likert s-
recently come into being in Turkey. A small number of studies cale was used to assess the degree of importance accorded to each
have been carried out on this topic, but so far none has been of these statements. In this way a score was obtained for each s-
found which is supported by a survey and explained by examples. tatement showing the degree of importance the cotton farmers at-
These are some of the reasons for the importance of this work. tached to it.
2. Materials and Methods 3. The Structure of Cotton Market and Or-
This study examined the futures market in two stages: at macro ganisation of Futures Market in Turkey
and micro level. For the macro level, the study made use of data The general flow of cotton marketing channels in Turkey is
from relevant studies in the literature. Sources included books, shown in Figure 1. The Turkish grower typically sells seed cotton
research, articles and statistics. to either the cooperative gin or a private ginner (Hudson, 1997).
Data for the micro level were obtained from the survey work. According to the results of a survey study carried out in Aegean
This survey work had the aim of determining the views of the Region of Turkey, it was determined that a significant portion of
farmers involved in agricultural production on the futures market. cotton farmers (63.10%) sold cotton to the cotton marketing (or
When making the choice of which agricultural product to exam- sales) cooperative (Adanacioglu, 2009). Contract ginning does
ine, attention was paid to which products were traded on the Fu- take place but on a very limited basis. Private sector ginners typ-
tures and Options Exchange, which operates in the Turkish city ically act alone in that they are independent firms with no um-
of Izmir. In this regard, one of the two agricultural commodities brella organization. The cooperative gin, in contrast, is acting as
which are traded in this exchange is cotton (the other is wheat), a part of a larger organization, and typically has access to sub-
and this was chosen. The choice of this product was affected by stantial financial resources.
the fact that, although there has been a decline in recent years, During harvesting and ginning, seed cotton prices are estab-
production is being carried out on the not inconsiderable area of lished in the local markets, reflecting the price at which seed cot-
420.000 ha (TurkStat, 2009a), that cotton production is carried ton is traded between cotton growers and ginners (Gazenfer,
out in four areas of Turkey, namely the Aegean Region, Antalya, 2007). Seed cotton is also bought by intermediaries, who subse-
Cukurova and South-east Anatolia, and that in these regions a quently sell it to nearby ginners. Price formation in seed cotton is
large number of agricultural operators are involved in cotton pro- largely linked to the prevailing lint cotton prices and cotton seed
duction, that closely involves the textile sector, and that it is one oil prices. Until 1993 Governments implemented a support price
of the products most at risk from prices. policy through the Agricultural Sales Cooperative Unions (AS-
The survey was carried out in 2006 in the Aegean region of CUs). Since 1998 growers have been receiving ‘Premium
Turkey, which has 25% of the country’s cotton production, with (bonus) payments’, which contribute significantly to the sustain-
the aim of determining the attitudes of cotton farmers to the fu- ability of domestic production.
tures market (Ozudogru, 2006). One province was chosen from ASCUs play a considerable role in the cotton sector, with Taris
within the Aegean region which was important in terms of area (Aegean), Antbirlik (Antalya) and Çukobirlik (Mediterranean
and quantity of production. The province chosen as the base for and south-east) providing agricultural inputs (i.e seeds, fertiliz-
the survey was the province of Aydin, which has 33.26% of the ers, chemicals) and finance to their members, buying the seed
Aegean region’s cotton producing area, and 34.78% of the re- cotton and, after ginning, selling the lint cotton in the domestic or
gion’s production of cotton fibre. In the choice of sub-provinces export markets.
where the survey would be carried out, note was taken of the dis- Main players in the market are ASCUs, spinners and traders.

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There exists a well-functioning spot market for lint cotton in the of TurkDex also increased significantly and was around 1.2 bil-
Izmir Mercantile Exchange (IME), which has been active since lion USD as of June 2010 (TurkDex, 2010b). However, futures
1891. The IME, the cash exchange for the Aegean Region, is the and options trading in the agricultural commodities is at a negli-
most active cash (spot) exchange in Turkey. Lint cotton prices es- gible level. In Turkey, 11.148 transactions ($7206) were made for
tablished at the IME are registered and announced daily. agricultural commodities on this market in 2009, which is equiv-
Cotton imports have become a growing necessity to meet the alent to 0.000003% of the total of trading volume (TurkDex,
increased demand from the booming textile and garment sector, 2009).
especially after 1993, when Turkey became a net cotton import- An examination of contracts made in the world for agricultural
ing country and cotton exports declined to low volumes. products shows that the top ten products are sugar, soybeans, soy-
bean meal, corn, rubber, soy oil and wheat. It has been found that
futures and options trading in soybeans is particularly widespread
Figure 1 - The Marketing Channels of Cotton in Turkey.
