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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
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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

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