Revisiting the Determinants of Futures Contracts: The Curious Case of Distillers' Dried Grains

Abstract

A futures market for distillers' dried grains (DDGs) was introduced on the Chicago Mercantile Exchange in early 2010, but the market became inactive only four months after its inception. While many new futures contracts do not develop into high-volume traders, significant interest from DDG cash market participants seemed to indicate that this contract would be successful. This study examines whether it might have been possible to predict the ineffectiveness of the DDG contract. We test multiple factors found in previous literature to affect the success of futures contracts, as well as the impact of market participants and the activeness of supporting futures markets. In particular, we empirically determine whether lack of activity in the ethanol futures market contributed to the ineffectiveness of the DDG contract. While the existing literature would have predicted a high likelihood of success for a DDG futures contract, our estimation results draw a conflicting conclusion and indicate that a primary reason was an inactive supporting ethanol futures market.