(Acworth, 2010). In Turkey, however, only cotton and wheat are
traded on the futures and options exchange.
Cotton is one of the major agricultural products of Turkey.
Farmers, cotton traders and all the other people who buy or sell
cotton or its derivatives face the cotton price risk. Cotton prices
have been weak for years and there is also fluctuation in season-
al prices. The fluctuation in cotton prices has revealed a negative
result in terms of planning and production in general. Therefore,
the area under cotton cultivation in Turkey has seen a significant
decrease. This reduction in the area of cotton production can be
seen in Turkey in the ten-year period between 1999 and 2009.
Taking 1999 as a base (719.294 ha), the area under cotton in
Turkey showed a decrease of approximately 42% in 2009
(420.000 ha). As a result of a continued decline in harvested cot-
ton area, the production of cotton fibre, which was 781.298 tons
in 1999, also fell by 18.3% to 638.250 tons in 2009 (TurkStat,
2009a). Apart from this, industrialists or merchants that are af-
Source: Gazanfer, 2007. fected by price fluctuations can not do risk management. Cotton
prices in cash or spot markets are composed of some intermedi-
aries. A very wide participation in the market can not be
There are four different types of exchanges operating in achieved. Now with the introduction of the cotton future contract,
Turkey. These are: the commodity exchanges where the agricul- these people have the chance to hedge this risk effectively and are
tural products are traded as spot, Istanbul Stock Exchange (ISE) able to make longer future plans (TurkDex, 2010a). However,
where the stocks are traded, Istanbul Gold Exchange (IGE) where there is almost no cotton futures and options trading on the Turk-
the precious metals are traded and the Derivatives Exchange ish Derivatives Exchange.
(TurkDex) where the financial and agricultural contracts are trad-
ed. Turkdex is the first private exchange of Turkey. Opened in 4. Results and Discussion
February 2005, Turkish Derivatives Exchange (TurkDex) has be-
come an important derivatives exchange in the region (IME, 4.1. Socio-Economic Characteristics of the Cot-
2010). As Turkey’s first entirely electronic derivatives exchange, ton Farmers
TurkDex offers a core product base of financial and commodity The average age of cotton farmers on the farms which were ex-
instruments. Its primary objective is to develop and provide de- amined was found to be 49.78 years. 52% were in the 15 to 49-
rivatives to help traders, hedgers, and investors to manage their year age group, and the remaining 48% were aged 50 or over.
risks effectively. With the launch of TurkDEX, market partici- They had an average of 6.16 years of formal education, and had
pants now have the proper tools for managing their exposures to worked for approximately 28 years (27.66 years) in cotton grow-
price fluctuations in foreign currency, interest rates, equities and ing.
commodities (cotton, wheat, gold). In farms producing cotton, it was found that the average area
According to the Futures Industry Association, TurkDex was per farm devoted to cotton production was approximately 3.9 ha
one of the fastest developing exchange in the world in 2009. (3.85 ha), and that a significant proportion of the farms examined
TurkDex has witnessed a tremendous growth in its trading vol- (70%) had 4 ha or less under cotton.
ume since its first year of operation. TurkDex reached a total When the level of knowledge of cotton farmers concerning the
trading volume of over 140 billion USD at the end of June 2010. futures market was examined, it was found that 74% of them had
In terms of number of contracts, as of June 2010 total trading vol- no knowledge of it, and that the remaining 26% had very little
ume reached 34 million contracts. Daily average trading volume knowledge of it. Moreover, of those farmers who stated that they

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had very little knowledge, it was found that some did not know ing the adoption of forward trading and the futures market.
exactly what the futures market meant, and others confused it After identifying cotton farmers’ views on the futures market,
with the Izmir Mercantile Exchange. Farmers who said that they a Likert table was prepared to measure the extent to which they
had heard about the subject from the local press or television agreed with various statements concerning the futures market.
were found not to have taken part in any education programme. Table 2 gives the statements and the responses received, in order
In order to assess the attitudes of the cotton farmers being studied of scale average.
