Transcript Slide 1

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.
Abstract
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
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.
Figure 1
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
•
•
•
•
•
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.
Economics of Trading: Inventory holding and uncertainty due to volatility
Falling
stock
S
O
D0 @
Going
price
Season
A
D2 D0
D0= Average Demand per unit of time
D1
Off-Season
S=Surplus
Season
A = Actual Loss
O= Opportunity loss
Volatility and demand
P2
PO
P1
D1 DO 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
1.
2.
3.
4.
5.
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;
6. 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, PhysicaVerlag, Heidelberg.
Principals and Agents: Market Information and Signals
Secondary Information Flows Primary Information flows
Principal Farmer:
Agent –
Wholesaler:
Agent –
Retailer:
Farm
Harvest
Price
Wholesale
Retail
Price
Price (Signal)
Secondary Information Flows
Principal-
Consumer:
Preferences &
demand
(Signal)
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.
Interventions in food markets
Goverment Intervention in Grain Trade
90
Percentage of Total Supply
80
70
60
50
Rice
40
Wheat
30
20
10
0
1970 1973 1976 1979 1982 1985
1988 1991 1994
Average Government Supply as a percentage of Total Supply of Wheat
During 1970-95
State
Andhra Pradesh
Bihar
Gujarat
Haryana
Madhya Pradesh
Maharashtra
Karnataka
Punjab
Rajasthan
Uttar Pradesh
India
Percentage
98.56468
89.01433
59.57123
19.54613
56.33779
88.1841
93.875
10.33546
51.80106
34.02208
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
• The restrictions on trade prevent arbitrage
possibilities, which could possibly help remove shortterm 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
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
•
•
•
•
•
•
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
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
Rice on Wheat price for Delhi 1970-99
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.992211
R Square 0.984482
Adjusted R Square
Standard Error
Observations30
0.983928
0.090286
ANOVA
df
Regression 1 14.48033
Residual
28
Total
29
SS
MS
F
Significance F
14.48033
1776.375 7.07E-27
0.228245 0.008152
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
• 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.