Price Discovery through Crude Palm Oil Futures: An Economic Evaluation 1

By Fatimah Mohd. Arshad Zainalabidin Mohamed Faculty of Economics and Management Universiti Putra Malaysia 43400 Serdang Selangor Malaysia Email: fatimah@econ.upm.edu.my zam@econ.upm.edu.my

Abstract
This paper examines the forward pricing efficiency of the local crude palm oil (CPO) futures market. In an efficient market, the relevant signal to be used by -the producers, traders and processors is simply the futures price. The forward pricing efficiency is measured in terms of the forecasting ability of Malaysian crude palm oil futures price on physical price. The relative predictive power of futures price is compared with the various forecasts estimated from proven forecasting techniques like moving average, exponential smoothing, Box Jenkins and econometric. The relative predictability of futures price as a forecast for spot prices during various months before delivery is also measured.

INTRODUCTION
Commodity futures trading was introduced in Malaysia in October 1980 with two major economic purposes. Firstly, to provide an efficient price discovery mechanism for the palm oil industry and other agricultural commodities. Secondly, to provide a hedging mechanism against the risk of price instability. Like any other agricultural commodities, Malaysian palm oil is subjected to significant price fluctuations. The palm oil prices fluctuated without any clear trend or cyclical pattern in the last three decades. The degree of price instability can be measured by using instability indices. As shown in Table 1, palm oil prices are relatively volatile in comparison to commodities like cocoa, rubber and petroleum at the international market. Instability indices for the Malaysian market show similar instability in the price palm oil as compared to other commodities. The volatility in palm oil prices is a significant risk to producers, traders, consumers and others involved in the production and marketing of palm oil. In situations of considerable uncertainty and high risks, price forecasts are necessary to help decision-making. Accurate price forecasts are particularly important to facilitate efficient decision making as there is time lag intervenes between making decisions and the actual output of the commodity in the market (Mad Nasir and Fatimah, 1991). Hence, futures market is necessary to provide the price discovery function for the market participants to guide them in their production, consumption and financing decisions. Besides, hedging on futures is one of the effective risk management strategies available to reduce the associated risks that producers and traders are exposed to. In the past, local traders have to rely on quoted prices of
1

This is a reprint of Fatimah Mohd. Arshad and Zainalabidin Mohamed (1994): "Price Discovery through Crude Palm Oil Futures Market: An Economic Evaluation," in Erdener Kaynak and Mohamed Sulaiman in proceedings on Third Annual Congress on Capitalising the Potentials of Globalisation - Strategies and Dynamics of Business, Penang: International Management Development Association (IMDA) and Universiti Sains Malaysia, pp. 73-92.

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soybean in distance markets in Rotterdam, London and Chicago for price reference and hedging. This often turned out to be unsatisfactory since soybean oil prices did not reflect the true characteristics of palm oil market. Factors determining the changes in soybean oil market are different from those affecting palm oil. Traders’ previous reliance on foreign futures market might have led to inefficient price transmission (due to distance factor), irrational production and stockholding decisions. The first commodity to be traded was crude palm oil (CPO), followed by rubber RSSI in 1983, SMR20 in 1986, tin in 1987 and recently cocoa in 1988. The performance of futures contract at Kuala Lumpur. Commodity Exchange (KLCE) is presented in Table 2. The CPO market has been growing steadily since 1980 with the average daily turnover increasing from 122 lots in 1980 to 776 lots in 1983. However, in March 1984, the market suffered a temporary setback due to market defaults. The market began to recover by early 1986. Since then trading recovered progressively. The CPO market recorded high turnovers in 1991 totalling 321,072 lots with daily average of about 540 lots or 13,500 tonnes. Table 1: Degree of Price Instability of Selected Commodities Market/Commodity Percent deviation from trend 17.75 19.70 23.21 28.80 14.65 13.79 14.37 RMSD c/ 18.23 16.04 18.45 8.99 Instability Index

INTERNATIONAL a/ Soybean oil Palm oil Groundnut oil Coconut oil Cocoa Rubber Petroleum MALAYSIA b/ Palm oil Natural rubber Cocoa Sawn timber

