Is Futures Market Mitigating Price Risk: An Exploration of Wheat and Maize Market

Instability of commodity prices has always been a major concern of theproducers as well as the consumers in an agriculture-dominated countrylike India. Farmers in a bid to avert the price risk often tend to go fordistress sale and thereby reduce the potential returns. In order to cope upwith this problem, futures trading has emerged as a viable option forproviding a greater degree of assurance on the price front. Thus, futuresmarkets serve as a risk -shifting function. In the present study, an attempthas been made to look into the mechanism of movement of spot andfutures prices for two important food crops in Indian agriculture. TheAugmented Dickey Fuller (ADF) test has been used for both the crops tocheck the stationarity of the time series data. Most of the series have beenobserved to follow the stationary pattern at the first difference. The cointegrationtest has been attempted to find out whether there exists a longrunrelationship between spot and futures prices of various contractmonths for maize and wheat crops. However, there exists a short rundisequilibrium between these two. It has been observed that the futurescontract behave in an expected manner and there exists a mechanism forlong-run equilibrium in the maize as well as wheat crops. This phenomenonof price convergence for both maize and wheat crops clearly states thatthe farmers are mitigating price risk as spot prices and future pricesconverges.