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Abstract:
The main justification for the existence of commodity futures markets is the supposed role they fulfil in ensuring efficient price discovery and price risk mitigation. The futures market price barometer role influences farmers production decisions since these markets supposedly provide commodity price information. This study examined price discovery in the white maize and wheat futures market of South Africa. The Vector Error Correction model was used to investigate the short run and long run relationship between spot and futures prices of white maize and wheat traded on South Africa Futures Exchange Agricultural Products Division. The data for the spot and futures was collected from South Africa Futures Exchange website. The study found that spot prices of wheat and white maize contain useful information which could be used to predict future prices. Furthermore, long run and short run causality was found in the spot and futures price series of white maize and wheat contracts. The study failed to confirm both short run and long run causality from futures to spot prices hence refuting the price discovery role of futures markets. Prices are discovered in the spot markets of South Africa grain markets a finding which suggests that price changes are due to fundamental changes rather than speculation that is characterised with futures markets. The implication of this finding is that farmers have to watch spot market activity as it would determine prices and ultimately influence production decisions.
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