1.92 2.24 2.26 3.12 1.46 1.42 1.16 MBI d/ 2.09 1.77 2.09 0.93

Source: World Bank, as quoted in Larson, 1991 Fatimah et al., 1991 Note: a/ b/ c/ d/ Figures based on monthly prices from January 1979 to June 1990 Figures based on annual prices from 1965 to 1989 Root Mean Squared Deviation Index of Instability Macbean Index of Instability

The local market is relatively new compared to other established futures exchange in other parts of the world. Hence, little research has been attempted to measure and assess its performance. One area which is of particular importance is pricing efficiency which is defined as to degree to which a commodity’s price reflects demand supply conditions in a market. There are at least two elements of pricing efficiency: the degree to which a commodity’s price is determined by competitive forces and the speed with which a commodity’s price or price quotation incorporates information about changes in demand - supply conditions (Burns, 1983). In short, it refers to a market where there are many wellinformed traders whose action lead to market prices which reflect all information (Veeman and Taylor, 1987). If the futures market is efficient, then the futures prices should be unbiased estimate or forecast of the cash price at contract maturity. Inaccuracies in forward pricing may cause a social welfare loss due to misallocation of resources by producers using futures prices as expected prices in their production decision (Kamara, 1982, and Cox, 1976).

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This paper addresses the question on the forward pricing efficiency of the crude palm oil futures. The following paragraphs present the theoretical framework of testing the necessary condition of pricing efficiency. This is followed by discussion on the methodology, result and conclusions.

Table 2: Total turnover of futures contracts on the KLCE, 1980-94 (in lots)

Year

Crude Palm Oil

RSS 1

SMR20

Palm Kernel

Tin

Cocoa

RBD Palm Olein

Crude Palm Kernel Oil

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Note:

5,600 32,587 56,237 191,685 50,757 822 41,303 131,303 207,185 261,871 241,984 320,199 255,870 358,176 567,898

1724 12499 4296 -

1020 79 2543 499 -

-

180 35 6441 15830 5772 10702 12016 3133 7721 10687 156 2376 2240 18 519 156 -

2721 7172 208

Source: Kuala Lumpur Commodity Exchange One lot is equal to 25 metric tonnes for crude palm oil, 10 tonnes for RSS1, SMR 20 and cocoa, 5 tonnes for tin and 15 tonnes for crude palm kernel oil. The crude palm oil contract was introduced in October 1980, RSS1 rubber in September 1983, SMR20 in March 1986, tin in October 1987, cocoa in August 1988, rbd olein in February 1990 and crude palm kernel oil in October 1992.

FUTURES MARKET EFFICIENCY
Many studies on futures market efficiency utilised Fama’s concept developed in 1970. According to Fama, an efficient market generates price, which at any point in time always reflect all available information. Thus at any point in time, t, an actual price will emerge that reflects current information on supply and demand. Simultaneously, current expectation concerning future levels of supply and demand will be fed into the today’s futures price of a contract maturing in time t + j. According to Tucker and Fuller (1986), the market is efficient if futures prices exhibit two separate though related characteristics. First, futures price will follow a random walk model as suggested by Samuelson (1965). In a perfect market, futures price will behave as a martingale model. Second, futures prices will provide the best available estimates of the subsequent actual prices (or matured futures prices). Whether futures prices are unbiased estimates of subsequent cash prices remain an empirical issue, Roberts (1967) and Fama (1970) classified three different types of test concerning efficiency of market as “weak”, “semi-strong” and “strong” form. Weak form test relies on a historical set of prices often reduce to test on the randomness of prices. The market is said to be semi-strong if prices reflect all publicly available information as it is released. A strong-form test examines if any particular group in the market has monopolistic access to information as it is released. Most studies on efficiency tend to cluster around the “semi-strong” form using linear regression.

