Food Security in India: Does the futures market for wheat meet the bill?
Download
1 / 17

Layout - PowerPoint PPT Presentation


  • 364 Views
  • Updated On :

Food Security in India: Does the futures market for wheat meet the bill? Prof. K.V. Bhanu Murthy Department of Commerce, Delhi School of Economics, University of Delhi. Affiliation: Professor, Department of Commerce, Delhi School of Economics, Delhi 110007.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Layout' - paul


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Slide1 l.jpg

Food Security in India: Does the futures market for wheat meet the bill?

Prof. K.V. Bhanu Murthy

Department of Commerce,

Delhi School of Economics,

University of Delhi.

Affiliation:

Professor, Department of Commerce, Delhi School of Economics, Delhi 110007.

E-mail: [email protected]

Ph: +91-11-27311688

(m) 9811601867

Keywords: Agricultural Markets, Food Security, Commodity Futures Market, Restrictions on internal trade.

JEL Code:D4, D52, M31, G14 & N5.


Slide2 l.jpg

Abstract meet the bill?

The thrust of agricultural policy during the sixties and seventies was towards restriction on trade. While this might have been the justified in the years of shortages the present trend towards surplus production of foodgrains necessitates a review of such restrictive policies. Also agricultural policy needs to tap the potential of the market by creating the necessary price incentive and the information processing mechanism of the market so as to ensure long-term food security. An efficient commodity futures market along with removal of restrictions may be the right long term strategy for India’s food security.

In this context this paper seeks to analyze the long term trends in area, production, yield and prices of Wheat. It dwells upon the question of whether futures’ trading in wheat is integrated with the long-term trends and relationships in Indian Agriculture.


Layout l.jpg
Layout meet the bill?

This paper is laid out in five sections. The first section is about the issues in agricultural markets. The second section lays down the methodological details. The third analyzes the long term trends in wheat. The fourth section analyzes the relationship between the trends of spot and future prices of wheat. The fifth section examines the problems with the futures market in this regard.


Slide4 l.jpg

Figure 1 meet the bill?

Long-term Relationship

Right Prices

Interaction with demand

Production Incentives

Increased long-term productivity and supply

Right Crop Pattern

Attracts – technology investment and research


Economics of trading costs and spreads l.jpg
Economics meet the bill? of trading: Costs and spreads

  • There are three types of costs:

  • 1.Order processing cost

  • 2. Adverse selection cost

  • 3. Inventory holding cost

  • These costs are optimized by optimizing the Bid-Ask spreads.

Jha, R. and K.V. Bhanu Murthy et al (1999) “Components of wholesale bid-ask spread and the structure of grain markets: The case of rice in India,” Agricultural Economics, V.31, No.2, Elsevier, Amsterdam.


Slide6 l.jpg

Economics of Trading: Inventory holding and uncertainty due to volatility

Falling stock

S

O

D0 @ Going price

A

D0

D2

D1

Season

Off-Season

Season

D0= Average Demand per unit of time

S=Surplus

A = Actual Loss

O= Opportunity loss


Volatility and demand l.jpg
Volatility and demand to volatility

P2

PO

P1

DO

D1

D2

Deaton, A. and G. Laroque. “Competitive Storage and Commodity Price Dynamics”. Journal of Political Economy 104(1996): 896-922.


Features of efficient spot markets l.jpg
Features of Efficient Spot Markets to volatility

  • Low arbitrage possibilities exist;

  • Efficient stock and informational flows;

  • Low extremes in price volatility;

  • Expectations are realized;

  • Adverse selection, inventory holding and order processing costs are optimized by traders;

  • Bid-ask spreads are well-managed.

Jha, R. and K.V. Bhanu Murthy et al (1997) "Market Integration in Indian Agriculture," September, Economic Systems, Vol.21, No.3, September, pp. 217-234, Physica-Verlag, Heidelberg.


