Efficiency in agricultural commodity futures markets in India: Evidence from cointegration and causality tests

Purpose – In line with the ongoing global and domestic reforms in agriculture and allied sectors, the Indian Government is reducing its direct market intervention and encouraging private participation based on market forces. This has led to increased exposure of agricultural produce to price and other market risks, which consequently emphasize the importance of futures markets for price discovery and price risk management. The purpose of this paper is to analyze the efficiency of agricultural commodity markets by assessing the relationships between futures prices and spot market prices of major agricultural commodities in India. Design/methodology/approach – The efficiency of the futures market for 12 agricultural commodities, traded at one of the largest commodity exchanges of India, i.e. National Commodity & Derivatives Exchange Ltd, has been explored by using Johansen's cointegration analysis and Granger causality tests. Unit root test procedures such as Augmented Dickey-Fuller and non-parametric Phillips-Perron were initially applied to examine whether futures and spot prices are stationary or not. The hypothesis, that futures prices are unbiased predictors of spot prices has been tested using econometric software package. Findings – Results show that cointegration exists significantly in futures and spot prices for all the selected agricultural commodities except for wheat and rice. This suggest that there is a long-term relationship between futures and spot prices for most of the agricultural commodities like maize, chickpea, black lentil, pepper, castor seed, soybean and sugar. The causality test further distinguishes and categorizes the commodities based on direction of relationship between futures and spot prices. The analysis of short-term relationship by causality test indicates that futures markets have stronger ability to predict subsequent spot prices for chickpea, castor seed, soybean and sugar as compared to maize, black lentil and pepper, where bi-directional relationships exist in the short run. Practical implications – The results of this study are useful for various stakeholders active in agricultural commodities markets such as producers, traders, commission agents, commodity exchange participants, regulators and policy makers. Originality/value – There are very few studies that have explored the efficiency of the commodity futures market in India in a detailed manner, especially at individual commodity level.