LIVESTOCK FUTURES MARKETS AND RATIONAL PRICE FORMATION: EVIDENCE FOR LIVE CATTLE AND LIVE HOGS

Stephen R. Koontz, Michael A. Hudson and Matthew W. Hughes

Southern Journal of Agricultural Economics, 1992, vol. 24, issue 01, 17

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: Demand and Price Analysis; Livestock Production/Industries (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:sojoae:30384

DOI: 10.22004/ag.econ.30384

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