Market Efficiency of Agricultural Commodity Futures Market in India

Abstract

In India, farmer producers not only face yield risk because of fluctuating monsoon conditions, but also are exposed to high level of price risk especially for agricultural commodities. Direct market intervention by the Government is reduced and to a great extent the prices for commodities are determined by market on the influence of demand and supply of commodities in the market.  Such a kind of market controlled mechanism has exposed agricultural commodities to not only price risk but also to market risk as well. Commodity futures as a derivative instrument plays a crucial role in price risk management. In this study, price discovery relationship of two commodities such as cotton and cardamom are studied. Daily data for spot prices and futures prices is collected from the prominent exchanges in India, including MCX and NCDEX for a period from April 2013 to March 2019. For Futures prices near month contract was taken for study. ADF was applied to test the stationarity of the data, results reveal all the data were stationary at first order level. Next to gauge the long run relationship between spot prices and futures prices johansencointegration test was used and to study the short run dynamics VEC models were applied. Test results indicate the existence of bidirectional causality and futures markets are found to be more efficient in discounting new information.