Agricultural Commodity Price Hikes Since 2006: Empirical Study on Efficiency of U.S. Futures Market

Well established and efficient agricultural commodity futures markets, are expected to perform the role of price discovery and risk management more effectively. The results of the Johansen’s cointegration tests have shown that the spot and futures markets for the 12 agricultural commodities are cointegrated (during the main and sub-periods of study). This suggests that the markets are efficient and the agriculture commodity futures exchanges (CBOT, KCBT, CME, & ICE) provide efficient hedge against price risks emerging in respective commodities. The Granger causality test results show bi-directional flow of information in majority of the commodities during the main as well as the two sub-periods. This shows both the spot and future markets are equally responsible for the price discovery process. However, examination of the F-statistics indicates a strong flow of information from the futures markets to spot markets than the reverse. The unidirectional causal relationships exhibited by commodities such as wheat, soybean, lean hogs and cocoa, imply that the futures markets help discover prices in the spot markets and that the markets are efficient. The causal relationship results suggest that information flow from futures markets to spot markets appears to have increased over the years. This apparent increase in information flows could be attributed to the increase in the relative importance of electronic trading of futures contracts in recent years, which results in more transparent and widely accessible prices. The results meet our three criteria of market efficiency and suggest that there is no need for changes in the existing regulations of the agricultural futures market.