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.
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.
Professor, Department of Commerce, Delhi School of Economics, Delhi 110007.
Keywords: Agricultural Markets, Food Security, Commodity Futures Market, Restrictions on internal trade.
JEL Code:D4, D52, M31, G14 & N5.
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.
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.
Interaction with demand
Increased long-term productivity and supply
Right Crop Pattern
Attracts – technology investment and research
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.
Economics of Trading: Inventory holding and uncertainty due to volatility
D0 @ Going price
D0= Average Demand per unit of time
A = Actual Loss
O= Opportunity loss
Deaton, A. and G. Laroque. “Competitive Storage and Commodity Price Dynamics”. Journal of Political Economy 104(1996): 896-922.
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.
Secondary Information Flows
Primary Information flows
Secondary Information Flows
Principal - Farmer:
Agent – Wholesaler:
Agent – Retailer:
Preferences & demand
Primary Goods flow
Secondary Goods flow
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.
Average Government Supply as a percentage of Total Supply of Wheat
Andhra Pradesh 98.56468
Madhya Pradesh 56.33779
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.
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.
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.
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.
Rice on Wheat price for Delhi 1970-99
Adjusted R Square0.983928
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%