Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-19T22:38:10.309Z Has data issue: false hasContentIssue false
  • English
  • Français

Livestock Futures Markets And Rational Price Formation: Evidence For live Cattle And Live Hogs

Published online by Cambridge University Press:  09 September 2016

Stephen R. Koontz ,
Michael A. Hudson  and
Matthew W. Hughes
Stephen R. Koontz
Affiliation:
Department of Agricultural Economics, Oklahoma State University
Michael A. Hudson
Affiliation:
Department of Agricultural Economics, Cornell University
Matthew W. Hughes
Affiliation:
Doanes Marketing Research, St. Louis, Missouri
Get access Rights & Permissions [Opens in a new window]

Abstract

The efficiency of livestock futures markets continues to receive attention, particularly with regard to their forward pricing or forecasting ability. The purpose of this paper is to present a more general theory that encompasses the forward pricing concept. It is argued that futures contract prices for competitively produced nonstorable commodities, such as live cattle and live hogs, follow a rational formation process. Futures contract prices reflect expected market conditions when contracts are sufficiently close to the delivery month that the supply of the underlying commodity cannot be changed. However, prior to the period when future supplies are relatively fixed, futures contract prices should adjust to reflect the competitive equilibrium, where output price equals average costs of production. Presented evidence suggests that live cattle and live hog futures markets support the rational price formation hypothesis: prices for distant contracts reflect average costs of feeding. Implications for risk management strategies are considered.