Principals and agents market information and signals l.jpg
Principals and Agents: Market Information and Signals to volatility

Secondary Information Flows

Primary Information flows

Secondary Information Flows

Principal - Farmer:

Farm Harvest

Price

Agent – Wholesaler:

Wholesale

Price (Signal)

Agent – Retailer:

Retail Price

(Signal)

Principal-

Consumer:

Preferences & demand

Primary Goods flow

Secondary Goods flow

Primary demand

Capps, Jr., O. and P. Sherwell, "Alternative Approaches in Detecting Asymmetry in Farm-Retail Price Transmission of Fluid Milk," Agribusiness: An International Journal, July 2007.



Slide11 l.jpg

Average Government Supply as a percentage of Total Supply of Wheat

During 1970-95

State     Percentage      

Andhra Pradesh 98.56468

Bihar 89.01433

Gujarat 59.57123

Haryana 19.54613

Madhya Pradesh 56.33779

Maharashtra 88.1841

Karnataka 93.875

Punjab 10.33546

Rajasthan 51.80106

Uttar Pradesh 34.02208

India 66.73544  

Jha, R. and K.V. Bhanu Murthy et al (1999) “Real Consumption Levels and Public Distribution in India.”April 10-16, Economic and Political Weekly, Mumbai.


Restrictions on trade l.jpg
Restrictions on trade Wheat

  • The restrictions on trade prevent arbitrage possibilities, which could possibly help remove short-term price differentials. Some of the most important laws are:

  • The Essential Commodities Act, 1955.

  • Standard of Weights and Measures Act, 1976.

  • Agricultural Produce Marketing Acts.

  • Various Agricultural Commodity Control Orders.

  • Prevention of Food Adulteration Act, 1955.

  • State Levy Control Orders.

Jha, R. and K.V. Bhanu Murthy, et al (2005) “Fragmentation of Wholesale Rice Markets in India”   [Review of Agriculture] Economic and Political Weekly Issue: Vol. 40 No. 53 December 31 - January 06, 2006.


Ii methodological details l.jpg
II Methodological details Wheat

Data from Agricultural Situation in India, Agricultural Prices in India along with prices from NCDEX have been used for the analysis. As a preliminary exercise we have used a semi-log equation for determining the annual compound growth rates in area, production and yield. We shall be using co-integration techniques with structural breaks for comparing spot and future prices of wheat.


Trends in wheat l.jpg
Trends in Wheat Wheat

  • With the help of semi-log equations.

  • ACGR

  • Area 1 % per annum

  • Production 3.7 % per annum

  • Yield 2.7 % per annum

  • Despite all the restrictions and interventions demand due to population growth is being met.


V problems l.jpg
V Problems Wheat

Unlike many other commodities wheat is a major foodgrain. While in the case of other commodities or financial futures the linkage with the real sector is not so important in the case of foodgrains like wheat it is important to know whether the futures market stabilizes the real sector. It should “mirror” the desirable long term trends. Also commodities such as wheat and rice are related goods. The Futures market may or may not account for this.


Related goods l.jpg
Related goods Wheat

Rice on Wheat price for Delhi 1970-99

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.992211

R Square 0.984482

Adjusted R Square 0.983928

Standard Error 0.090286

Observations 30

ANOVA

  df SS MS F Significance F

Regression 1 14.48033 14.48033 1776.375 7.07E-27

Residual 28 0.228245 0.008152

Total 29 14.70857      

  Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -0.05919 0.142867 -0.41428 0.681828 -0.35184 0.233463

LWAPIDL 1.036639* 0.024596 42.14706 7.07E-27 0.986256 1.087021


Conclusion l.jpg
Conclusion Wheat

  • If restrictions are removed and government intervention in the wheat market is minimized it would help in the long term stabilization of agriculture.

  • If the futures market helps the process of long term stabilization it is justified.

  • Futures trading should not introduce distortions of its own.

  • This paper attempts at enquiring into whether the futures market in wheat meets the bill.


ad