Unbiasedness and Market Efficiency Tests of the U.S. Rice Futures Market

This study examines short-run and long-run unbiasedness within the U.S. rice futures market. Standard OLS, cointegration, and error-correction models are used to determine unbiasedness. In addition, the forecasting performance of the rice futures market is analyzed and compared to out-of-sample forecasts derived from an additive ARIMA model and the error-correction model. The results of our unbiasedness tests and the forecasting performance of the rice futures market provide supporting evidence that the U.S. long-grain rough rice futures market is efficient. The results have important price risk management and price discovery implications for Arkansas and U.S. rice industry participants.     

Co-integration and error-correction modelling of agricultural export supply in Cameroon

Estimates of factors influencing Cameroon^,s exports of cocoa, coffee and cotton are derived in a system of equations using the Engle-Granger and Johansen co-integration and error-correction representation procedures. Two co-integrating vectors involving cocoa and coffee exports as endogenous variables are identified in the system while tests for exogeneily of cotton exports are consistent with the independence of cotton from the other two commodities. These findings are corroborated by estimates of a restricted error-correction model which lead to acceptance of the hypothesis that cocoa and coffee exports are-indeed determined endogenously to the system and not linked to cotton exports. Statistical significance of the error-correction terms for cocoa and coffee validates the existence of an equilibrium relationship among the variables in each of these co-integrating vectors. The combined short run dynamic effect of lagged quantities of cocoa and coffee, export/domestic price ratio and GDP jointly explain changes in exports of cocoa whereas lagged quantities exported do not seem to have a significant short-run dynamic effect on changes in coffee exports.     

Exploiting the cointegration properties of the US soy-based market system

Perhaps for the first time, this paper applies Johansen and Juselius' methods of the cointegrated vector autoregression (VAR) model to a monthly US system of markets for soybeans, soy meal, and soy oil. Analysis of the error correction or cointegration space illuminates the empirical nature of policy-relevant market elasticities, and of effects of important policy, market, and institutional events on US soy-related markets. A statistically strong US demand for soybeans emerged as the primary cointegrating relation in the error-correction space.     

Evaluating Commodity Market Efficiency: Are Cointegration Tests Appropriate?

This paper investigates the claim that the finding of cointegration between commodity spot and lagged futures rates reflects the existence of commodity arbitrage and not, as is generally accepted, long‐run market efficiency. The methodology of Kellard et al. (1999) is employed to match spot and lagged futures rates correctly for the UK wheat futures contract traded at LIFFE. Bi‐variate analysis shows that spot and lagged futures rates are cointegrated with the vector (1, ‐1), a necessary condition for market efficiency. However, at variance with asymptotic theory, in a tri‐variate VECM estimation, the spot rate, lagged futures rate and lagged domestic interest rate are shown to be cointegrated with the vector (1, ?1, 1). The “cointegration” paradox is explained by investigating the relative magnitudes of the forecast error and the domestic interest rate. The small sample results demonstrate that it is impossible to distinguish between the influence of commodity arbitrage and the existence of market efficiency using cointegration‐based tests. In summary, this work implies that such tests are not wholly appropriate for evaluating commodity market efficiency.     

Structural Breaks,the Export Enhancement Program and the Relationship between Canadian and US Hard Wheat Prices

This paper examines the long‐term relationship between the export prices of Canadian and US hard wheat and the effects of the US Export Enhancement Program (EEP). Using monthly prices for 1974–2001, we adopt the cointegration procedure of Johansen et al. (2000) which permits structural breaks. Results show that a long‐term relationship exists, and there are two breaks that coincide with the EEP. The first break is in late 1985 when the long‐term US/Canadian price ratio fell by 5.5%, while the second is in early 1995 when it increased by 9.2%. Weak exogeneity tests imply that Canada is the price leader, and impulse responses show that long‐term equilibrium is restored within five months following a shock to either price.     

Analysis of export demand for Ghana's timber products: A multivariate co-integration approach

