| From its beginnings in the nineteenth century grain trade centered in Chicago, the modern institution of futures trading in the United States has grown and evolved into a complex set of markets far exceeding the scope and function of early futures trading. One particular line of evolution, which brings with it interesting theoretical and practical questions, is the recent development of several futures contracts for trade in goods that either are not or cannot be held in inventory through time.;The present study focuses on the formation of intertemporal prices in inventory and noninventory futures markets. A model is developed in which the futures price is determined as a market equilibrium price that equates planned demand for units of future dated commodity with planned supply. The model posits a production function for future dated goods where output in one period is available only if inputs are applied some number of periods in advance. The model is first developed for case of the storable commodities and then extended to consider intertemporal price determination in the case of nonstorables.;The major conclusion drawn from the theory developed in this study is that inventory-holding of a commodity is not a necessary condition for intertemporal price correlation. Any factors that create interdependency between current and future-dated demand or supply for a futures-traded commodity will tend to induce correlation between pairs of intertemporal prices.;The nature of intertemporal price relationships for three storable commodities, wheat, corn, and soybeans, and four nonstorable commodities, live cattle, feeder cattle, hogs, and iced broilers, is explored empirically. Using estimated correlation coefficients, it is shown that intertemporal livestock prices exhibit positive correlation, though to a lesser degree than the storable commodities studied. It is also shown that for storables and nonstorables alike, intertemporal prices are generally more highly correlated the shorter the spread between the prices. The data used in this study reveal that prices in both intercrop-year and intracrop-year spreads are positively correlated. Finally, a test is performed using ordinary least squares regression techniques to show that intertemporal prices for storable commodities tend to be proportionately related even though both prices in the intertemporal spread are changing, given ceteris paribus changes in expectations concerning future supply or demand for the commodity.;Much of the research in futures trading has been aimed at understanding intertemporal price relationships. However, because the traditional theory in intertemporal price determination depends on the storable nature of goods traded in futures, the development of futures trading in nonstorable commodities has caused accepted theory to lose generality.;The principal objectives of this study are to demonstrate that inventory-holding is not the essential ingredient for futures trading and that the same positive correlation among intertemporal prices for storable commodities is generally to be expected for nonstorable commodities as well. An attempt is made to broaden the perspectives of futures trading by emphasizing that the business of futures trading is the buying and selling today of future-dated commodities. Indeed, the competitive determination of a current price to guide the use of scarce resources in producing future-dated goods may be the most valuable result of futures trading in storables and nonstorables alike. |
