nderstanding and identifying the components of market price risk is becoming U an increasingly important part of managing an agricultural enterprise. The Food, Agriculture, Conservation, and Trade Act of 1990 (commonly called the 1990 Farm Bill) has reduced the number of farm acres eligible for deficiency payment benefits through the triple base provisions. With additional concern over government expenditures for farm programs and movements toward trade liberalization policies, it is conceivable that the government's contribution toward individual firms' management of commodity price risk will continue to diminish in future years.
An important component in understanding and managing market price risk for agricultural commodities is identifying the relationships between local cash markets and nationally traded commodity futures markets. It has long been argued that futures markets represent an assimilation of all relevant public information regarding the supply/demand relationship for a given commodity in some future time period [Telser (1958); Cox (1986); Garcia, Leuthold, Fortenbery, and Sarassoro (1988)l. Understanding the extent to which local prices are cointegrated with national futures prices is critical in "localizing" futures price information. Without a thorough knowledge of the relationships between local and futures markets, it is difficult to decipher how changes in futures prices can be expected to impact local market agents.
Considerable effort has been devoted to measuring the dynamics of price discovery when both cash and futures markets exist. Recent studies in agricultural markets include Ollerman and Farris (1985); Brorsen, Ollerman, and Farris (1989);Koontz, Garcia, and Hudson (1990);and Bessler and Covey (1991). A common feature of these studies is that they focused on nonstorable commodities. Research on storable commodities is necessary to further understand the causal relationships between futures and cash markets, and lead to a more complete understanding of basis relationships and price forecasting opportunities in these markets. Such work can provide insight into the relative efficiency of markets for storable commodities, as well as provide important information for agents concerned with the process of price discovery and risk. One might expect, for instance, that because of the storage function, cash and futures markets for storables are more highly cointegrated than for nonstorables [Bessler and Covey (1991)l. A test of this