China's Wheat Futures Market Price Discovery And Study Of The Mechanism Of Conduction

As one of the main food in China, wheat plays a crucial role in food security andsocial stability. Wheat production cycle is long and easy to be affected by naturalconditions and market changes, which results in the volatility of wheat production andprice. In order to avoid the risk of wheat price volatility, futures, as a standardizedcontract which fixes the future price of a transaction is created. Worldfuturestransaction has been constantly growing and played an important role in pricediscovery and hedging since the first standardized futures contracts was introduced byChicago Board of Trade in1865.At the beginning of2007, international food prices growth rapidly. Wheat pricesrose as high as112%in2007. However, the soaring international food prices droppedsignificantly in the second half of2008and sustained volatilityin recent years. Therelationship between thespot and futures prices of international wheat is relativelyclose,and the futures prices play an important role in the spot price. However, underthe situation of international wheat futures and spot price volatility, China’s wheatfutures and spot prices remain relatively stable upward trend, and show differentbehavior with the international market. A number of international research institutionsascribe the international food price volatility to agricultural Financialisation andexcessive speculation in future market. Some other scholars believe that thegrowingdemand of wheat in China, India and other developing countries produce the increasein international food prices.In this paper, we firstly make a brief review of the futures market theory andChina’s futures market development, then select the futures price data of Qiang Wheatand Pu Wheat in China’s first futures exchange-Zhengzhou Commodity Exchangeand the futures prices of wheat in Chicago Mercantile Exchangefrom2007to2012and make ADF unit root test and cointegration analysis on these data. Secondly, weselect the futures price data of Qiang Wheat and Pu Wheat in Zhengzhou CommodityExchange and spot price data of wheat in Zhengzhou grain wholesale market from2007to2012and establish the VAR model for Johanson co-integration test andGranger causality test, and then make impulse response function and variancedecomposition of the futures and spot market. The main conclusion of this paper isfollowing:1．During two decades of development,the size of the transaction of China’sfutures market continues to expand and management become more standardized. Compared with the mature international futures market trading system, there is still alarge differences and gaps in management mode of China’s futures market.2．Under the situation of the international wheat futures price volatility, futuresprices of wheat inZhengzhou Commodity Exchange and Chicago MercantileExchange are different. Further, there is no long equilibrium relationship between thedomestic and foreign futures market. The reason for this phenomenon is thatChina’sfutures market run ina membership-based management system and the transactiontime is limited and etc.Therefore, China’s futures market should be further improvedand perfected.3．Domestic spot price of wheat increasesin a steady-state due to the wheat policyof Chinese government.Futures price of Pu Wheat have a better price discoveryfunction on the spot price, while Qiang Wheat futures price have a relative bad pricediscovery function.Further, there is a strong price linkage between the Qiang Wheatand Pu Wheat futures. Moreover, from the results of Granger causality test andvariance decomposition, the spot market has an stronger impact on the futures market,which further indicates that the spot market is the basis of the futures market.Therefore, in order to supporting the development of China’s futures market, thegovernment should firstly meet the needs of spot market of wheat.