The soybean complex spread: An examination of market efficiency from the viewpoint of a production process

✍ Scribed by Robert L. Johnson; Carl R. Zulauf; Scott H. Irwin; Mary E. Gerlow

• Publisher: John Wiley and Sons
• Year: 1991
• Tongue: English
• Weight: 875 KB
• Volume: 11
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990110104

✦ Synopsis

arket efficiency is an important topic of research in the academic community.

M Futures market efficiency means that futures prices accurately incorporate all currently known information. Therefore, current futures prices are unbiased forecasts of subsequent cash and/or futures prices. Futhermore, traders cannot earn abnormal returns (see Fama (1970)). Previous studies have examined the efficiency of futures markets from the viewpoint of whether futures prices follow a random walk; whether futures prices are efficient forecasts of subsequent prices; and whether profits can be generated from trading rules.

This research tests for trading profits by applying a profit margin trading rule to the intercommodity spread of soybeans, soyoil, and soymeal (i.e., the soy complex). The trading rule applied in this study has been tested extensively in hedging studies. The rule calls for initiating trades when a pre-specified level of implied profit exists. Implied profit is derived from currently-quoted futures prices for the output of the production process and estimated production costs.

One approach used to estimate production costs employs cash prices, historical prices, and/or imputed opportunity costs for variable and/or fixed inputs. Hedging studies employing this approach usually hedge only the output price (for examples of crop studies see Frank et ul. (1989); soybeans;and Wood, et al., (1989); cotton; for examples of livestock studies see Holland, et ul. (1972); fed cattle; Leuthold and Pe-

The authors thank Tom Sporleder, Luther Tweeten, and two anonymous journal reviewers for their comments and insights on earlier drafts of this article.