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Many studies have examined the pricing accuracy of futures market. Tomek and Gray (1970), Leuthold (1974) and Kofi (1973) investigated the forecasting ability of futures markets within the context of allocative efficiency. Tomek and Gray compared price relationships of two storable commodities, corn and soybeans, with non-storable commodity, Maine potatoes. All three are produced seasonally but while stocks of corn and soybean are held continuously from harvest to harvest, stocks of potatoes are not. They found that corn and soybean market prices are relatively a better forecast then potato market prices. The difference in pricing performance between these markets indicates the significance of stock on the price spread and the influence of expectations on the price level. Kofi’s study provides further support to Tomek and Gray’s finding. He examined the Chicago’s futures market for wheat and maine potatoes during 1953-69. He found that storable commodity, in this case wheat, provides relatively reliable forecasts of cash prices at any point in time. Kofi also shows that the longer the horizon, the worse the futures market performs as a predictor of spot prices. Leuthold (1972) also found that futures price were efficient forecasts of spot prices for only nearmaturity dates. He also compared futures prices of live beef representing a non-storable commodity with corn - a commodity with continuous production. Despite the clear differences between the two with respect to storage and production, he found no significant difference in the pricing accuracy. He showed that futures prices were efficient forecasters of spot prices for only near-maturity dates. Stein (1981), carried the analysis a step further and placed emphasis not only the biasedness of futures market forecasts but, in addition, on the variance of the forecast error. Stein concluded that futures prices earlier than four months prior to delivery are useless forecasts of closing prices. Leuthold and Hartman (1979) examined monthly average of daily futures prices of live hogs during 1971-78. Using an economic forecasting model as a performance norm, they found that the futures market “has not at all times fully reflected available information”. Peck (1975) found that futures prices for eggs are as accurate as several econometric models examined. Giles and Goss (1980) studied the forward pricing functions of wool using General Instrumental Variables Estimator (GIVE). The results support the view that lagged futures prices are unbiased estimates of delivery date spot prices for wool with lags one to 12 months, and for live cattle with lags from one to three months. This hypothesis is generally accepted for wool (except for lags of 3 or 12 months) and is rejected for beef. Recent works by Bigman, et al., (1983) further support the previous findings on futures price efficiency, i.e., the market is inefficient for the more distant futures contract. Rausser and Carter (1983) examined the forecasting accuracy of futures prices versus multivariate and ARIMA models, for various soybean futures. They found that the multivariate and ARIMA models, “outperform” the futures market for soybean meal but not for soybean oil both for long and short-run horizons. Earlier, Rausser and Just (1979) examined the forecasting accuracy of futures prices versus’ econometric models for average quarterly cash price of several agricultural commodities. Their findings are inconclusive as to the strength of each model. They indicate striking differences among markets, reflecting different degrees of available information. Besides, there is a sufficient degree of information independence between the econometric forecasts and futures price. Fatimah and Zainal (1991) have estimated the relative forecasting accuracy of futures price on spot .compares to well proven statistical techniques like Box-Jenkins, econometric and various types of moving averages. They have shown that futures prices outperforms the other techniques in forecasting forward price. In view of the mixed results and findings, it is highly probable that in the event of inaccuracies in forward pricing it may have caused social losses in particular in the non-inventory markets. Social losses are minimised in an inventory market where futures prices are reliable forecasts. Kamara (1982) indicated that more research is needed to determine the magnitude of the avoidable social

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losses, and more important, to examine the causes of these inefficiencies. Some of the factors that contribute to the inefficiencies are lack of a sufficient proportion of producers and firms actively trading in the market (suggested by Leuthold and Hartman, 1979 and Cappoza and Cornell, 1979). Other causes of inefficiences include irrational trades, poor-quality speculation, tax effects, misinterpretation of information, transaction costs and others. Theoretical and empirical research in this area is yet to be explored.

METHODOLOGY
For the purpose of analysis, this paper utilises, firstly, the traditional efficient market model ( Hanson and Hodrick, 1980, Bilson, 1981 and Birgman et al., 1983). Secondly, the recent efficient market hypothesis by Rausser and Carter (1983) where it is contended that inefficiency implies that a model does exist whose forecasts are more accurate than the futures market. Following are brief review of the two models.