This study analyzed the factors that affect the export demand for Ghana's timber products. Export demand functions and error correction models for sawnwood, plywood, and veneer using data from 1961 to 2006 were estimated. Six categories of explanatory variables were hypothesized to determine export demand: world price of wood products, income of importing countries, Ghana's external debt, exchange rates, time-related variables, and policy changes (log export ban, reduction in annual allowable cut and the imposition of export levy on air-dried sawnwood). All variables except external debt were determined from augmented Dickey–Fuller unit root tests to be integrated of order one. The Johansen multivariate cointegration test showed that there was only one cointegration relationship in each timber product data. Exchange rates and income were significant determinants of exported timber products and had the theoretically expected positive signs. The three policy initiatives significantly reduced the exports of sawnwood, but increased the exports of plywood and veneer. Price was moderately elastic for sawnwood and plywood and had the expected negative signs in both cases, while it was positive and inelastic for veneer. The error-correction coefficients show that 68% of shocks to veneer exported is corrected in the following year, while only approximately 20% and 19% of this are corrected for sawnwood and plywood, respectively. Sawnwood and plywood face stiff competition in the international market and this has revenue and tax policy implications for Ghana's forestry sector. Policies that encourage domestic processing and restrictions on both legal and illegal harvesting would work to ensure greater value-added benefits to, and sustainable forest management in, Ghana.     

Efficiency tests of agricultural commodity futures markets in China

The efficiency of the Chinese wheat and soybean futures markets is studied. Formal statistical tests were conducted based on Johansen's cointegration approach for three different cash markets and six different futures forecasting horizons ranging from 1 week to 4 months. The results suggest a long-term equilibrium relationship between the futures price and cash price for soybeans and weak short-term efficiency in the soybean futures market. The futures market for wheat is inefficient, which may be caused by over-speculation and government intervention.     

Use of composite forest commodity price indices for cointegration analysis

Time series data on forest product prices used in research is frequently the product of temporal, spatial as well as product aggregation. This paper analyzes the implications of the use of composite commodity price indices in cointegration analysis and tests the validity of the assumptions underlying it. It tests for the presence of a common stochastic trend in disaggregated softwood lumber product price series in multiple US markets, a validity condition supported by the Generalized Composite Commodity Theorem (Lewbel, 1996. Aggregation without separability: a generalized composite commodity theorem. The American Economic Review 86(3), 524–543.). The presence of a common stochastic trend in softwood lumber product price series tested is consistently rejected by Johansen's (1988. Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control 12(2–3), 231–254.) multivariate cointegration analysis. Together with rejection of non-stationarity property for a significantly large number of price series tested, the results highlight the significance of the assumptions underlying the use of composite forest commodity price indices for cointegration analysis.     

Causality and Efficiency in the Coffee Futures Market

Tests for causality and rationality in the coffee futures market were carried out using data from the New York Market. Tests of causality indicated that futures prices strongly influence variations in spot price eight weeks or more to maturity. However, beginning seven weeks to maturity there seems to be a strong causal relationship going from futures to spot and from spot to futures. Risk constancy or neutrality, equality of risk premium and spot price, and efficiency were rejected for the period 18, 51, and 33 weeks or more to maturity. However, simultaneity of risk neutrality and efficiency was accepted for contracts with 55-77 weeks to maturity. The general conclusion from this study is that coffee futures market can be used as an indicator of spot market prices for contracts with 55-77 weeks to maturity. While benefits can be obtained through short term adjustment of available stock and making use of quality storage facilities, planning longer term planting and marketing decisions (e.g., ≥ 77 weeks) on the basis of futures market price can result in misallocation of resources and welfare loss.     

Forecast performance of WASDE price projections for U.S. corn

We conduct a comprehensive evaluation of the season‐average price projections for U.S. corn as published by the U.S. Department of Agriculture's World Agricultural Supply and Demand Estimates (WASDE), an important issue given reduced resources and increased program scrutiny within the Federal Government. This study is the first in the literature to evaluate the WASDE corn projections relative to futures adjusted forecasts throughout the forecasting cycle using a lengthy evaluation period (1980/81–2012/13). We find that WASDE projections provide lower RMSEs relative to futures adjusted forecasts for 9 of the 16 forecast periods, 4 of which are statistically different. Encompassing tests show that WASDE projections often provide incremental information not present in the futures adjusted forecasts. Composite forecasts based on futures adjusted forecasts and WASDE projections reduced the RMSEs over all forecast periods by an average 12–16%. Favorable average trading profits may be generated for some forecast months using WASDE projections. Overall, our results suggest that WASDE projections of the U.S. corn season‐average price provide useful information to the market and could enhance the efficiency of the agricultural sector.     

Revisiting the determinants of futures contracts success: the role of market participants

The Chicago Mercantile Exchange introduced a futures contract for distillers’ dried grains (DDGs) in early 2010, but the market became inactive only four months after its inception. While many new futures contracts do not develop into high‐volume traders, interest from DDG cash market participants indicated that this contract could be successful. Prompted by the unexpected lack of trading activity in this new futures market, we empirically revisit the question of what factors contribute to a futures contract's success and extend the literature by investigating the roles of market participants and the significance of supporting futures markets. Estimation results indicate that the market participant type—hedger or speculator—affects futures contract trade volume. More importantly, we find that the viability of new futures contracts for commodities that are jointly produced with other commodities is impacted by hedgers’ trade volume of the related futures contract. These results provide important additions into the portfolio of indicators used by commodity exchanges to more cost‐effectively evaluate new futures contract products.     

