Masters Theses

Rene Gouin

Date of Award

3-1973

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Charles Sappington

Committee Members

Ray Daniel, Frank Leuthold

Abstract

Ten years ago most commodities traded in futures were of the storable type. It was commonly assumed that storability was a pre requisite for a commodity -to be successfully traded in futures. How ever, several nonstorable commodities belonging to the livestock cate gory were introduced on futures markets in the middle 1960's and have met with considerable success. Trading in live hog futures was introduced in 1966 on the Chicago Mercantile Exchange and is now a well-established market.

Since storability was until then conceptually associated with futures trading, this notion was quite central to the "classical" analysis of futures prices. A different frame of analysis is yet to be developed for nonstorable futures prices.

This study focuses on the temporal structure of hog futures prices. The prices of different futures traded at the same time for different times of delivery are considered as one price with a temporal structure, just as simultaneous prices of the same commodity on geographically dispersed market places can be considered as one price with a spatial structure. Thus, the purpose of this study was to search for, and hopefully identify, any systematic or permanent element in the temporal structure of live hog futures prices and to identify any typical reactions of the price structure to specific stimuli such as hog supply outlook news.

Graphical methods were judged appropriate for the exploratory character of this study. Particular features or behaviors in the temporal price structure which appeared in the observations with a relative frequency greater than two-thirds were judged likely to have a systematic character and were therefore embodied in tentative generalizations termed "hypotheses."

Six hypotheses were eventually developed, pertaining to the following points:

1. the seasonal component in the temporal price structure;

2. futures prices' movements in time of unexpected, strong hog cash price movements;

3. the market's performance as a predictor of bullish or bearish cash markets ;

4. the "phase" component in the temporal price structure, reflecting expectations of year-to-year supply variations;

5. the change in value of selected futures spreads over their "lives";

6. futures price changes immediately after the release of the U.S.D.A. Hogs and Pigs quarterly reports, and in the succeeding three months.

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