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Weather Shocks And Agricultural Commodity Prices In India

Author

Listed:
  • N. R. BHANUMURTHY

    (National Institute of Public Finance and Policy, 18/2, Satsang Vihar Marg, Special Institutional Area (Near JNU), New Delhi 110067, India)

  • PAMI DUA

    (Department of Economics, Delhi School of Economics, University of Delhi, Delhi 110067, India)

  • LOKENDRA KUMAWAT

    (Department of Economics, Ramjas College, University of Delhi, Delhi 110007, India)

Abstract

We analyze the impact of weather shocks on price formation in spot and futures market for food in India where until the recent introduction of commodity futures markets in 2005, the transmission of these shocks to short-term (spot) price movements was unclear. Hitherto, the price discovery mechanism was weak and end price was expected to be different (mostly higher unless some product prices were administered) from the market-clearing price. In addition, this weak mechanism was expected to result in higher price volatility. The introduction of a futures market is expected to reduce risk, a major component in agricultural production as well as in price formation. Though the commodity futures market in India is nascent, we model transmission of weather shocks to futures and spot prices using monthly data. Based on cointegration analysis, our results suggest strong long-run co-movement between futures prices and spot prices for commodities traded in futures markets. Changes in rainfall affect both futures and spot prices with different lags. However, rainfall shocks generate larger responses from futures prices than from spot prices. Although there could be other factors that affect futures prices, after controlling for fuel prices, our results clearly show the transmission mechanism of weather shocks from futures to spot prices. We also explore the changes in responsiveness of prices of major agricultural commodities to rainfall with introduction of futures contracts to facilitate the pass-through of various types of shocks to agricultural commodity prices. Using smooth transition regression, we find that the bivariate relationships between rainfall and prices of rice, wheat and pulses show some nonlinearity with the structural change happening after the introduction of futures market. These relations are found to be much stronger in the post-structural change period that broadly coincides with the introduction of futures market.

Suggested Citation

  • N. R. Bhanumurthy & Pami Dua & Lokendra Kumawat, 2013. "Weather Shocks And Agricultural Commodity Prices In India," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 1-20.
    • Handle: RePEc:wsi:ccexxx:v:04:y:2013:i:03:n:s2010007813500115
    DOI: 10.1142/S2010007813500115
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    References listed on IDEAS

    as
    1. N R Bhanumurthy & Pami Dua & Lokendra Kumawat, 2012. "Weather Shocks, Spot And Futures Agricultural Commodity Prices: An Analysis For India," Working Papers id:5172, eSocialSciences.
    2. Dasgupta, Dipak & Dubey, R.N. & Sathish, R, 2011. "Domestic Wheat Price Formation and Food Inflation in India," MPRA Paper 31564, University Library of Munich, Germany.
    3. Dipak Dasgupta & R N Dubey & R Satish, 2011. "Domestic Wheat Price Formation and Food Inflation in India: International Prices, Domestic Drivers (Stocks, Weather, Public Policy), and the Efficacy of Public Policy Interventions in Wheat Markets," Working Papers id:4291, eSocialSciences.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Weather shock; spot prices; futures prices; smooth transition models; India; JEL Codes: G14; JEL Codes: Q10; JEL Codes: E30;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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