The Quality of Speculation in the Soybean Complex

This paper examines the quality of speculation in the soybean, soyoil and soymeal futures markets. High quality speculation is defned as speculative activity that quickly brings markets to equilibrium when economic events dictate that a new equilibrium is required. A model of spot and futures market interaction is developed and estimated using cross sections of time-series data from 1992, 1993 and 1994. The dynamics of market equilibration are simulated by using the estimated parameters and also by using alternative assumptions about speculative and hedging behavior. It is found that hedgers contribute little to market equilibration. Speculative activity consisting of arbitrage between the spot and futures markets based on carrying costs was found to be low in quality and potentially destabilizing. True speculative activity consisting of arbitraging the futures markets against expected futures prices was found to be the highest quality of speculation