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Is Futures Market Mitigating Price Risk: An Exploration of Wheat and Maize Market

Author

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  • Singh, N.P.
  • Kumar, Ranjit
  • Singh, R.P.
  • Jain, Praveen Kumar

Abstract

Instability of commodity prices has always been a major concern of the producers as well as the consumers in an agriculture-dominated country like India. Farmers in a bid to avert the price risk often tend to go for distress sale and thereby reduce the potential returns. In order to cope up with this problem, futures trading has emerged as a viable option for providing a greater degree of assurance on the price front. Thus, futures markets serve as a risk -shifting function. In the present study, an attempt has been made to look into the mechanism of movement of spot and futures prices for two important food crops in Indian agriculture. The Augmented Dickey Fuller (ADF) test has been used for both the crops to check the stationarity of the time series data. Most of the series have been observed to follow the stationary pattern at the first difference. The cointegration test has been attempted to find out whether there exists a longrun relationship between spot and futures prices of various contract months for maize and wheat crops. However, there exists a short run disequilibrium between these two. It has been observed that the futures contract behave in an expected manner and there exists a mechanism for long-run equilibrium in the maize as well as wheat crops. This phenomenon of price convergence for both maize and wheat crops clearly states that the farmers are mitigating price risk as spot prices and future prices converges.

Suggested Citation

  • Singh, N.P. & Kumar, Ranjit & Singh, R.P. & Jain, Praveen Kumar, 2005. "Is Futures Market Mitigating Price Risk: An Exploration of Wheat and Maize Market," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 18(2005).
  • Handle: RePEc:ags:aerrae:58459
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    File URL: http://purl.umn.edu/58459
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    References listed on IDEAS

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    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    2. H. Holly Wang & Bingfan Ke, 2005. "Efficiency tests of agricultural commodity futures markets in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(2), pages 125-141, June.
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    Cited by:

    1. Sendhil, R. & Ramasundaram, P., 2014. "Performance and Relevance of Wheat Futures Market in India – An Exploratory Analysis," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 174839, Agricultural and Applied Economics Association.
    2. Sinha, Rajesh Kumar & Kumar, Ranjit, 2010. "Innovative Technologies, Institutions and Policies for Successful Value Chains for Tur Farmers: A Case Study of NCDEX Spot," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 23(2010).
    3. Sendhil, R. & Kar, Amit & Mathur, V.C. & Jha, Girish K., 2013. "Price Discovery, Transmission and Volatility: Evidence from Agricultural Commodity Futures," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 26(1).

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    Keywords

    Agricultural and Food Policy;

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