Price formation in world wheat markets — implications for policy

Abstract

This paper is an attempt to understand the price formation mechanism in world wheat markets and trace its likely implications for agricultural trade liberalization in India. The main objective is to identify the determinants of price formation and more specifically to understand the influence of major exporters/producers on the stability of world wheat markets. The analysis, using a two-sector econometric model, indicates that output and stock-holding policies of major exporters like USA, Canada and Australia hold large implications for the stability of world wheat markets. In the domestic sector, simulation results show rigidity in supply-response to higher world prices, possibly due to constraints imposed by non-price factors. Exports are likely to increase and imports show a likely decline. Stagnant domestic production combined with increased exports, decreased imports and rising population is likely to result in a decline in per capita net availability of wheat in domestic market leading to an increase in domestic prices. This is confirmed by our simulation results, which show a growth rate of more than 8.5% per annum in nominal terms in case of domestic prices, after liberalization.