Price Discovery and Convergence of Futures and Cash Prices

Prices for corn, soybeans, and wheat futures contracts traded on the Chicago Mercantile Exchange and corresponding cash prices at delivery locations frequently failed to converge to the per bushel cost of delivering on futures contracts from 2000 to 2009. We found that convergence failure did not adversely effect the incorporation of market fundamentals from unanticipated information. Essentially identical mark fundamentals, from unanticipated information was incorporated into futures and cash prices when convergence failed. Futures and cash prices moved closer together as contract maturity approached even when they did not converge all the way to the per bushel contract delivery cost, indicating that arbitrage was occurring between the two prices but not completed. Without arbitrage the prices would most likely not incorporate identical market fundamentals from unanticipated information when convergence failed. Our results indicate that the failure to complete the arbitrage between futures and cash prices by driving the difference between them down to per bushel delivery cost at contact maturity affected the ability of the two prices to reflect identical market fundamentals.