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International Conference onAgribusiness and Food Industry in

Developing Countries: Opportunities and Challenges

Does Agro commodity Prices influence Does Agro commodity Prices influence Macroeconomics: Exploring the Interlinkages Macroeconomics: Exploring the Interlinkages

between macroeconomics and Agro between macroeconomics and Agro commodity prices using commodity prices using CoCo--integration Modelintegration Model

Presented By:Presented By:Ms.Surabhi AgarwalMs.Surabhi AgarwalMs.Preeti LaddhaMs.Preeti Laddha

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Backdrop to the StudyBackdrop to the Study

• Agricultural production and its role in commodity markets

• Agriculture vs. Services– Agro production still contributes to the GDP to

a sizeable extent. – 24% in Indian GDP

– Employs 57% of the work force.

Graph showing the Fluctuations in the National Graph showing the Fluctuations in the National GDP of AgricultureGDP of Agriculture

Source : GoI StatisticsSource : GoI Statistics

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History of Commodity Markets

Existence of commodity markets in India for centuries, - by and large unorganized.

Emergence of commodity exchanges and revival of futures trading in recent years.

Strong interlinkages of Commodity prices with various macroeconomic factors like GDP, inflation money supply and exchange rates.

Objective Of the StudyObjective Of the Study• Understanding the linkages between

macroeconomics and commodity markets in India.

• Measuring the degree of influence of commodity prices on macroeconomic factors in India.

• Understanding what these relations mean for the economy as a whole and agro based industries in particular

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MethodologyMethodologyExamining the relationship between GDP, wholesale price index (WPI) and agricultural yield and prices.

- Five major crops were selected namely rice , wheat , cotton ,sugar and oilseeds .

Hypothesizing that the macroeconomic indicators have a significant influence on the commodity prices

- its impact on pricing mechanisms in the commodity markets both at spot prices and futures.

Analysis with the use of:- OLS Model- Co-Integration Model

Some Facts…….

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Index Numbers for Commodity prices for select Index Numbers for Commodity prices for select Crops (1995Crops (1995--96 to 200496 to 2004--05)05)((

1831741751421852004-05

1811581691391812003-04

1761381661351422002-03

1751131671461492001-02

1771031681531572000-01

1751221711561471999-00

1521391461541671998-99

1381141341341551997-98

1371151291191331996-97

1121171171131591995-96

WheatOilseedsRiceSugarCottonYear

Graph Showing the Commodity Prices in Graph Showing the Commodity Prices in Different YearsDifferent Years

Commodity Prices in Various Years

020406080

100120140160180200

1995

-1996

1996

-1997

97-98

98-99

99-00

00-01

2001

-2002

2002

-2003

2003

-2004

2004

-2005

Years

Pric

es

Rice(Prices)WheatPrices)CottonPrices)SugarPrices)Oilseeds(Prices)

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Yield of different Crops for different Yield of different Crops for different YearsYears

7324.887.8234.217.12004-05

72.125.187236.213.82003-04

65.115.172.7281.68.72002-03

72.820.793.3297.2102001-02

69.718.4852969.52000-01

76.420.789.7299.311.51999-00

70.825.286295.712.21998-99

66.3825.583.5228014.81997-98

64.524.179.6273.614.31996-97

62.622.479.628313.11995-96

WheatOilseedsRiceSugarCottonYear

Graph Showing the Yield of Different CropsGraph Showing the Yield of Different Crops

Yield in different Years

050

100150200250300350

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

Years

Yiel

d

Wheat RiceCottonSugarOilseeds

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Agricultural GDP Growth Rate and Agricultural GDP Growth Rate and WPIWPI

187.91.12004-05175.99.12003-04166.8-5.22002-03161.36.52001-02155.7-0.12000-01145.30.31999-2000140.76.21998-99132.8-2.41997-98127.29.61996-97121.6-0.91995-96WPIGDPYear

Graph Showing The GDP Growth RateGraph Showing The GDP Growth RateGDP growth rate in Agri and Allied sector

-6

-4

-2

0

2

4

6

8

10

12

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

Year

GD

P gr

owth

rate

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Graph Showing the changes in WPIGraph Showing the changes in WPI

WHOLESALE PRICE INDEX

020406080

100120140160180200

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

Years

WPI WPI

AnalysisAnalysis

Correlation analysis suggests that commodity prices and WPI do share a strong relationship. However, testing the convergence among them in the long run can be shown with the help of co-integration model.

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Results Based on OLS ModelResults Based on OLS Model

0.883 0.7790.332 0.11 Wheat

0.708 0.5010.539 0.29Oilseeds

0.87 0.760.50 0.25Rice

0.446 0.1990.241 0.058Sugar

0.563 0.3170.247 0.061Cotton

R R2R R2

WPI , PricesGDP ,Output , Prices Commodity

OLS Model Significance ResultsOLS Model Significance Results

SignificantNot significant Wheat

SignificantSignificant Oilseeds

SignificantSignificantRice

SignificantNot significant Sugar

SignificantNot significant Cotton

Significance LevelSignificance Level

WPI , PricesGDP ,Output , Prices Commodity

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CoCo--Integration ResultsIntegration Results

-0.1136 -2.365 Not Significant

-2.227 -2.365 Not Significant

Wheat

-1.6269 -2.365 NotSignificant

-1.723 -2.365 Not Significant

Oilseeds

-1.7640 -2.365 NotSignificant

Not-0.651 -2.365 Significant

Rice

-0.2114 -2.365 Not Significant

-3.741 -2.365 SignificantSugar

-0.8137 -2.365 Not Significant

-9.564 -2.365 SignificantCotton

T Stats Critical SignificanceValue

T Stats Critical SignificanceValue

WPI , PricesGDP ,Output , Prices Commodity

OLS Model & CoOLS Model & Co--Integration Model Integration Model ResultsResults

OLS MODEL results give mixed picture.

- there lies a significant correlation between the pricesof rice and oilseeds and yield of corresponding prices and the agricultural growth rate.

- the relationship is not significant in other cases.

CO- INTEGRATION results :

- only cotton and sugar exhibit stationarity in the case where GDP is a function of Prices and Yield but not inthe case of WPI being a function of Prices.

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Our TakeOur Take

• High degree of correlation between WPI and commodity prices

- sugar and cotton, the degree of co-relation with WPI is less (56 and 44% respectively).

-both sugar and cotton have a high degree of weightage attached to them in WPI composition compared to the other three crops.

• Cotton and sugar though being co integrated, their correlation is low.

• Macroeconomic influences are minimal or remain oblivious to the changes in agricultural prices and yield.

• Also reflected in the continuing decline in the share of agriculture in the national GDP.

- a matter of concern

• Current nature of the industry is leading often to overproduction

• The changing composition of WPI also is an indicator of these trends.

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• Findings reflect the studies that there is a very high impact of the commodity prices on WPI .

• To an extent the degree of impact of prices on inflation does affect the net export position of the country.

• The issue of the commodity prices responding to aggregate demand shocks also rises

• The availability of alternative instruments might have reduced the hedging in commodities which would have influenced these prices.

• Prices may respond to short run shocks indicating a high co-relation with the WPI but may not sustain it in the longer run.

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THANKYOU !!!!