Efficiency Analysis of Future Markets in
India for Agricultural Commodities: Using
Cointegration and Causality Tests
Jabir Ali and Kriti Bardhan Gupta
Agriculture Management Centre
Indian Institute of Management
Lucknow – 226 013
Saturday, July 29, 2017
Objectives
• Main objective of the present study is to explore the
efficiency of agricultural future markets in India
• Are the futures prices of agricultural commodities in India
cointegrated with spot prices?
• What is the direction of influence between future and cash
prices?
Page 3
Data and Methodology
• The daily closing future prices for 23 major agricultural commodities were
collected from National Commodity and Derivatives Exchange Ltd
(NCDEX) for the period of about last three years.
• The daily closing prices of these commodities in spot markets were also
collected from NCDEX website for the same period for markets, which were
also the place of delivery under future contracts for respective commodities
• The efficiency of future markets for different commodities were tested based
on cointegration tests using econometric software
Page 4
Johansen's Cointegration Tests Statistics
• Based on cointegration analysis of futures and sport
prices of 23 agricultural commodities:
• The commodities can be grouped into three categories –
• No cointegration
• Cointegration with null hypothesis of zero cointegrating
vectors, and
• Cointegration with null hypothesis of non zero
cointegrating vectors
Page 5
Cointegration Tests (contd.)
• Commodities with no cointegration
• Wheat, Rice, Coffee, Arhar
• Cointegration with null hypotehesis of zero
cointegrating vectors
• Wheat, Rice, Coffee, Arhar, Masur, Groundnut in shell,
Maize, Urad, Pepper, Cottonseed oil cake, Mentha, Potato,
Raw jute
• Cointegration with null hypothesis of non zero
cointegrating vectors
• Guarseed, Cashew
Page 6
Granger Causality Tests
• Based on the tests, the commodities can be grouped
into three categories –
• Unidirectional
• Forward Price
Spot Price
• Unidirectional
• Spot Price
Future Price
• Bi-directional
• Spot Price
Future Price
Page 7
Granger Causality Tests (contd.)
• Unidirectional (Forward Price
Spot Price)
• Wheat, Chickpea, Castor seed, Soybean, Sugar, Chilli,
Jeera, Turmeric, Mustard seed oil cake and Guarseed
• Unidirectional (Spot Price
Future Price)
• Rice, Cofee, Masur, Groundnut in shell and Cashew
• Bi-directional (Spot Price
Future Price)
• Arhar, Maize, Urad, Pepper, Cottonseed oil cake, Mentha,
Potato, Raw jute
Page 8
Categorization based on Cointegration and Causality
Causality
Cointegration
No cointegration
Cointegration with
null hypothesis of
zero cointegrating
vectors
Cointegration with
null hypothesis of
non zero
cointegrating
vectors
Unidirectional
Unidirectional
(F→S)
(S→F)
Wheat
Rice, Coffee
Chickpea, Castor Masur, Groundnut
seed, Soybean,
in shell
Sugar, Chilli, Jeera,
Turmeric, Mustard
seed oil cake
Guarseed
Cashew
Bidirectional
S↔F
Arhar
Maize, Urad,
Pepper, Cottonseed
oil cake, Mentha,
Potato, Raw jute
--
Page 9
Summary and Conclusions
•
•
Government market intervention limited to some foodgrains
only and getting reduced over time
•
Role of future market for food grain become important in price
discovery and risk management
•
Commodity exchanges can play an important role in achieving
unfulfilled objective of agricultural price policy (i.e., promotion of
alternative crops for sustainable agriculture
Sustainability of future agricultural commodity market depends
on:
•
transparency and efficiency of its functioning in terms of price discovery,
price risk management, flexible contract specification, controlling unfair
speculation, commodity delivery system & coverage, infrastructural
support etc.
Page 10
Summary and Conclusions
• Empirical findings indicating the existence of a long-term
relationship between future and spot prices
• The relationship not uniform for different commodities
• futures markets have enough ability to predict subsequent
spot prices i.e. to discover prices in spot market for certain
commodities
• that future markets for these commodities may be said to be
performing quite efficiently
Page 11
Summary and Conclusions
•
Majority of primary stakeholders not participating in the
agricultural commodity market due to low level of commodity
surplus
•
Possibility of their inclusion in the future market needs due attention
•
Integration of different formal and informal institutions at local level
such as e-kiosks, Self Help Groups (SHGs), cooperatives, banks,
warehouses, government agencies and private participants quite
important for expanding future commodity trading and information
dissemination
Page 12
Page 13