An examination of the Australian wheat futures contract

This paper assesses whether the recently delisted Australian wheat futures contract was able to provide an efficient hedging mechanism for wheat market participants. Johansen's multivariate cointegration method, which takes into account nonstationarity in price series, was implemented to establish the existance and nature of the relationship between the Australian wheat futures and spot markets. This method enabled testing for the presence of a long-run equilibrium relationship between the futures and the spot price series, which is indicative of market stability and efficiency, as well as testing for short-run deviations from the long-run equilibrium, which is indicative of the price discovery process. Furthermore, the nature of any such relationships was explored via the testing of expectations hypothesis. A statistically significant cointegrating relationship was only found to exist for the one-month contract, indicating that market participants could utilise futures contracts with one month to maturity to aid their production planning.