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Could packers manipulate spot markets by tying contracts to futures prices? And do they?
Author(s) -
Xia Tian,
Crespi John M.,
Dhuyvetter Kevin C.
Publication year - 2019
Publication title -
canadian journal of agricultural economics/revue canadienne d'agroeconomie
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 37
eISSN - 1744-7976
pISSN - 0008-3976
DOI - 10.1111/cjag.12179
Subject(s) - futures contract , cash , tying , economics , financial economics , price discovery , spot contract , forward market , microeconomics , business , monetary economics , finance
Some producers, policy makers, and researchers claim that packers influence cash prices through contracts tied to futures prices. This paper provides a theoretical and empirical study on the price effects of contract‐pricing terms linked to futures price and the related formula pricing terms linked to a cash price. We show that contract‐pricing terms tied to a cattle futures price can theoretically be used to reduce the cash price. Furthermore, the model demonstrates that such tied‐to‐a‐futures‐price contract‐pricing clauses and the related tied‐to‐a‐cash‐price formula pricing clauses can be substitutable tools for packers to depress the cash cattle price. Nevertheless, although empirical results are consistent with the predictions of the theoretical model they show that while such manipulations may occur, their market power impact appears quite small.