PERFORMANCE EVALUATION OF SOME AGRICULTURAL FUTURES MARKETS

This study evaluated the economic performance and statistical forecasting accuracy of some major agricultural futures markets relative to production and marketing decisions. The objectives were to: analyze the intertemporal price relationships between cash and futures markets; develop strategies associated with production and marketing decisions which incorporate both cash and futures prices; and evaluate the performance of alternative strategies to reduce unfavorable price fluctuations and increase realized profits. To achieve these objectives, a forecasting model, one of the forecasting approaches, was developed. The profitability of selective hedging by producers and marketing firms depends upon their ability to accurately forecast prices, costs and basis. Two categories of production and marketing strategies--forecasting strategies and forecasting-futures strategies--were also considered for each commodity. The futures market performance of forecasting future cash prices was evaluated by single linear regressions with futures prices as the independent variable and cash price as the dependent variable. The economic performance of each decision strategy was evaluated with respect to additional profitability, commodity by commodity. Historical data supported the conclusions that for grain and livestock, the futures market provides moderately reliable estimates of the cash prices for several months into the future. If one has a more accurate econometric model to be used for forecasting future cash prices than the direct use of the futures market prices, then profits can be increased for production and marketing of grain by adopting selective hedging strategies. Selective hedging also increased returns for hog feeding. However, selective hedging for cattle feeding resulted in lower returns than under the forecasting strategy during the study period. Economic efficiency would suggest that producers and marketing firms may have the potential for increased profits from using the decision strategies to reduce price risk and increase profitability. Their performance may also be improved with inclusions of production decisions based on the potential expected revenues among competitive enterprises. Furthermore, the decision strategies could also be used as a public advisory service to each industry with model respecification and implementation.