Testing the efficiency of the South African futures market for white and yellow maize.

Abstract

An efficient futures market should provide a forecast of the future spot price which reflects all publicly available information; ideally, for effective price discovery such forecasts would also be unbiased. The trading of maize futures contracts began in South Africa (SA) in mid-1996 after the power of the Maize Board to set maize producer prices was abolished. Cointegration analysis of the efficiency of SA white and yellow maize futures markets shows that (1) the futures price for white maize was a biased predictor of the spot (cash) price for white maize in 1997, but an unbiased predictor in 1998 (evidence of a market learning process), and (2) the futures price for yellow maize was an unbiased predictor of the spot (cash) price for yellow maize in 1997 and 1998. White maize is predominantly used for human consumption and SA is considered a leader in the world market for white maize. Yellow maize is mostly used for animal consumption and is traded internationally on the Chicago Board of Trade in the United States of America. This makes the domestic futures price for yellow maize more susceptible to international maize marketing conditions than the domestic futures price for white maize. The relatively greater volume of trade in yellow maize would provide more reliable information about crop and market prospects to futures traders. Local producers of white and yellow maize can, therefore, use price information derived from recently introduced white and yellow maize futures contracts to forecast likely local white and yellow maize cash prices. This information can help them to decide whether, and what portion of their crops, to hedge against price risk using futures trading, and what cash prices to negotiate with millers and traders. Both markets, however, suffer from past spot price information having a significant effect on current spot prices. This violation of efficiency implies that futures market participants can use this information to make abnormal profits. There is a lack of spot price information in the maize industry, as there is no readily available price recording system that participants can use. The development of such a system would aid users in price discovery and allow for better decision making by participants.