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Was the Pea Futures Contract Doomed to Fail? An Analysis of the 1995 Canadian Contract

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Author Info

  • Lyster, N.V.
  • Lerohl, Mel L.
  • Unterschultz, James R.

Abstract

Feed peas are relatively high in energy and protein and compete with other feed grains and protein crops in the livestock feed market. Prior to 1995, a futures market did not exist for this commodity. To meet industry demand for a hedging and forward pricing mechanism, the Winnipeg Commodity Exchange (WCE) introduced a feed pea futures contract in November 1995. This study investigates the Canadian feed pea market prior to and during the startup of this first WCE feed pea futures contract. In particular, the study explores whether the WCE could have conducted an analysis using then-existing data that would have assisted in the design and establishment of the futures contract. The primary research objective was to determine the ability of the Winnipeg feed pea futures contract, as first specified in November 1995, to provide a price discovery mechanism and to reduce pricing risk. Historical feed pea price data and key concepts related to successful futures contracts were evaluated. Feed pea price data available to the WCE before and just after introduction of the futures contract were analyzed to compare pea prices in Canada to pea prices in Europe. This analysis evaluated the potential for success of the WCE feed pea futures contract. The analysis included (1) measuring absolute and relative price risk in feed peas and other North American crops; (2) comparing the basis (costs to move the product between one market and another) of feed peas to the basis for other crops traded between North America and Europe; (3) carrying out Granger causality tests to compare price determination in North America and Europe; and (4) conducting cointegration tests to assess the relationship between the Canadian and European feed pea markets. We argue that this is the analysis the WCE could have conducted to assist in designing and establishing the 1995 feed pea futures contract.

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File URL: http://purl.umn.edu/45693
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Bibliographic Info

Article provided by Canadian Agricultural Economics Society in its journal CAFRI: Current Agriculture, Food and Resource Issues.

Volume (Year): (2001)
Issue (Month): 02 ()
Pages:

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Handle: RePEc:ags:cafric:45693

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Web page: http://caes.usask.ca/papers/cafri/index.php
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Related research

Keywords: International Relations/Trade; Risk and Uncertainty;

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