Influence of Minimum Support Price on price discovery in Agricultural Futures Markets

Abstract: Instability in farmers' income due to fluctuating farm prices has remained a challenge for farmers and agricultural policymakers over the years. Minimum Support Price (MSP) has been initiated to support farmer incomes, and as an incentive to enhance farmer investment and boost production. Since 2003, formal agricultural futures markets that provide a market based platform for price dissemination of select agricultural commodities have also been functioning in India. Interventional Time Series Analysis (ITAS) has been used to examine the impact of MSP on futures prices. MSP announcement significantly affects the price discovery function of futures markets in the short and long run. The findings of this study provide insights to policy makers to understand the impact of new information arrival in the futures market. It suggests that policy intervention in agricultural commodities undermines the futures markets ability to independently discover prices. This study is the first of its kind to examine the effect of MSP on futures prices using a representative dataset. It uses the novel ITAS methodology that helps understand the impact of MSP announcements of a crop on its corresponding futures market. Keywords: Agricultural Commodities, Minimum Support Price, Price Risk Management, Interventional Time Series Analysis, Futures Market JEL Classification Number: C78, D82, G11, G15, H12, Q02, Q11, Q13