Measuring the functional efficiency of agricultural futures markets

Abstract

This article presents a method for measuring the functional efficiency of agricultural futures markets in terms of social welfare using a standard futures market structural model. Employing the concept of social surplus, it can be shown that, when futures prices are used to estimate future spot prices, the errors in prediction produce to some degree resource misallocation, which in turn results in welfare losses. Therefore, the social welfare associated with the presence of futures markets can be measured using a Social Loss index. The indicator was calculated for the period 1975-2015 and for several subperiods, which allow us to analyse functional efficiency before and after the 2007-2008 spikes in the prices of agricultural commodities. Futures contracts for 12 products are evaluated. The products are grouped in three different categories: 'soft products', 'livestock' and 'grains and oilseeds'. The results indicate that livestock contracts tended to be more efficient than the rest of the contracts during the whole period, but in 2008-2015 their efficiency decreased visa -vis the rest of the products. Nevertheless, 2008-2015 proved to be the most efficient subperiod, confirming the remarkable development of agricultural futures markets over time.

Assessing the functional efficiency of agricultural futures markets in China

“…In the model, Stein assumed that commercial participants are sellers hedging against the risk of falling prices, that is, commercial participants hold a net short position in futures contracts. Consuegra and Verdugo (2017) assumed that the quality of the hedging instrument was perfect for simplicity’s sake, but the relaxation of this assumption would not change the research conclusions. Accordingly, the functional efficiency of futures markets is assessed by estimating the social loss derived from allocation errors that are committed when the prices of futures contracts are used to estimate the spot prices.…”

“…), the SL values of American agricultural futures market can be used as the benchmark. According to Consuegra and Verdugo (2017), who evaluated the functional efficiency of 12 agricultural futures markets in the USA using the social loss index, the SL values of the American agricultural futures markets are all less than 4 and all SL values of the lean hog futures market, which is regarded as the most efficient market, are below 2. Therefore, it can be assumed that when the SL value is less than 2, the functional efficiency of the futures market is excellent; however, when the SL value is greater than 4, the functional efficiency of the futures market is very poor.…”

“…Consuegra and Verdugo (2017) used the same method to calculate the SL values of American agricultural futures markets in the 2008–2015 period, and the average SL values of sugar, corn, soybean and wheat are 1.74, 2.90, 2.31 and 2.90, respectively. Table II shows the average SL values in American and Chinese futures markets.…”

“…Yan (2010) and Yan and Reed (2015) studied the price discovery of the Chinese corn futures market by using Granger causality, co-integration test and other related measures. Consuegra and Verdugo (2017) used social loss index to evaluate the functional efficiency of 12 agricultural futures markets in the USA.…”

Guarantee Function of Corn Futures to the Development of Corn Planting Industry

“…Risk can be measured by probability, and its size depends on the probability distribution of loss occurrence, expected value, and return variance. There are many types of risks in economic activities, mainly including price volatility risk, liquidity risk, political risk, default risk, natural risk and circulation risk [8].…”