Measuring the functional efficiency of agricultural futures markets

This article presents a method for measuring the functional efficiency of agricultural futures markets in terms of social welfare using a standard futures market structural model. Employing the concept of social surplus, it can be shown that, when futures prices are used to estimate future spot prices, the errors in prediction produce to some degree resource misallocation, which in turn results in welfare losses. Therefore, the social welfare associated with the presence of futures markets can be measured using a Social Loss index. The indicator was calculated for the period 1975–2015 and for several subperiods, which allow us to analyse functional efficiency before and after the 2007–2008 spikes in the prices of agricultural commodities. Futures contracts for 12 products are evaluated. The products are grouped in three different categories: ‘soft products’, ‘livestock’ and ‘grains and oilseeds’. The results indicate that livestock contracts tended to be more efficient than the rest of the contracts during the whole period, but in 2008–2015 their efficiency decreased vis‐á‐vis the rest of the products. Nevertheless, 2008–2015 proved to be the most efficient subperiod, confirming the remarkable development of agricultural futures markets over time.     

Structural Breaks and the Relationship between Barley and Wheat Futures Prices on the London International Financial Futures Exchange

Co-movement between futures prices can arise when commodities are substitutes. Counterintuitively, Dawson and White fail to find a significant long-run link between feed barley and wheat prices on the London International Financial Futures Exchange. This relationship is re-examined using  Johansen, Mosconi, and Nielsen's co-integration procedure that permits structural breaks. Results show evidence of co-integration and hence price discovery. There is a significant break in October 2000 following Common Agricultural Policy intervention price reductions, the barley–wheat futures market is perfectly integrated, and the barley price Granger-causes the wheat price. Modeling structural breaks in price relationships appears important.     

A Maximum Likelihood Cointegration Analysis of Canadian Lumber Exports

Johansen 's cointegration analysis is used to investigate causal relationships between Canadian lumber exports, U.S. lumber price, U.S. housing starts and the Canada-U.S. exchange rate. The results suggest that there is only one stable equilibrium relationship among these variables in the long run. Forecast error variance decomposition and impulse responses from a vector error-correction model are used to examine the short-run dynamic relationships among the variables. The results suggest significant dynamic relationship among the variables. The results also indicate that the pass-through of exchange rate is incomplete in the long run and that the effects of exchange rate on lumber exports vary between the short run and long run L'analyse de cointégration de Johansen est utilisée pour examiner les rapports de cause à effet entre les exportations de bois d'oeuvre canadien, le prix du bois d'oeuvre aux Etats-Unis, les mises en chantier de constructions à usage d'habitation el le taux de change Canada-Etats- Unis. Les résultats semblent montrer qu'il n 'v a à long terme qu'un seul rapport d'équilibre stable entre ces variables. On recourt à la decomposition de la variance de l'erreur de prédiction et aux réponses sur impulsion déhvées à partir d'un modèle de correction d'erreur vectorielpour examiner les rapports dynamiques à court terme entre les variables. Les résultats laissent apparaître un rapport dynamique significatif entre les variables. Ils montrent aussi que la transmission des effets du taux de change canado-américain est incomplète à long terme et que les effets de cette variable sur les exportations canadiennes de bois d'oeuvre ne sont pas les mêmes à court qu'à long terme     

Marketing and Pricing Dynamics in the Presence of Structural Breaks: The Hungarian Pork Market

