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Abstract
Instability of commodity prices has always been a major concern of the
producers as well as the consumers in an agriculture-dominated country
like India. Farmers in a bid to avert the price risk often tend to go for
distress sale and thereby reduce the potential returns. In order to cope up
with this problem, futures trading has emerged as a viable option for
providing a greater degree of assurance on the price front. Thus, futures
markets serve as a risk -shifting function. In the present study, an attempt
has been made to look into the mechanism of movement of spot and
futures prices for two important food crops in Indian agriculture. The
Augmented Dickey Fuller (ADF) test has been used for both the crops to
check the stationarity of the time series data. Most of the series have been
observed to follow the stationary pattern at the first difference. The cointegration
test has been attempted to find out whether there exists a longrun
relationship between spot and futures prices of various contract
months for maize and wheat crops. However, there exists a short run
disequilibrium between these two. It has been observed that the futures
contract behave in an expected manner and there exists a mechanism for
long-run equilibrium in the maize as well as wheat crops. This phenomenon
of price convergence for both maize and wheat crops clearly states that
the farmers are mitigating price risk as spot prices and future prices
converges.