Price discovery dynamics in European agricultural markets

• Published date: 01 May 2018
• Date: 01 May 2018
• DOI: http://doi.org/10.1002/fut.21891

Received: 22 December 2016

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Accepted: 11 October 2017

DOI: 10.1002/fut.21891

RESEARCH ARTICLE

Price discovery dynamics in European agricultural markets

Philipp Adämmer

1

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Martin T. Bohl

2

1

Department of Mathematics/Statistics,

Chair of Applied Stochastics and Risk

Management, Helmut Schmidt University,

Hamburg, Germany

2

Department of Economics, Chair of

Monetary Economics, University of

Münster, Münster, Germany

Correspondence

Philipp Adämmer, Department of

Mathematics/Statistics, Chair of Applied

Stochastics and Risk Management, Helmut

Schmidt University, Holstenhofweg 85,

22043 Hamburg, Germany.

Email: adaemmer@hsu-hh.de

This article examines the influence of European agricultural futures contracts on price

discovery during periods of price turmoil and rising trading activity. We use a hand-

collected data set of spot and futures prices for canola, wheat, and corn and show that

the impact of the futures markets was high during the first period of price spikes (2007

to 2009) but lower during the second one (2010 to 2013). These results are noteworthy

as more trading activity in futures markets did not lead to a higher influence on spot

prices.

KEYWORDS

common factor weights, european agricultural markets, price discovery, time-varying VECM

JEL CLASSIFICATION

G10, G12, G13, Q10

1

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INTRODUCTION

Despite being praised during calm economic periods for facilitating reliable price information and serving as hedging

instruments, futures markets are quickly blamed when commodity prices spike on allegedly unwarranted grounds. Since the

early 2000s, commodity markets have faced significant changes in terms of investor structure, trading volume, and open interest.

These institutional changes in combination with the recent turmoil in commodity prices have renewed the interest in the pricing

process in agricultural markets (Irwin & Sanders, 2012).

It has been early hypothesized that futures markets react quicker to new information than spot markets due to higher liquidity,

more transparency, and lower transaction costs (Black, 1976; Working, 1962). The empirical investigation of price discovery in

agricultural markets has been predominantly devoted to the US, most likely because of the global relevance and long history of

US futures exchanges. The empirical findings underscore the dominant role of futures markets in the price discovery process and

they are qualitatively similar for samples before and during the years of price turmoil. This suggests that the financialization did

not significantly disrupt commodity pricing in agricultural futures markets (e.g., Brockman & Tse, 1995; Brorsen, Bailey, &

Richardson, 1984; Covey & Bessler, 1992; Dwyer, Holloway, & Wright, 2012; Hernandez & Torero, 2010; Peri, Baldi, &

Vandone, 2013).

Studies which focus on European markets are scarce, despite the fact that Europe obtains a large share of global agricultural

production (USDA, 2017). Similar to the US, European spot markets have faced significant institutional changes in recent years,

such as the abolition of high guaranteed fixed prices, which has led to international competition and higher hedging needs for

European producers (European Commission, 2011). Hence, European futures exchanges have become more relevant for the

agricultural business. Institutional differences between North America and Europe impede the use of US findings to derive

implications about the pricing mechanisms in Europe. For example, US markets have already been very liquid before the recent

periods of price spikes. The average monthly trading volume of US corn contracts traded at the Chicago Board of Trade between

2000 and 2006 was about 1.8 million. This exceeded three hundred times the volume of the corresponding European contract.

The trading volume of US wheat exceeded Europe's by 50 and in the case of canola by 10. In addition, the largest commodity

J Futures Markets. 2018;38:549–562. wileyonlinelibrary.com/journal/fut © 2018 Wiley Periodicals, Inc.

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