to the futures market, they were asked whether they would enter in-
to an agreement or contract before the beginning of the cotton- Table 2 - Cotton Producers’ Evaluation of the Futures Market
growing season (for example in March) which fixed the price at the
Likert scale
time of harvest in September or October. 90% of farmers gave a to-
average
tally positive answer to this question without any reservations. But
at the same time there were some, albeit a small The use of the futures market can reduce price risks 4,52
number, of cotton farmers who were not willing to enter into Futures trading provides the possibility of higher
futures trading. Among the reasons for this were that they saw it process than do price mechanisms that operate on
as a risk, they thought their level of knowledge was insufficient cash transactions 4,44
for futures trading, they were afraid that they would not be able
The use of futures trading increases income more than
to fulfil their annual commitments to the cooperative (Taris) they
expenses 4,12
belonged to, and that their trust in the futures market was low be-
cause they had not seen examples to guide cotton farmers on the Trading on the futures market is very complicated 2,94
futures and options market. Prices of cotton at planting time suggest what prices
Significant statistical differences were found between the cot- will be at the time of harvest 1,64
ton farmers who showed an interest in the futures market and
1) I completely disagree 5) I completely agree
those who did not in terms of education, the length of time they
had spent producing cotton, and the size of the cotton fields
which they worked (Table 1). These results indicate that those Currently, cotton farmers’ income, which is affected by price
who showed an interest in the futures market for cotton were y- risk, shows variability in relation to prices. For a cotton produc-
ounger and had spent less time in cotton production. These y- er who makes use of the futures market, however, there is no such
ounger and less experienced farmers showed a greater entrepre- risk. Responses by cotton farmers to the statement “Use of the fu-
neurial spirit. Goodwin and Schroeder (1994) found that the use tures market can reduce price risk” showed an average of 4.52 on
of management strategies for price risk (futures, forward trading, the Likert scale, which meant that they were almost all in agree-
etc.) declined in proportion to an increase in experience. ment with the statement.
In addition, it was found that the size of the area under cotton A substantial proportion of the farmers thought that alternative
worked by those who showed an interest in the futures market was price mechanisms such as the futures market could bring higher
greater than that of those who did not. Previous studies have also prices than a market using cash. The average score on the Likert
shown that farmers with larger farms were more likely to make use scale for this statement was 4.44, which is an indication of the be-
of forward trading and futures contracts (Musser et al., 1996). liefs that farmers have about the futures market.
At the same time, it was found that the level of time spent in e- Cotton prices in recent years have not reached desired levels, and
ducation of those who showed an interest in the futures market have even fallen below production costs, so that the income of farm-
was slightly longer than that of those who showed no interest. ers has suffered a severe reduction. This has even brought some
Previous research also showed that education influenced the use farmers to the point of pulling out of cotton production. Cotton
of futures markets (Makus at al., 1990). Another study, carried farmers in the farms studied believe that this problem could be over-
out on farmers of corn and soybean (Goodwin and Schroeder, come by means of the futures market. Thus the majority of cotton
1994), reached the conclusion that education was a factor affect- farmers (4.12) agreed that their incomes would be greater than their
expenses if they changed over to futures trading.
Although cotton farmers in the farms examined were positive
Table 1 - Education, Length of Time Spent Growing Cotton, Age and towards the futures market, they generally (2.94) drew attention
Area of Land under Cotton of Producers with and without an Interest
in Using the Futures Market. to the difficulty of trading on this market. Since these farmers did
not have much knowledge of how trading on the futures market
was carried out, it can be seen as normal that they should make
such an evaluation. However, as this type of trading begins to
spread in Turkey, it seems likely that a new era will eventually
open up for farmers.
With regard to other considerations, a substantial proportion of
cotton farmers stated that it was difficult to estimate what the
price of cotton would be at harvest time by looking at the prices
at the time of planting (1.64). However, as already stated, this

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problem can be overcome by examining historical price data. For sired sale or purchase (Meulenberg and Pennings, 2002). The fact
example, the Agricultural Marketing Services department of the that the amount to be protected from risk is small causes farmers to
United States Department of Agriculture publishes on a monthly resort more to the spot market, which is exposed to uncertain
basis the changes in cotton prices for each region. The difference changes in price. An increase in the amount to be protected from
between futures prices and spot or cash local prices ia also set by risk causes a decrease in the effects of that risk. The futures market
the use of this data (Seamon et al., 1997). in Turkey is just beginning to develop; farmers do not yet know e-
nough about this type of trading; and Turkish farmers behave with
great caution where risk is concerned. All of this shows that there
4.3 Evaluation of the Weak Points of the Fu-
tures Market in Relation to the Agriculture will be a smaller amount to protect from risk in the futures market.
