Linkages among agricultural commodity futures prices: evidence from Tokyo

Malliaris and Urrutia (1996) use cointegration to analyse the prices of agricultural commodity futures contracts traded on the Chicago Board of Trade (CBOT). They ® nd a long-run relationship among US grown corn, wheat, oat, soybean, soybean meal and soybean oil futures prices and assert that this empirical ® nding is consistent with two alternative hypotheses. The ® rst is that common economic fundamentals cause long-run comovements as a result of commodity substitutability or complementarity. Comovement is also fostered by similar US Government farm and regulation programmes and, as Stevens (1991) and others point out, by weather and general climatological factors. The second is the excess comovement hypothesis (ECMH) of Pindyck and Rotemberg (1990), who provide evidence that the raw prices of several unrelated commodities, such as wheat, cotton, copper, gold, crude oil, lumber and cocoa, tend to move together. They argue that this price comovement may be partially the result of the presence of herding in the ® nancial markets (i.e. traders being bullish or bearish on all commodities for no apparent reason) and dub this behaviour excess comovement because it may exist in addition to the comovement attributed to common fundamentals. The purpose of this letter is to examine which of these two hypotheses better explains the often observed long-run interdependency of agricultural commodity futures. This task is accomplished by investigating the dynamic linkages among the prices of corn, redbean, soybean and sugar futures traded on the Tokyo Grain Exchange (TGE). Unlike the CBOT, the underlying cash crops of the TGE contracts are produced in a number of countries and under diŒerent weather conditions. The spatial disperson of the growing regions of these cash crops makes it possible to use cointegration tests to distinguish between the viability of the common fundamentals hypothesis and the ECMH.