Traditional Efficient Market Model
Empirical tests of futures market efficiency are commonly formalised as regression tests that assume models of the form ST = a + bFt,T + Ut (1)

Where ST is the spot price at delivery date, Ft,T is futures price quoted at time t for delivery date of T, and Ut is an error term. The hypothesis that the market is efficient is formalised in this model by the null hypothesis Ho : a = 0 and b =1, under the assumption that Ut , the random disturbances, are independent and identically 2 distributed with Ut N ( O, σ ). Consider now a sequence of futures prices FI,T, FIt+1, T, FT-1,T quoted at consecutive trading dates for the same delivery date. If the market is efficient than in each regression of the form ST = ai + bi FT - I, T + UT – I i = 1, ….., T-1 The efficiency hypothesis implies ai = 0 and bi = 1 for all i, where I denotes the number of weeks (or days) before accumulation of information with the passage of time monotonically with T-i. Hence, the prices on near futures spot prices than the more distant futures contract prices. (2)

where UT – I are serially uncorrelated and delivery at which futures is quoted. The 2 suggest that R value should increase contract should better estimates delivery

Rausser and Carter Efficient Market Hypothesis
According to Rausser and Carter, market efficiency can be tested by examining the relative accuracy of futures price forecasting ability compared to established and well proven forecasting methods. If there exists a model that is more accurate than the futures market forecasts, the market is than considered as inefficient. This condition however is only necessary. According to the writers, sufficiency can be obtained by including the condition that the cost of building and utilizing the model is less than the incremental benefits appropriately adjusted by risk (relative cost/benefit). Both conditions are necessary and sufficient for the inefficiency property of commodity futures market. In view of limited literature on the second condition, this paper will only focus on the first necessary condition of inefficiency. That is, if there exist a more accurate forecasting model than the futures market, than the market is not effectively processing information and thus is relatively inefficient.

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This study compares the forecasting ability of futures prices on physical prices with four major forecasting techniques namely univariate (Box-Jenkins), exponential smoothing, moving average and econometric modelling. The following are brief review of the selected techniques. Futures price on physical price The futures prices of each contract month (quoted between one to four months ahead) are compared to the physical prices of the contract at the maturity date. The forecasting ability of the futures price is measured by the error of the two prices which is defined as the difference between the physical and futures price. The underlying hypothesis that is to be tested here is futures price is an accurate forecast of forward physical. Hence statistical error should be at its minimum (the measurement of which is described in the later paragraphs). Univariate Box-Jenkins model is based on the model developed by Box and Jenkins (1976). This study utilises the model identified by Fatimah and Ghaffar (1987) for CPO price series which is in the form of seasonal moving average which can be presented as follows: (1 – B) – (1 – B ) t = (1 – B)(1 – B – B ) or MA (0,1,1) (0,2,2)6 The chosen model is then fitted into the data from January 1982 to December 1990 which produces the following estimates (with t – values in the parentheses) θ = - 0.29067 (- 2.848) 2 θ = 1.2240 (12.959) 12 θ = - 0.44687 (- 4.7455) Fatimah and Ghaffar (1987) have shown that the identify model is highly efficient in short term forecasting in particular up to one to three months ahead. Forecasting studies by cooper (1973), Bourke (1979) and Brandt and Bessler (1981) indicate the superiority of the Box-Jenkins univariate model over econometric model despite being criticized as devoid of economic theory. The proven superiority of this method would provide a suitable basis of comparison on the ability of futures market to discover accurate forward prices. If the univariate approach could generate better forecast than the consensus of the futures market participants, it can be deduced that some elements of inefficiencies might have led to irrational decision. Exponential smoothing method utilised here are: Holt Winter’s Additive Seasonal and Holt Winter’s Multiplicative Seasonal approaches (Winters, 1960 and Chatfield, 1978). These models are chosen as they may easily be generalised to deal with time series containing trend and seasonal variation. The Holt Winter’s Method is based on three smoothing equation for this method is as follows: St = αXt + (1 - α) (S t-1 + bt-1) / I t-L Where X is the series, I is seasonal adjustment factor, L is the length of seasonality and b is trend component. The ex-post forecast equation for m period ahead (test period) is as follows: F
t+m 1 2 6 6 12

= (S t + bt M)

I t-L+m

Moving average method is a simple forecasting technique to determine the influence of past data on the mean (as a forecast) and to ascertain the number of past observations will be included in a mean (Markridakis, 1983). Moving average is used to describe this procedure as each new observation becomes available, a new average is computed by discarding the oldest observation and including the latest one. Ale moving average is then used to forecast for the next period. This study has computed

