Dr. John Robinson

Associate Professor and Extension Economist
Cotton Marketing

Department of Agricultural Economics
Texas A&M University
Phone: (979) 845-8011
2124 TAMU, College Station, TX 77843-2124
jrcr@tamu.edu

Marissa Chavez and Moonsoo Park

Graduate Students

Department of Agricultural Economics
Texas A&M University
2124 TAMU, College Station, TX 77843-2124

Phone: (979) 862-4014

mjchavez@ag.tamu.edu

Dr. Vicky Salin

Associate Professor
Agribusiness Management and Finance

Department of Agricultural Economics
Texas A&M University
Phone: (979) 845-8103
2124 TAMU, College Station, TX 77843-2124
v-salin@tamu.edu

Abstract

One of the most debated underlying principles regarding futures markets is whether or not these markets are efficient and whether participants can earn a return in these markets by forward pricing. The U.S. cotton futures market is no exception. Several studies have been conducted on the efficiency of the soybean and grain futures markets but there is a lack of research when looking at the cotton futures market. Following Fama’s definition of efficiency and principles of modern finance, there may be a price bias present in the cotton futures market which is the compensation for risk. This price bias would then be displayed as either normal backwardation or a contango. Kolb (1992) takes this idea and analyzes several different commodity markets, testing for normal backwardation and/or contangos. Meanwhile, Zulauf and Irwin (1998) analyze the efficient market hypothesis and its application to commodity futures market. They identify different marketing strategies commonly used to generate income. One such strategy, the systematic strategy utilizes an indicator variable when deciding what position to take on in the market.

Focusing first on Kolb’s work, we test the cotton futures market for normal backwardation (price bias). We then take a closer look at the underlying principle of systematic strategies and focus on economic indicators that may have some relation to the movement of cotton prices. By analyzing different indicator variables, we can gain a better understanding of external factors that may influence cotton prices; thereby, allowing market participants to better formulate strategies to implement in the cotton futures market.