The study of marketing margins and price transmission on various commodity markets has been a popular research topic of the past decades (see Meyer & Von Cramon-Taubadel, 2004 Meyer , J. , & Von Cramon-Taubadel , S. ( 2004 ). Asymmetric price transmission: A survey . Journal of Agricultural Economics , 55 ( 3 ), 581 – 611 .[Crossref], [Web of Science ®] , [Google Scholar], for a recent survey). However, with a few exception these studies focused on developed economies. This article examines this phenomena on the Hungarian pork market. The Johansen (maximum likelihood, 1988 Johansen , S. ( 1988 ). Statistical analysis of cointegrating vectors . Journal of Economic Dynamics and Control , 12 , 231 – 254 .[Crossref], [Web of Science ®] , [Google Scholar]) or Engle and Granger (2-step, 1987 Engle , R. F. , & Granger , C. W. J. ( 1987 ). Cointegration and error correction: Representation, estimation and testing . Econometrica , 55 , 251 – 276 .[Crossref], [Web of Science ®] , [Google Scholar]) cointegration tests do not reject the no-cointegration null hypothesis between the Hungarian pork producer and retail price series. Therefore, we applied the Gregory and Hansen (1996 Gregory , A. W. , & Hansen , B. E. ( 1996 ). Residual-based tests for cointegration in models with regime shifts . Journal of Econometrics , 70 , 99 – 126 .[Crossref], [Web of Science ®] , [Google Scholar]) procedure with recursively estimated break points and Augmented Dickey Fuller (ADF) statistics and found that the prices are cointegrated with a structural break occurring in April 1996 Gregory , A. W. , & Hansen , B. E. ( 1996 ). Residual-based tests for cointegration in models with regime shifts . Journal of Econometrics , 70 , 99 – 126 .[Crossref], [Web of Science ®] , [Google Scholar]. Exogeneity tests reveal the causality running from producer to retail prices both in the long and short run. Homogeneity tests are rejected, suggesting a markup pricing strategy. Price transmission modeling suggests that price transmission on the Hungarian pork meat market is symmetric in the long run but asymmetric in the short run; that is, processors, wholesalers, or retailers might take temporary advantage should price changes occur.     

Hedging Multiple Price Uncertainty in International Grain Trade

Commodity and freight futures contracts are analyzed for their effectiveness in reducing uncertainty for international traders. A theoretical model is developed for a trader exposed to several types of risk. OLS hedge ratio estimation is compared to the SUR and the multivariate GARCH methodologies. Explicit modeling of the time-variation in hedge ratios via the multivariate GARCH methodology, using all derivatives, and taking into account dependencies between prices, results in reductions in risk, even after accounting for transaction costs. Results confirm that while the commodity futures contracts are important for hedging risk, freight futures are a useful mechanism for reducing risk.     

The Role of Farmer's Behavioral Attitudes and Heterogeneity in Futures Contracts Usage

The relationship between farmers' behavioral attitudes and use of futures contracts is examined, taking into account non-directly observable variables and the heterogeneity of farmers. The relationships are tested on a stratified data sample of 440 farmers. Cluster analysis and covariance structure equation models are used to validate the relationships. Farmers are found not to be homogenous regarding the factors influencing their use of futures. Heterogeneity at the segment level masked important effects at the aggregate level, notably risk attitude. Furthermore, several psychological constructs for farmers related to market orientation, risk exposure, market performance and entrepreneurial behavior play important roles in their use of futures contracts.     

Announcement effects and the theory of storage: an empirical study of lumber futures

We investigate how lumber futures returns are affected by monthly housing starts announcements and analyze the dependence of the response on lumber inventories and time to delivery. To do so we develop a generalized least squares (GLS) method to jointly analyze simultaneously traded contracts. We find that increases in the unanticipated component of housing starts announcements increase returns on lumber futures contracts. Further, and as predicted by the theory of storage but previously unrecorded, the effects of housing starts shocks decline with lumber inventories. There is also a time-to-delivery effect: near-delivery contracts respond more sharply to housing starts news than do farther-out contracts.     

Spatial Integration of Wheat Markets in India: Evidence from Cointegration Tests

Using the maximum likelihood method of cointegration, this paper empirically evaluates intra-state and inter-state spatial integration of wheat markets in India. The cointegration tests provide strong evidence in favour of spatial integration of the regional wheat markets. Even though the regional markets are geographically dispersed, the prices across different market centres within and across the selected states have exhibited long-run spatial linkages, suggesting that all the exchange locations are integrated and the prices provide relevant market signals. There are several implications of these results for agricultural price policy and food market liberalization programmes.     

Hedging Opportunities for Canadian

The unprecedented commodity price volatility in the last decade has resulted in a growing interest in futures trading by farmers. One of the major reasons often provided for the usefulness of commodity futures markets is that they provide a mechanism whereby producers can shift the risk of price change onto others. Interestingly, little research has been conducted on the effectiveness of the WCE as a hedging tool for farmers.
The objective of this paper was to investigate the extent to which the futures contracts for rapeseed, barley and flaxseed can be used by farmers in order to reduce price risk (measured by volatility). Drawing on earlier literature, the theory of hedging was reviewed and formulae for estimating the optimal hedge and the effectiveness of hedging were presented. An empirical analysis determined that the Winnipeg rapeseed, barley and flaxseed futures contracts are very useful in terms of allowing a producer the opportunity to reduce exposure to price risk.