Keywords

futures marketsrational price formationforecasting performanceforward pricing
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 24 , Issue 1 , July 1992 , pp. 233 - 249
Copyright
Copyright © Southern Agricultural Economics Association 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Breusch, T. S., and Pagan, A. R.. “The Lagrange Multiplier Test and its Applications to Model Specifications in Econometrics.” Rev. Econ. Studies, 47(1980):239–253.CrossRefGoogle Scholar
Colling, P. L., and Irwin, S. H.. “On the Reaction of Live Hog Futures Prices to Informational Components in Quarterly USDA Hogs and Pigs Reports.” Proceedings of the 1989 NCR-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, pp. 17–35. Dep. Econ., Iowa State University, 1989.Google Scholar
Colling, P. L., and Irwin, S. H.. “The Reaction of Live Hog Futures Prices to USDA Hogs and Pigs Reports.” Am. J. Agr. Econ., 72(1990):84–94.Google Scholar
Cox, D. R., and Hinkley, D. J.. Theoretical Statistics. London: Chapman and Hall, 1974.CrossRefGoogle Scholar
Dewbre, J. H. “Interrelationships Between Spot and Futures Markets: Some Implications of Rational Expectations.” Am. J. Agr. Econ., 63(1981):926–933.CrossRefGoogle Scholar
Ehrich, R. L. “Cash-Futures Price Relationships for Live Beef Cattle.” Am. J. Agr. Econ., 51(1969):26–40.Google Scholar
Fama, E. F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” J. Finance, 25(1970):383–417.Google Scholar
Garcia, P., Hudson, M. A., and Waller, M. E.. “The Pricing Efficiency of Agricultural Futures Markets: An Analysis of Previous Research Results.” So. J. Agr. Econ., 20(1988a): 119–130.Google Scholar
Garcia, P., Leuthold, R. M., Fortenbery, T. R., and Sarassoro, G. F.. “Pricing Efficiency in the Live Cattle Futures Market: Further Interpretation and Measurement.” Am. J. Agr. Econ., 70(1988b): 162–169.CrossRefGoogle Scholar
Gray, R. “The Futures Market for Maine Potatoes: An Appraisal.” Vol. 3, Selected Writings on Futures Markets, Peck, A.E., ed. Chicago: Chicago Board of Trade, 1977.Google Scholar
Harvey, A. C. Time Series Models. Oxford: Philip Allan, 1981.Google Scholar
Helmuth, J. W. “A Report on the Systematic Downward Bias in Live Cattle Futures Prices.” J. Futures Markets, 1(1981):347–358.Google Scholar
Hoffman, G. “The Effects of Futures Prices on Short-Run Supply of Fed Cattle and Hogs.” Livestock Futures Research Symposium, Leuthold, R. M. and Dixon, P., eds. Chicago: Chicago Mercantile Exchange, 1979.Google Scholar
Hudson, M. A., Koontz, S. R., and Purcell, W. D.. “The Impact of Quarterly Hogs and Pigs Reports on Live Hog Futures Prices: An Event Study of Market Efficiency.” Dep. Agri. Econ. Bull. AE-54, Virginia Polytechnic Institute and State University, June 1984.Google Scholar
Just, R. E., and Rausser, G. C.. “Commodity Price Forecasting with Large-Scale Econometric Models and the Futures Markets.” Am. J. Agr. Econ., 63(1981): 197–208.CrossRefGoogle Scholar
Kamara, A. “Issues in Futures Markets: A Survey.” J. Futures Markets, 2(1982):261–294.Google Scholar
Kiviet, J. “On the Rigor of Some Specification Tests in Modelling Pyramidic Relationships.” Rev. Econ. Studies, 53(1986):241–262.CrossRefGoogle Scholar
Koontz, S.R., Hudson, M. A., and Hughes, M. W.. “Rational Price Formation in Live Cattle and Live Hog Futures Markets.” Oklahoma Agricultural Experiment Station Technical Bulletin, Oklahoma State University, forthcoming.Google Scholar
Leuthold, R. M. “The Price Performance on the Futures Market of a Nonstorable Commodity: Live Beef Cattle.” Am. J. Agr. Econ., 56(1974):271–279.Google Scholar
Leuthold, R. M., and Hartmann, P.. “A Semi-Strong Form Evaluation of the Efficiency of the Hog Futures Market.” Am. J. Agr. Econ., 63(1979):482–489.Google Scholar
Leuthold, R. M., Garcia, P., Adam, B. D., and Park, W. I.. “The Necessary and Sufficient Conditions for Market Efficiency: The Case of Hogs.” Appl. Econ., 21(1989): 193–204.Google Scholar
Martin, L., and Garcia, P.. “The Price-Forecasting Performance of Futures Markets for Live Cattle and Hogs: A Disaggregate Analysis.” Am. J. Agr. Econ., 63(1981).209–215.Google Scholar
Miller, S. E. “The Response of Futures Prices to New Market Information: The Case of Live Hogs.” So. J. Agr. Econ., 2(1979):67–70.Google Scholar
Miller, S. E., and Kenyon, D. E.. “Empirical Analysis of Live-Hog Futures Price Use by Feeders and Packers.” Livestock Futures Research Symposium, Leuthold, R. M. and Dixon, P., eds. Chicago: Chicago Mercantile Exchange, 1979.Google Scholar
Miller, S. E., and Kenyon, D. E.. “Rational Price Formation in the Fed Cattle Futures Market.” Staff Paper, SP-77-7, Virginia Polytechnic Institute and State University, Department of Agricultural Economics, March 1977.Google Scholar
Paul, A. P., and Wesson, W. T.. “Pricing Feedlot Services Through Futures.” Agr. Econ. Res., 19(1967):35–45.Google Scholar
Peck, A. E. “The Economic Role of Traditional Commodity Futures Markets.” Futures Markets: Their Economic Role, Peck, A. E., ed. Washington D. C.: American Enterprise institute for Public Policy Research, 1985.Google Scholar
Peck, A. E. “Futures Markets and Intertemporal Commodity Pricing.” Efficiency in Agricultural and Food Marketing, Kilmer, R. L. and Armbruster, W. J., eds. Ames, Iowa: Iowa State University Press, 1987.Google Scholar
Purcell, W. D., and Hudson, M. A.. “The Economics Roles and Implications of Trade in Livestock Futures.” Futures Markets: Regulatory Issues, Peck, A. E., ed. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1985.Google Scholar
Purcell, W. D., Flood, D., and Plaxico, J. S.. “Cash-Futures Interrelationships in Live Cattle: Causality, Variability, and Pricing Processes.” Livestock Futures Research Symposium, Leuthold, R. M. and Dixon, P., eds. Chicago: Chicago Mercantile Exchange, 1979.Google Scholar
Schroeder, T., Blair, J., Mintert, J., and Featherstone, A.. “The Impacts of USDA Inventory Reports on Livestock Cash and Futures Prices.” Proceedings of the 1989 NCR-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, pp. 36–52. Dep. Econ., Iowa State University, 1989.Google Scholar
Shonkwiler, J.S. “Are Livestock Futures Prices Rational Forecasts?” West. J. Agr. Econ., 11(1986):123–128.Google Scholar
Stein, J. L. “Speculative Price: Economic Welfare and the Idiot of Chance.” Rev. Econ. Stat, 63(1981):223–232.Google Scholar
Tomek, W. G., and Gray, R. W.. “Temporal Relationships Among Prices on Commodity Futures Markets: Their Allocative and Stabilizing Roles.” Am. J. Agr. Econ., 52(1970):372–380.Google Scholar
Trapp, J. N. “Seasonal Aspects of Cattle Feeding Profits.” Oklahoma Agricultural Experiment Station, Oklahoma State University, Department of Agricultural Economics, Current Farm Economics, 62(1989):19–30.Google Scholar
Working, H. “Theory of the Inverse Carrying Charge in Futures Markets.” J. Farm Econ., 30(1948): 1–28.Google Scholar