Testing the Efficiency of Testing the Efficiency of Agriculture Commodities Agriculture Commodities

Market in IndiaMarket in IndiaProf Sanjay Sehgal Prof Sanjay Sehgal

Abhishek SinghAbhishek Singh

Place of agriculture.Place of agriculture. Agriculture contributes about 22% to the GDP of the Indian

economy.It employees around 57% of the

labor force on a total of 163 million hectares of land.

Institutional development, which Institutional development, which improves the liquidity and efficiencyimproves the liquidity and efficiency

of commodity markets, would of commodity markets, would impact upon a large fraction of impact upon a large fraction of India’s population.India’s population.

It imposes considerable direct costs It imposes considerable direct costs upon the government, and has led upon the government, and has led to a suboptimal resource allocation. to a suboptimal resource allocation.

Tetable HypothesisTetable Hypothesis

1) The introduction of 1) The introduction of commodity future has commodity future has increased spot market increased spot market efficiencyefficiency

2) Future prices are 2) Future prices are determined on the basis of determined on the basis of cost of carry modelcost of carry model

DATA SOURCEDATA SOURCE

Spot Prices :NCDEXSpot Prices :NCDEX

Forward Prices :NCDEXForward Prices :NCDEX

Transportation cost:Transportation cost:

Warehousing Cost :CWC ,SWCWarehousing Cost :CWC ,SWC

Random walk testRandom walk testSSerial correlation coefficient testerial correlation coefficient test

Runs testRuns test

MethodologyMethodology

Forward pricing with transportation costForward pricing with transportation cost

F = (SF = (S00 +U) e +U) e rTrT

F = SF = S00ee(r+u)T(r+u)T

Forward pricing with convenience YieldForward pricing with convenience Yield

F = SF = S00ee(r+u-y)T(r+u-y)T

Cost-of-carry Model Futures price = Spot Price + Carry Cost