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Price Convergence in Agricultural
Commodity Market
SURABHI MITTAL
What we know?
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Commodity exchanges were initiated by The
Government of India in 2003-04
This can be an effective mechanism for price
discovery and risk management.
MCX and NCDEX
Soya oil, guar seed, guar gum, gram, jute,
rubber, pepper, turmeric, wheat, kapas etc
What we don’t know?
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Institution of the commodity spot markets in
not well developed
Price discovery is poor in terms of efficiency
Degree of price volatility
Relationship between the spot and future
prices
What we intend to find?
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Convergence of spot and futures prices
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Present state of relation between spot and future
prices
Decompose the factors that impacts the
convergence
Agricultural commodity markets.
Policy implications and recommendations
based on the derived results.
Spot vs Future Price
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Spot prices: Prices agreed in present and cash paid instantly
to get the commodity.
Future prices: Price agreed in present time and exchange of
commodity for payment is done later at the end of the
contract.
As futures contract nears expiration
– Futures price = Spot price
– Futures price > Spot price, we can buy in spot and sell in
futures
– Futures price < Spot price
Difference in the convergence is explained
– Arbitrage
– Law of supply and demand
– Storage, seasonality, transportation costs etc
– The gap contain information about the expected future price
How do we find?
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Notion of the law of one price, notion of market
integration.
To analyze price convergence in the present context
apply several methodologies
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Correlation analysis
Stationary and co-integration analysis
Price indexes.
Impacts of various factors that lead to non
convergence would be decomposed using the
methodology of decomposition models.
Data
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Data - Major agricultural commodity traded
Sensitivity analysis
The time period would be post 2003
Averaged monthly/weekly data points
Thank You!
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