Dynamic price discovery in the European wheat market based on the concept of partial cointegration

Understanding the pricing process in agricultural spot and futures markets is important for every market participant. In this article we analyse price discovery in the European wheat market based on the partial cointegration approach recently introduced by Clegg and Krauss (2017). Partial cointegration allows for not only transient but also persistent shocks to the long-run equilibrium relationship between two or more variables. By combining the concept of partial cointegration with state space modelling we are able to generate time-variant price discovery metrics that allow for shifts in the long-run relationship between futures and spot prices, for example due to changes in the quality composition of the wheat harvest from year to year, or due to changes in the specification of the futures contact. We find that price discovery is in general dominated by the futures market but that the spot market takes on greater significance for the pricing process during phases of higher price volatility. We also find evidence that the persistent shocks the long-run relationship between spot and futures prices estimated by the partial cointegration method are affected by the availability of high-quality wheat on the spot market