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two to six months moving averages (MA) both for physical and futures prices. The forecasts are then compared to actual cash and futures prices. Econometric model is based on the model developed by Mad Nasir et al. (1993) which is represented by the following equation: PPO t = (SPO t , TC t , PPO t-1 , PPO t-2 , DUM) where PPO t is the price of crude palm oil, at time t SPO t is the ending stock of palm oil, TC t is the total consumption of palm oil and DUM is a dummy variable of price fluctuation over the period to capture the seasonally. Econometric model for the estimated equation of the price of crude palm oil is as follows: PPO
t

=

242.316 (-2.709) - 167.517 FEB (-2.637) - 213.474 JUL (-3.233) - 94.995 DEC (-1.598)

- 0.18772 SPO (1.572) - 178. I81 MAR (-2.432) - 145.160 AUG (-2.182)

t

+ 0.21615 TC (5.672) - 81.618 APR (-1.297)

t

+ 1.255 PPO (7.321)

t-1

- 0.360 PPO (-2.266)

t-2

- 118.667 MAY (-2.341) - 102.595 OCT (-1.783)

- 179.861 JUN (-3.023) - 81.850 NOV (-1.161)

- 101.747 SEP (-1.885)

R = 0.9015

2

D.W. = 2.0746

SER = 103.928
2

The estimated equation seems to fit the data well, as evident by the R and T-values which are 0.9015 and 2.0746 respectively. All estimated coefficients have the expected signs, except for the estimation for consumption variable where it is insignificant. The model postulates that CPO prices are significantly related to the three variables considered, i.e.., stock levels, total consumption and lagged price. In particular, the model shows that price are highly sensitive to changes in stock level where the short-run price flexibilities to stock levels was estimated to be -1.41. Some forecasting studies (Lcuthold et al., 1970) and Gellatly (1979) indicate that econometric method provides superior prediction compared to other techniques. Unlike univariate forecasting, econometric model takes into account other major macro-economic variables into its system. It renders the method as more realistic as it is able to capture the dynamics of the structural changes in the market. The constructed models or techniques are then examined on the basis of whether each significantly “outperforms” the forecasting ability of the futures price. Performance of the model is measured by the validity of its estimate on the basis of its forecasting power. ‘Re results are evaluated using indicators like the Root Mean Square Simulation Terror (RMSE), Root Mean Square Percentage Error (RMSPE) and Theil’s inequality coefficient (U-statistic). The RMSE for the variable A, given by RMSE = [ 1/T Σ
T t=1

(P t – A t ) ]

2 1/2

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where T is number of periods in the simulation, P is the predicted value and A is the actual value. It measures the deviation of the predicted value from its actual time path. The RMPSE is defined as;

RMPSE = [ 1/T Σ

T t=1

(P t – A t /A t ) ]

2 1/2

The Theil’s inequality coefficient (U-statistic) is defined as follows: U = 1 Σ t=1 (P t – A t ) T ------------------------1 2 1 Σ t=1 (P t ) + 1 Σ T T
1 2

T t=1

( At )

2

In the case of perfect fit, the Theil’s coefficient takes the value of zero. The value of one indicates the prediction technique is no better than. a naive no change model i.e. P t = At or Pt=1 = A
t

Data
This study utilised monthly prices of CPO both for physical and futures deliveries published by PORLA (Palm 0il Registration and Licensing Authority) and KLCE respectively. The data for CPO futures and spot prices were collected for the period of 1983 until 1992 (except for Box Jenkins and econometric analysis which utilised different time framework as indicated earlier).

RESULTS Traditional Efficient Market Model
The traditional efficient market model given in equation (1) tests the hypothesis that futures prices reflecting the subjective through rational expectation of traders, are unbiased estimates of futures spot prices. This study compares the “price” performance of various months of CPO futures contract one to 1 five months before delivery. The results for January and May contracts are presented in Tables 3 and 4 and the rest of the future contracts are presented in Appendix 1. The results for the two contracts confirm that the shorter the future contract i.e., the shorter is time distance between the quoting date 2 2 of the futures price and delivery date - the higher the value of R , as expected. For instance, the R value one month before delivery is 0.94 for January contract (0.93 for May). This value reduces to 0.71 at five months before delivery for January contract (0.61 for May). In the case of January, the 2 2 value of R reduces sharply on the quoting date of 4 months before delivery. The value of R reduces sharply on the second month for May contracts. The slope coefficients are significantly different from unity for all the months before delivery for the 2 contracts as expected. The standard error increases as the time distance is further from delivery date. The Durbin Watson (DW) statistics show no serial correlation for all the months before delivery, while F statistics (for testing the simultaneous hypothesis H0 : a = 0 and b = 1) is significant at 5%
1

January and May contracts were chosen for discussion as January appears to be the most active month (total turnover for January contract between 1983 – 92 was 167 113) while the month of May represent the least active month ( a total of 107 430 lots were traded for May futures contracts).