Sector in Turkey A final trading risk concerns cost margins. The buyer or seller of a
The futures market can in some important ways be a means of futures contract must put down an initial margin (a deposit or starting
risk management for the agricultural sector. Some of these strong guarantee), and a maintenance margin (maintenance guarantee) re-
points are that it provides protection from price risk, it presents pos- lated to developments in the price. For example, an investor wishing
sibility of flexibility to participants in that transactions can be to buy or sell one wheat or cotton futures contract on the Turkish Fu-
opened or closed at any time, and it creates an objective environ- tures and Options Exchange must have $1551 in his account as a
ment for the spot market because it is completely open. At the same starting guarantee. If the balance of the guarantee account of an in-
time, however, the futures market has its weak points. One of these vestor with a long or a short position in a wheat or cotton futures con-
is trading risk. Because of cross-hedging, more products are differ- tract falls below $116 (maintenance guarantee), he is called to com-
entiated, and thus the difference between the futures price and the plete the guarantee (to make up the balance to $155) (TurkDex,
spot price increases (Meulenberg and Pennings, 2002). Cross-hedg- 2010b). According to Kalavathi and Shanker (1991), an increase in
ing is the pricing of a cash commodity position by using futures for the cost margin reduces the demand for futures contracts by hedgers
different commodities. Simple cross-hedging uses futures of one acting to shelter from risk. It is thought that in Turkey, this cost mar-
commodity to offset a cash position, and multiple cross-hedging us- gin (especially the initial and maintenance guarantees) must have a
es two or more different commodities. However, cross-hedging is deterrent effect on farmers considering using the futures market.
more complicated than direct hedging. Difficulties arise in selecting Another weak point of the futures market is its negative image.
the appropriate futures contracts as cross-hedging vehicles and deter- Various potential users of the futures market see it as a form of gam-
mining the size of the futures position to be established. Potential bling, and thus display a negative attitude to it (Meulenberg and
cross-hedging vehicles must be commodities that are likely to Pennings, 2002). The reason for this is the manipulation of the fu-
demonstrate a strong direct or inverse price relationship to the cash tures market which happened in the past. For example, the possibil-
commodity (Rahman et.al., 2001). For example, if a farmer produc- ity of futures transactions in agricultural products on the Turkish Fu-
ing barley is afraid that the price of his product may fall in the future, tures and Options Exchange having no physical delivery but being
and if he wants to determine the sale price as of the present, he has to performed entirely in cash shows that it was more open to manipu-
sell a futures contract drawn up on barley. However, if futures con- lation. It is thought that corrections to increase the economic func-
tracts on barley are not being traded on the market, but contracts for tion of the futures market will help to reduce this negative image. In
wheat are being traded, the farmer can provide cross-hedging by sell- addition, it is expected that the image of the futures market will im-
ing a futures contract for wheat rather than barley, given that the cor- prove in parallel with an increase in the number of entrepreneurs in
relation between them is high (Anonymous, 2009). The fact that on- farming and the agro-food industry.
ly cotton and wheat are traded on the Futures and Options Exchange The lack of suitable products for futures trading is another weak
in Turkey further increases this cross-hedging risk. point of this market. In the world in general, futures trading con-
Another trading risk is that the market depth risk is great. Market tracts are available for a large number of agricultural commodities.
depth is generally analyzed by determining the slope dPF/dQ, However, there is no possibility of futures trading in many agricul-
where PF is the futures price, and Q is the quantity traded. The lack tural commodities such as fresh horticultural products, and this lim-
of sufficient market depth results in relatively high hedging costs, its the potential scope of the futures market (Meulenberg and Pen-
and inhibits the growth of futures contract volume (Pennings et al., nings, 2002). Not only is it the case that fresh product is not traded
2003). It has been shown that market depth risk is particularly felt on this exchange, the only two agricultural products which are trad-
at small commodity futures exchanges (Pennings et al., 1998). ed on the Turkish futures exchange are cotton and wheat. This trade
Thus, the market depth risk of the Turkish Futures and Options Ex- is conducted in cash and at a negligible level. In order to expand the
change can be said to be high. The fact that trading in agricultural range of agricultural products traded on the futures market in
products on this market is negligible and is not showing an increase Turkey, it will be necessary first to ensure the success of the trade in
makes the level of risk very large. these two items.
