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Price Convergence in Agricultural Commodity Market

Price Convergence in Agricultural Commodity Market. SURABHI MITTAL. What we know?. 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

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Price Convergence in Agricultural Commodity Market

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  1. Price Convergence in Agricultural Commodity Market SURABHI MITTAL

  2. What we know? • 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

  3. What we don’t know? • 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

  4. What we intend to find? • Convergence of spot and futures prices • 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.

  5. Spot vs Future Price • 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

  6. How do we find? • Notion of the law of one price, notion of market integration. • To analyze price convergence in the present context apply several methodologies • 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.

  7. Data • Data - Major agricultural commodity traded • Sensitivity analysis • The time period would be post 2003 • Averaged monthly/weekly data points

  8. Thank You! surabhi@icrier.res.in

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