Recipient Organization
OHIO STATE UNIVERSITY
1680 MADISON AVENUE
WOOSTER,OH 44691
Performing Department
Agriculture, Environment and Development Economics
Non Technical Summary
Efficient production of grains is necessary but not sufficient for the success of a farm or agribusiness. In the absence of skilled marketing, a highly efficient producer can nonetheless be rendered unprofitable through poor pricing decisions or ignorance of risk management. Successful producers must combine agronomic excellence with economic excellence through attentive, informed marketing decisions. Cash grains prices are set via financial markets that trade futures contracts on those grains. Physical transactions occur at premiums or discounts to those futures prices, but the futures prices nonetheless underlie the cash transaction price. Therefore, efficient and effective grain marketing requires efficient and effective grain futures markets.Futures markets exist to serve two roles; price discovery of the traded commodity and transfer of risk from physical market participants to speculators. Because the assets underlying the futures contracts have physical presence, and contract performance can entail the delivery or receipt of the physical good, futures markets for physical commodities present special challenges to users, regulators and researchers. It is delivery that ties the prices of the physical commodity at the delivery point to the prices traded in the futures markets. For this reason, the operation of the delivery mechanism is crucial to the operation of the futures market.This project seeks to better understand the behavior of futures prices through analyzing the physical delivery markets for cash grains, thereby increasing understanding of the futures markets, and improving the ability of all market participants to use futures markets.
Animal Health Component
100%
Research Effort Categories
Basic
0%
Applied
100%
Developmental
0%
Goals / Objectives
1. Evaluate the performance of futures delivery mechanisms using data on grain stored in elevators, the number of deliveries made, and delivery prices.2. Compare various delivery mechanisms in terms of their impact on price discovery and volatility. For example, the CBOT single area delivery mechanism, as in corn and soybeans, compared to the multiple zone mechanism as in CBOT wheat, compared to the mechanism in the South African wheat futures in which every elevator in the country is a delivery point.3. Analyze the effects of changes over time in delivery market rules, such as storage cost ceilings and floors imposed by the CBOT and KCBOT, and location differentials charged by nearly all exchanges, for their effect on hedging efficiency, price discovery, and risk transfer.4. Each of (1)-(3) will be examined for their effect on producer and consumer use of futures markets.
Project Methods
The primary method used in completing the objectives will be the 'event study' in time series econometrics. In each case, the changes in delivery mechanisms will be treated as natural experiments, and the behavior of prices in the studied market and comparable markets will be modeled, and contemporaneous changes in price behavior will be analyzed in an attempt to understand whether the changes in price behavior are an effect of the changed market mechanism or an anomaly. Fama, Fisher, Jensen and Roll are one of the earliest applications of the methodology to financial markets. Later research has applied event studies to many different commodity markets, including oil (Deaves and Krinsky), stocks (Wong), and lumber (Rucker, Thurman, and Yoder). As the number of markets examined has increased, likewise has the methodology broadened, as in McKenzie, Thomsen and Dixon.Deaves, Richard and Itzhak Krinsky. "The behavior of oil futures returns around OPEC conferences" Journal of Futures Markets 1992, 12(5), p563-574.Wong, Elizabeth, "Investigation of Market Efficiency: An Event Study of Insider Trading in the Stock Exchange of Hong Kong" Thesis, Stanford University, 2002.Fama, Eugene F., Lawrence Fisher, Michael C. Jensen, and Richard Roll. "The Adjustment of Stock Prices to New Information." International Economic Review, 1969 10(1), p1-21.Mckenzie, Andrew M., Michael R. Thomsen, and Bruck L. Dixon, "The Performance of event study approaches using daily commodity futures returns." Journal of Futures Markets, 2004 24(6), p533-555.Rucker, Randal R., Walter N. Thurman and Jonathan K. Yoder "Estimating the Structure of Market Reaction to News: Information Events and Lumber Futures Prices." American Journal of Agricultural Economics, May 2005 87(2), p482-500.