Risk, Futures Pricing, and the Organization of Production in Commodity Markets
This paper examines equilibrium in a spot and futures market with both primary producers (growers) and intermediate producers (processo rs). For a commodity that is subject to output shocks, processors tend to hedge long, in contrast with J. R. Hicks's theory of futures hedging. Nevertheless, if transaction costs are low, the two-stage production process brings about a downward futures price bias, consistent with Hicks's pricing prediction. But if costs of trading futures are high, growers tend to be differentially driven from the futures market, reversing the direction of the bias. Futures trading may also affect the organization of industry. Copyright 1988 by University of Chicago Press.