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significant level. The same pattern of results (with minor variations) are observed for other contract months (Appendix I).

Table 3 : Regression Results between Spot and Future Prices for Crude Palm Oil (January) Futures Contract

Months Before Delivery 1

Constant

Slope

R

2

S.E

D.W

F Stat

-38.66

1.06 (8.60) 1.34 (8.77) 1.50 (4.24) 1.45 (6.12) 1.60 (3.54)

0.94

89.15

2.03

62.42

2

-241.09

0.89

110.37

2.03

77.03

3

-404.53

0.89

150.76

2.08

13.52

4

-391.46

0.85

145.79

1.83

21.10

5

-478.24

0.71

220.20

2.04

7.68

Table 4 : Regression Results between Spot and Futures Prices for Crude Palm Oil (May) Futures Contract

Months before Delivery i 1

Constant

Slope

R

2

S.E.

D.W.

F Stat.

-403.32

1.53 (8.87) 0.36 (3.20) 1.93 (3.40) 1.75 (3.20) 1.56 (3.75)

0.93

145.49

1.69

23.55

2

600.30

0.85

114.38

1.85

204.97

3

-698.68

0.73

291.57

1.99

4.61

4

-478.48

0.68

272.64

2.24

7.67

5

-284.78

0.61

268.73

2.10

14.09

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Table 5 : Comparison of Forecasts Generated by Selected Forecasting Techniques Technique RMSE 1. Futures prices on spot price Ex-post ( test period ) ( 1 month ahead ) ( 2 month ahead ) ( 3 month ahead ) ( 4 month ahead ) Moving Average ( MA ) on spot price MA2 MA3 MA4 MA5 MA6 Moving Average ( MA ) on futures price ( quotes 1 month ahead ) MA2 MA3 MA4 MA5 MA6 ( quoted 2 months ahead ) MA2 MA3 MA4 MA5 MA6 ( quoted 3 months ahead ) MA2 MA3 MA4 MA5 MA6 ( quoted 4 months ahead ) MA2 MA3 MA4 MA5 MA6 Smoothing method fitted value on futures price Holt’s Winter Addictive Seasonal Holt’s Winter Multiplicative Seasonal Ex-post on spot price Holt’s Winter Addictive Seasonal Holt’s Winter Multiplicative Seasonal Box-Jenkins on spot price Ex-post 194.20 198.42 206.76 220.09 233.73 18.25 19.04 20.09 21.46 22.89 1.54 1.59 1.67 1.77 1.88 109.83 184.76 213.56 223.86 9.94 16.97 20.22 21.62 0.25 0.87 1.43 1.67 Predictive Statistic Technique RMPE U-Stat

2.

64.39 104.10 127.13 144.74 164.06

5.79 9.60 12.15 14.16 16.27

0.50 0.80 0.99 1.15 1.31

142.19 159.08 170.07 184.71 202.14

13.06 15.08 16.51 18.16 19.98

1.11 1.26 1.37 1.49 1.62

214.54 219.43 230.15 242.72 254.39

20.60 21.32 22.39 23.69 25.06

1.74 1.79 1.87 1.97 2.07

229.87 240.71 253.06 264.66 275.32

22.44 23.48 24.75 26.12 27.52

1.90 1.98 2.07 2.17 2.26

3. (a) (b) (a) (b) 4.

