An Evaluation of Pricing Performance and Hedging Effectiveness of the Barley Futures Market

Abstract

This paper investigates the pricing efficiency and hedging effectiveness of the Winnipeg barley futures market, using the Chicago corn futures market as a norm. Several tests of pricing efficiency were conducted and the stability of the basis was studied. The barley futures market operates in a heavily regulated economic environment and this is shown to impact on both price behavior and hedging opportunities. The behavior of commodity futures prices always has drawn attention in the economics literature and this interest extends from well-established to newlyformed markets. Studies of price behavior on futures markets have been primarily concerned with both pricing efficiency and hedging opportunities. A price efficient market can be briefly described as one in which new information concerning supply or demand is discounted accurately and rapidly into the futures price. On the other hand, hedging opportunities are a function of basis behavior. The primary objective of this paper is to assess the pricing efficiency of the Winnipeg feed barley futures market. In addition, the effectiveness of hedging on the market is studied. Price behavior on the barley market is compared with that on the Chicago Board of Trade (CBT) corn market. The corn futures market is used as a norm because it is considered to be one of the most efficient in terms of price discovery (Gray) and it operates without Colin A. Carter is an Associate Professor in the Department of Agricultural Economics at the University of Manitoba.