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Cobweb price dynamics under the presence of agricultural futures market: theoretical analysis

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  • Ashutosh Vashishtha

    (Shri Mata Vaishno Devi University Katra)

Abstract

The basic thrust of the present paper is to demonstrate that agricultural futures markets may be expected to neutralize the long-term price destabilizing forces. This aspect has been examined within the broad frame of ‘cobweb’ expectation-formation behavior. The analysis is purely theoretical. The two basic relations of the conventional cobweb model, namely lagged supply function and the absence of inventories, have been retained. Additionally, it has been assumed that hedgers (commodity producers and buyers) pledge a part of their target quantities in the futures market during the early part of the period (crop-year) depending on their hedging propensities. The inclusion of futures market produces some significant results. One, it is found to generate only one type of price pattern (convergent time path of price) even as commodity demand–supply ratio assumes a more than unity value over a certain range. Two, the speed with which the market may be expected to converge on the equilibrium price is positively related to the hedging propensity of commodity producers and price responsiveness of speculators.

Suggested Citation

  • Ashutosh Vashishtha, 2020. "Cobweb price dynamics under the presence of agricultural futures market: theoretical analysis," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 67(2), pages 131-162, June.
    • Handle: RePEc:spr:inrvec:v:67:y:2020:i:2:d:10.1007_s12232-019-00335-8
    DOI: 10.1007/s12232-019-00335-8
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