109.55 108.00 114.80 110.99 110.00

10.65 10.14 10.72 10.12 10.82

0.94 0.91 0.93 0.89 0.89

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Rausser and Carter Efficient Market Model
Table 2 provides the summary of predictive statistics for forecasts by the selected techniques. The best forecasting model would be the one that produces the lowest, RMPSE and U-statistic. Based on these criteria, it was found that futures price quoted one month advance provides a relatively accurate forecast of spot prices with RMSE of 109.83, RMPSE 9.94 and U-Statistic of 0.25. The next efficient model is moving average (of two months) for spot price where the evaluative statistic are 64.39 (RMSE), 5.79 (RMPSE) and 0.5 (U-Statistics). This is followed by futures price (2 months ahead), Moving average of 3 months for spot price and econometric method which yielded RMSE, RMPSE and U-Statistics that are almost within the same range. Box-Jenkins and the smoothing techniques provide less impressive forecasts with U-statistics ranging between 0.91 – 0.94. Moving average for futures price fail to provide good results as the predictive statistics are relatively large (in particular the U-statistics are more than 1). Based on this finding, it is clear that futures price outperforms the other techniques in forecasting forward price. The nearer the maturity date its forecasting ability improves significantly. For instance, two months before maturity date, the RMPSE value is 16.97 compares 9.94 for one month in advance. Despite the superiority acclaimed by Box-Jenkins and econometric methods, their predictive performance is fairly reasonable.

CONCLUSION
Based on the results of the above analysis, it can be safely concluded that futures market does not exhibit strong evidence of inefficiency. It appears that futures market is able to establish forward prices efficiently particularly as the expiry date approaches. This means that the market utilizes and processes information efficiently, hence the price discovered at any point in time, can be taken as reflecting the current supply and demand as well as available information.

REFERENCE
Bigman, D., D. Goldfarb and E. Schechtman (1983), “ Futures Market Efficiency and the Time Content of Information Sets”, Journal of Futures Market, 3(3):321 – 34. Bilson J. E. O. (1981). “ The Speculative Efficiency Hypothesis”, Journal of Business, 54:435 – 51. Bourke, I.J. (1970). “Comparing the Box – Jenkins and Econometric Techniques of Forecasting Beef Process,” Review of Marketing and Agricultural Economics, Vol.47. Box G.E.O. and G.M. Jenkins (1976), Time Series Analysis, San Francisco:Holden Day. Brandt J.A. and D.A. Bessler (1981), “Composite Forecasting: An Application with the US Hog Prices”, American Journal of Agricultural Economics, 63. Burns S.M. (1983), “Futures Market and Marketing Efficiency” in Streit M.E. “Futures Markets: Modelling, Managing and Monitoring Futures Trading”, London: Basil Blackwell. Cappoza, D.R. and B. Cornell (1979) “Treasury Bill Pricing in the Spot and Futures Markets”, Review of Economics and Statistics, 72: 513-20. Chatfield, C. (1978), The Holt-Winters Forecasting Procedure, Applied Statistics, 27:264-79. Cooper R. L. (1972). “The Predictive Performance of Quarterly Econometric Model of the US in Hickman (Ed.). Econometric Models of Cyclical Behaviour, New York: Columbia University

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APPENDIX

Table 1: Regression Results between Spot and Futures Prices for Crude Palm Oil (February) Futures Contract

Months before delivery 1 2 3 4 5

Constant

Slope

R2

S.E.

D.W.

F Stat

66.60 -627.17 -446.91 -262.53 -568.77

0.91 (10.18) 1.75 (6.66) 1.66 1.52 1.75 (4.18) (2.87) (1.86)

0.96 0.90 0.66 0.62 0.62

90.83 167.14 234.38 299.53 279.66

1.91 1.94 1.98 1.79 2.03

84.65 15.95 17.48 5.09 5.80

Note: Figures in parantheses are t-values.

Fatimah and Zainal: Price Discovery through Crude Palm Oil Futures…

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Table 2: Regression Results between Spot and Futures Prices for Crude Palm Oil (March) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

287.67

0.69 (1.66) 0.973 (13.08) 0.96 (8.45) 1.41 (5.00) 1.51 (5.47)

0.97

46.15

1.97

22.93

2

14.06

0.95

73.35

1.94

80.75

3

-9.71

0.90

110.11

1.83

33.88

4

-329.69

0.86

150.96

1.60

10.92

5

-516.33

0.81

156.52

2.15

15.00

Note: Figures in parantheses are t-values.

Table 3: Regression Results between Spot and Futures Prices for Crude Palm Oil (April) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

-111.35

1.11 (15.08) 1.66 (17.07) 0.44 (1.50) 1.28 (8.20) 1.21 (6.34)

0.97

67.63

1.92

58.24

2

-600.02

0.95

86.76

1.79

34.74. 95 4.82

3

459.56

0.90

74.50

2.11

4

-220.64

0.90

108.66

1.90

32.44

5

-212.37

0.83

141.75

1.97

17.61

Note: Figures in parantheses are t-values.

