Price Discovery in Private Negotiation Trading with Forward and Spot Deliveries

Abstract

Advance production in spot markets increases seller costs because inventories must be held. This cost does not exist in production-to-demand (or forward) markets, for which production follows trading, and sales exactly match quantities produced. Data from laboratory-computerized markets that trade through private negotiation are analyzed. For the experimental supply and demand conditions, price convergence patterns show spot prices 10.8% lower and the number of trades 12.4% fewer than forward outcomes. The adverse impact of advance production and private negotiation on seller earnings is emphasized when earnings are compared with those from double auction trading. M arkets in agriculture involve numerous institutional arrangements and allow alternative methods of delivery (Tomek). A trading institution consists of rules and conventions that govern exchange. Auction and private negotiation are two trading institutions studied in this paper. The auction, specificall a double auction, consists of buyers and sellers announcing bid and ask prices that converge to an eventual trade price. Private negotiation is akin to this for one buyer and one seller, rather than the interaction of many buyers and sellers, in the price discovery process. 1 Interestingly, world wide web trading sites have been organized as either auctions or message boards that facilitate private negotiation.

Livestock Mandatory Price Reporting: A Literature Review and Synthesis of Related Market Information Research

“…This research deserves some detailed discussion. Menkhaus, Phillips and Bastain (2003) and Menkhaus, Phillips, Johnston, and Yakunina (2003) all found that forward contract prices were higher than cash market prices. This is opposite of what is observed in real world fed cattle markets.…”

Policy Experiments for the U.S. Intermountain West Native Seed Industry

“…We also analyze the experimental data using convergence analysis (Ashenfelter et al 1992;Noussair et al 1995;Menkhaus et al 2003), which makes it possible to conduct tests for statistical differences in variables of interest across treatments. We also analyze the experimental data using convergence analysis (Ashenfelter et al 1992;Noussair et al 1995;Menkhaus et al 2003), which makes it possible to conduct tests for statistical differences in variables of interest across treatments.…”

“…Many of these studies have taken place through private negotiation, an increasingly common trading institution in agricultural markets (Drabenstott 1999;Menkhaus et al 2003;Ward 2005). Under private negotiation, a buyer and seller negotiate privately rather than publically, as they would in an auction setting.…”

Price discovery in a private cash forward market for lumber

“…In a cash forward contracting arrangement, a buyer of lumber agrees to pay a seller of lumber a fixed price for delivery of lumber at some time in the future. Cash forward contracting arrangements for most commodities are almost always privately negotiated (Menkhaus et al, 2003), and unlike futures prices, cash forward prices are typically not made public. 2 Given this, researchers have had limited opportunity to empirically examine the performance of cash forward markets.…”

“…Indeed, the overall lack of publicly available data on cash forward markets makes the analysis of their price discovery function difficult. Researchers have often been forced to rely on theoretical, or more recently experimental economic methods, in analyzing the price discovery role of cash forward markets and other elements of market performance (Menkhaus et al, 2003;Krogmeier et al, 1997;Mahenc and Salaine, 2004;Mahenc and Meunier, 2003).…”