Temporal Relationships Among Prices on Commodity Futures Markets: Their Allocative and Stabilizing Roles
01 Aug 1970-American Journal of Agricultural Economics (Oxford University Press)-Vol. 52, Iss: 3, pp 372-380
TL;DR: In this article, the authors show that the model of intertemporal price relationships differs for the two cases and provide evidence for selected commodities and contrast the contrasting implications for allocation and stabilization.
Abstract: The role that futures markets play in guiding inventories, through hedging, has been emphasized in economic literature. Historically, futures markets first emerged for the annual crops that could be continuously stored (grain and cotton); hence inventory hedging has been important from the outset. But forward pricing which was not attendant upon inventories has long been practiced, and the more recent emergence of futures markets for non-inventory commodities dramatizes this fact. We show here that the model of intertemporal price relationships differs for the two cases and provide evidence for selected commodities. The contrasting implications for allocation and stabilization are also drawn.
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TL;DR: In this article, a risk-averse, competitive firm is assumed to face price uncertainty and must choose its level of output before the price uncertainty is resolved and may, at the same time, buy or sell output in a forward market at a fixed price.
Abstract: Recent models of the competitive firm under uncertainty have explored ways in which the competitive firm's decisions would deviate from those of a firm operating with certainty and have explored the effects of increasing risk aversion on the firm's decisions (see, for example, Agnar Sandmo; David Baron; Hayne Leland; R. N. Batra and Aman Ullah; and the author). These models all assume that the firm's only response to uncertainty is to adjust its output or input levels. In practice, however, a number of institutions have been developed to aid firms in the management of risk. One of the most common methods used to deal with price uncertainty is hedging. Futures markets exist for many agricultural products and some metals. Firms may also use forward contracts to fix the price at which output or inputs are traded in the future. Although there is a large literature dealing with futures markets, few attempts have been made to incorporate futures or forward trading in the theory of the firm.' Such a model is developed in this paper. A risk-averse, competitive firm is assumed to face price uncertainty. It must choose its level of output before the price uncertainty is resolved and may, at the same time, buy or sell output in a forward market at a fixed price. The major result of the paper is that the firm will produce a level of output which depends only on the forward price and is, in particular, independent of the firm's degree of risk aversion and the probability distribution of the uncertain price. In addition, if the forward price is less than the expected future price, the firm will generally hedge some, but not all, output in the forward market; it will hedge more, the more risk averse it is; and it will hedge more as the riskiness of the uncertain price increases. Finally, the existence of a forward market will generally induce the firm to produce a greater output than it would have in the absence of such a market.
429 citations
TL;DR: The tin agreement did not collapse, but for sugar and cocoa adverse market conditions and lack of general support made stabilization impractical as discussed by the authors, and the coffee market ceased largely because of disagreements both between and within the producing countries on the division of the benefits resulting from higher prices.
231 citations
194 citations
TL;DR: In this paper, the authors compared the accuracy of major commercial price forecasts for corn, wheat, soybeans, soy oil, soybean meal, cotton, live cattle, and hogs.
Abstract: This paper compares the accuracy of major commercial price forecasts for corn, wheat, soybeans, soybean oil, soybean meal, cotton, live cattle, and hogs. The price-forecasting information in futures prices is evaluated by comparison. The results among commercial forecasters are mixed, but futures prices perform relatively better on average although not universally so. These results have important implications for operational risk management.
191 citations
TL;DR: In this article, market efficiency and unbiasedness are tested in four agricultural commodity futures markets (live cattle, hogs, corn, and soybean meal) using cointegration and error correction models with GQARCH-in-mean processes.
Abstract: Market efficiency and unbiasedness are tested in four agricultural commodity futures markets - live cattle, hogs, corn, and soybean meal - using cointegration and error correction models with GQARCH-in-mean processes. Results indicate each market is unbiased in the long run, although cattle, hogs and corn futures markets exhibit short-run inefficiencies and pricing biases. Models for cattle and corn outperform futures prices in out-of-sample forecasting. Results also suggest short-run time-varying risk premiums in cattle and hog futures markets.