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Table 4: Regression Results between Spot and Futures Prices for Crude Palm Oil (June) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

112.78

0.88 (6.50) 1.72 (6.12) 1.40 (10.36) 1.18 (4.20) 0.78 (3.75)

0.89

107.23

2.10

24.85

2

-575.06

0.92

110.23

2.03

15.83

3

-371.85

0.96

68.81

2.14

63.59

4

-105.28

0.81

141.23

1.93

13.05

5

181.49

0.93

74.06

2.00

108.83

Note: Figures in parantheses are t-values.

Table 5: Regression Results between Spot and Futures Prices for Crude Palm Oil (July) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

456.17

0.41 (2.76) 0.72 (2.19) 0.57 (2.58) 1.66 (1.64) 0.60 (5.00)

0.55

150.25

2.20

3.71

2

227.61

0.54

151.58

2.19

3.60

3

336.89

0.56

148.43

2.08

3.38

4

-559.47

0.89

152.90

1.90

2.06

5

290.38

0.80

100.62

1.93

11.98

Note: Figures in parantheses are t-values.

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Table 6: Regression Results between Spot and Futures Prices for Crude Palm Oil (August) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

60.64

0.90 (4.79) 0.56 (1.83) 0.30 (0.92) 0.391 (1.41) 0.50 (1.18)

0.74

102.29

1.79

22.94

2

274.23

0.73

126.46

1.69

3.72

3

504.64

0.60

197.38

2.17

0.76

4

457.57

0.20

179.84

2.06

2.01

5

337.02

0.36

174.94

2.17

1.46

Note: Figures in parantheses are t-values.

Table 7: Regression Results between Spot and Futures Prices for Crude Palm Oil (September) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

-77.09

1.12 (8.50) 0.60 (2.88) 0.43 (1.50) 0.29 (0.87) 0.39 (1.38)

0.90

174.13

1.92

72.28

2

227.10

0.96

48.39

2.10

15.00

3

424.64

0.22

207.20

1.98

2.27

4

496.29

0.31

170.32. 90 210.84

1.89

1.14

5

459.97

0.19

2.03

1.92

Note: Figures in parantheses are t-values.

Fatimah and Zainal: Price Discovery through Crude Palm Oil Futures…

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Table 8: Regression Results between Spot and Futures Prices for Crude Palm Oil (October) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

259.82

0.70 (2.39) 0.53 (2.03) 0.42 (0.49) 0.73 (1.86) 0.46 (2.02)

0.96

45.18

1.90

13.06

2

388.21

0.95

47.68

1.73

11.67

3

517.96

0.49

149.18

2.01

2.44

4

245.91

0.30

210.47

1.92

3.47

5

397.80

0.95

50.57

2.00

26.25

Note: Figures in parantheses are t-values.

Table 9: Regression Results between Spot and Futures Prices for Crude Palm Oil (November) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

48.22

0.98 (13.69) 0.60 (1.10) 1.14 (3.82) 0.63 (1.54) 0.43 (1.23)

0.96

52.54

1.97

73.41

2

368.46

0.86

75.84

1.64

3.16

3

-27.10

0.61

152.37

1.53

2.14

4

367.35

0.23

210.98

2.04

2.39

5

519.11

0.17

222.42

1.21

1.53

Note: Figures in parantheses are t-values.

Fatimah and Zainal: Price Discovery through Crude Palm Oil Futures…

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Table 10: Regression Results between Spot and Futures Prices for Crude Palm Oil (December) Futures Contract

Months before delivery 1

Constant

Slope

R2

S.E.

D.W.

F Stat

-36.99

1.06 (5.34) 1.05 (4.79) (5.17) 1.03 (3.54) 0.38 (0.67)

0.86

90.68

1.94

8.50

2

11.61

0.82

121.99

2.06

14.04

3 4

116.28 86.90

0.77 0.61

123.02 159.86

1.98 1.98

26.72 12.56

5

538.15

0.52

135.66

2.11

1.12

Note: Figures in parantheses are t-values.

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