A further trading risk is that farmers cannot specify the amount to
be hedged to correspond to the quantity they have available for sale. 4. Conclusions
Thus, a futures hedge may not exactly match the amount of the de- Futures trading in agricultural products is a means of market-
based risk management which can help to establish an effective a-
gricultural market. The futures market is used with the aim of pro-
1 annual average exchange rate (TL/USD) in 2009: 1,5471TL . tection from price risk, and just as it enables a low-cost and high-ef-

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ficiency service, at the same time it provides the possibility of a fo- ment, the way could be opened for more agricultural products to
rum for the exchange of information about the conditions of supply be traded on the futures market than the two products, wheat and
and demand, and thus provides a clear mechanism to determine fu- cotton, which are marketed there at the present time.
ture prices. The functions of the futures market in protection from One of the important steps that must be taken to enable farm-
risk and determining price will encourage production, storage, mar- ers to move over to the futures market is the need to increase the
keting and processing of agricultural products to be more efficient number and effectiveness of cooperative-like organizations.
and help to improve the performance of the agricultural market as a Thus, it is not very probable that farmers in developing countries
whole (Anonymous, 2007)2. will directly enter the futures market for agricultural produce and
Along with this, the share of GDP of agriculture is 9.8% (Turk- the other markets which manage price risk. In the United States
Stat, 2009b), and it can be seen that the application of futures trad- even, where futures markets have been around for more than a
ing to the market in agricultural products has not been very suc- century, only a small proportion of farmers use these markets di-
cessful. Thus, the fact that the volume of trade in agricultural prod- rectly, but instead accomplish their futures and options trading by
ucts on the Futures and Options Exchange in the city of Izmir in means of agents or brokers. The majority of farmers trade on the
Turkey constitutes no more than 0.01% of total trade is an impor- market through such intermediaries as cooperatives, agents and
tant indicator of this. This problem can be examined from various merchants. In particular, farmers’ associations or organizations
angles. The findings obtained in the present study indicate that the can be the first point of contact between the farmers and the fu-
first and most basic problem which needs to be solved is that farm- tures exchange. These associations or organizations, by their size,
ers involved in agricultural activities are still not well enough in- attract the attention of banks, which are ready to give credit, and
formed on the topic of futures trading. The fact that 74% of cotton brokers. Apart from this, these farmers’ associations provide
farmers involved in this study had no knowledge of the futures mar- greater security because the risk is shared between the farmers.
ket supports this argument. A plan to disseminate information on Also, access to information, the dissemination of information,
this topic to farmers of agricultural products on the Izmir Futures and the establishment of communications with the trading ex-
and Options Exchange would contribute greatly to the solution of changes are all made easier when they are done through these as-
this problem. This would help Turkish farmers, who dislike risk and sociations (Combe, 1997). In this regard, it is seen as important
generally show a tendency to thriftiness, to adapt more easily to the that policies should be put in place to stimulate and facilitate or-
futures market. For example, the National Commodities and Deriv- ganization by farmers, as farmers’ organization in Turkey is in-
atives Exchange in the city of Mumbai in India has launched pilot sufficient. Despite having been made autonomous, the existing
projects in the States of Gujarat, Madhya Pradesh and Andhra cooperative associations in Turkey have not shown great success,
Pradesh to help farmers understand the concept and benefits of but they could protect themselves and thus the farmers from pos-
hedging the price risk on the trading platform of an Exchange prior sible future risks by trading on the futures market.
to harvesting. (Anonymous, 2004)3. Another necessary action to increase the volume of trade in a-
Furthermore, it can be seen that it is not enough to inform farm- gricultural products on the futures exchange and to make these
ers about the futures market. Thus, it is important for a farmer who transactions easier is to establish licensed warehouses. As previ-
wishes to enter the futures market to know the factors which affect ously mentioned, transactions concerning agricultural products
the price of his product or products. Such factors are the production on the Futures and Options Exchange in Turkey are currently
and consumption figures of the product within the country, the conducted in cash, and no actual physical delivery is involved.
amount in stock, variations in production, consumption and stock in Because a significant proportion of the trade on the exchange in-
the world, expectations of crop yield according to weather condi- volves delivery agreements, licensed storage facilities play an
tions, the development of other products which could be a substitute important role in commodity (or futures) trading. This storage fa-
for the product in question, product quality, government policy con- cility has various basic characteristics, such as being run by an in-
cerning the crop in question, economic developments, legal restric- dependent third party, providing sufficient storage places, assur-
tions on the import and export of the product, and changes in taxa- ing quality and quantity, being geographically located in a suit-
tion (Bagci, 2004). However, serious cause for concern is how the able place, and having facilities for preservation and certification
Turkish farmer, whose level of education is generally low, will ac- (Thomas, 2007). For this reason, measures to establish a licensed
quire and use this information. In order to dispel these anxieties, it warehouse system in Turkey need to be given priority.
is necessary to help farmers who have entered the futures market or
who wish to do so with a support service. For example, the estab- References
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