SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS JULY 1992 LIVESTOCK FUTURES MARKETS AND RATIONAL PRICE FORMATION: EVIDENCE FOR LIVE CATTLE AND LIVE HOGS

Abstract Two roles of futures markets have been empha-.. he~ ~ '^cn o c. sized in analyses of market performance (Tomek and The efficiency of livestock futures markets contin- Gray; Peck 1985 and 1987). The first role, the allo-ues to receive attention, particularly with regard to c r w i i b cative role, was investigated initially by Working in their forward pricing or forecasting ability. The pur-theirforward cingorforecastingability.Thea study of grain basis relationships and storage costs. pose of this paper is to present a more general theory availability of futures contracts for storableThe availability of futures contracts for storable that encompasses the forward pricing concept. It is commodities, deliverable upon out to a year in thecommodities, deliverable upon out to a year in the argued that futures contract prices for competitively f a future, are thought to provide price incentives whichproduced nonstorable commodities, such as live cat- influence storage decisions and thereby allocate tie and live hogs, follow arational formation process grain consumption through the crop year. Analysis Futures contract prices reflect expected market con- of the secondrole,forwardpricing,emerged withthe ditions when contracts are sufficiently close to the introduction offuturestradingsemi-storablecom-introduction of futures trading in semi-storable com-delivery month that the supply of the underlying modities(e.g.,onions potatoes)andnonstorablemodtfies (e.g., onions and potatoes) and nonstorable commodity cannot be changed. However, prior to thecommoditycannotbechanged.However,priortothe commodities (e.g., livestock). It has been argued that period when future supplies are relatively fixed,peod when future supplies are relatively fixed, price levels of futures contracts for nonstorable com-futures contract prices should adjust to reflect the moditiesdeliverableuponouttoyearinthefuture, modities, deliverable upon out to a year in the future, competitive equilibrium, where output price equals should forecast anticipated supply-emand coni-average costs ofproduction. Presented evidence sug- t i tions in these forward markets. Futures markets forgests that live cattle and live hog futures markets semi-storable commodities are thought to combin