174 citations
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TL;DR: In this article, the authors examine the role of private futures markets in commodity price stabilization and show that direct manipulation of spot prices is a very inefficient and unnecessarily costly method of achieving governmental policy goals: in particular, the stabilization of producer incomes.
Abstract: A REMARKABLE aspect of academic and non-academic discussions of commodity-price-stabilization programs has been their failure to examine the role of private futures markets. Price theorists have long recognized -at least formally-the need for information on future prices if allocative efficiency is to be achieved. Furthermore, there is a very substantial literature on hedging: the use of futures markets to reduce risk and to permit specialization in risk taking. However, the commodityprice-stabilization literature and the theoretical literature on hedging have this one fundamental omission in common: neither looks at the way in which farmers-or primary producers in generalcould optimally use efficiently organized futures markets under laissez faire. Virtually the whole of the hedging literature examines the decision-making problems facing merchants holding inventories but does not examine to any significant degree the hedging problems facing primary producers. The commodity-pricestabilization literature implicitly assumes that the word "price" refers to the spot price and entirely ignores the continuum of future prices. This myopia with respect to future prices has meant that numerous interventions by governmental authorities in commodity markets have been confined to the manipulation of spot prices. As shall be demonstrated, direct manipulation of spot prices is likely to be a very inefficient and unnecessarily costly method of achieving governmental policy goals: in particular, the stabilization of producer incomes. It is, therefore, a fundamental reason why so many international commodity agreements prove to be unsuccessful or abortive.' Before discussing what national or international policy should be, it is necessary to understand how individual producers at the macroeconomic level could make optimal use of an idealized set of futures markets. Farmers are assumed to have a certain trade off between risk and expected income. The reduction of risk (income variation) is important per se, but it may be even more important in reducing the external capital rationing constraint that farmers generally face.2 Therefore, one does not have to assume that farmers are more risk averse than other individuals to make hedging attractive to them. The dominant technological fact which distinguishes the farmer from the grain merchant holding inventories is that the farmer has to make investment commitments (planting decisions) from which the future output is uncertain. Thus, risk aversion consists of protecting himself from the
275 citations
TL;DR: In this paper, the authors developed a theory of cash-futures price relationships for beef cattle, and measured the factors that have affected cash-to-cash price relationships during the three years of trade in live-beef-cattle futures and provided a framework for evaluating the efficiency of futures markets and hedging in the pricing of feeder cattle.
Abstract: The objectives of this study, all pertaining to pricing efficiency, were: (1) to develop a theory of cash-futures price relationships for beef cattle; (2) to measure the factors that have affected cash-futures price relationships during the three years of trade in live-beef-cattle futures; and (3) to provide a framework for evaluating the efficiency of futures markets and hedging in the pricing of feeder cattle. Three types of evidence are employed to attain these objectives. First, the principles of cash-futures price behavior derived from observation of long-established futures markets serve as points of departure, while consideration is given to certain fundamental differences that arise from contrasting commodity characteristics. Second, empirical results relating to supply and demand for feeder cattle are employed to define expected relationships between futures prices and prices of feeder cattle of various weights. Third, data generated by the beef cattle futures market itself are analyzed, although it is recognized that these data cover only a short time period and are therefore of limited usefulness.
29 citations
TL;DR: In this article, the authors proposed a government support program that would not discriminate among farmers, and even more important, not discriminating among products, and at the same time minimize the disutility caused by the uncertainties of agricultural production.
Abstract: Government agriculture price support programs lead to inefficient allocation of resources, as well as highly inequitable rent returns to certain farm owners. At the same time, it is clear that society is not willing to leave the farmer to the vagaries of the market. This paper offers a suggestion for a Government support program that would not discriminate among farmers, and even more important, not discriminate among products, and at the same time minimize the disutility caused by the uncertainties of agricultural production.
3 citations