Can futures markets accommodate Indian farmers?

Abstract

Purpose It has become an ongoing debate whether Indian commodity futures markets can accommodate farmers. The purpose of this paper is to examine whether Indian commodity futures markets help rationalize farmers’ price expectation. The study starts with questions on the efficiency and other roles of commodity futures markets. Design/methodology/approach From a sectoral standpoint and economic importance, the study considers pepper, coffee, and natural rubber (NR) futures and spot markets. The efficiency of futures markets, divergence/convergence and causality between futures and spot markets have been studied by employing co-integrations, error correction and causality models. The sample period of the data are taken from the inception of futures trading. These three commodities are also compared on the basis of trading at the futures markets vs spot markets. Findings Analysis shows that though pepper futures market is informationally efficient in price discovery, while coffee and NR spot markets do the process faster. Pepper and coffee futures and spot prices exhibit the convergence; NR shows a sign of divergence. Unidirectional causality from pepper futures to spot market is observed wherein the former was weakly exogenous to the latter and while, bidirectional causality is observed in coffee and rubber. Coffee spot appears weakly exogenous while this remains inconclusive in the case of NR. Research limitations/implications The authors analyzed the futures markets in rationalizing the spot market price in three plantation crops in India. In order to make the study more generalizable, further research is warranted in other commodities including those prices of which are government regulated. Originality/value The paper is unique in terms of understanding the interaction or interrelationship between futures markets and spot markets and drawing inferences about the role of futures markets in price formation in plantation commodities like pepper, coffee and NR.