AN ANALYSIS OF CASH AND FUTURES PRICES IN THE DELIVERY PERIOD OF MATURING CONTRACTS IN THE COFFEE "C" MARKET, 1972-1981 (COMMODITIES BASIS)
The Commodity Exchange Act states that futures prices are subject to "speculation, manipulation and control" resulting in "unreasonable" price fluctuations which are detrimental to both consumers and producers. In 1979, the Commodity Futures Trading Commission issued a complaint against a number of respondents, charging them with price manipulation in the liquidation period of the July 1977 Coffee "C" futures contract.^ In this paper, empirical research is focused on the basis (cash price minus futures price) fluctuations in the delivery period of the Coffee "C" futures contract. The study tests the following propositions for the period between 1972 and 1981. (1) Do cash and futures prices tend to converge when the spot month becomes the delivery month? (2) Is the basis normally distributed in the delivery months of the Coffee "C" futures contract? (3) Are the same relevant quantifiable supply and demand factors significant in explaining the variation in the basis outliers as in the rest of the observations?^ A total of 2,262 observations of the basis were divided into two subsets, one for the delivery months and one for the non-delivery spot months. Analysis of the data suggests that cash and futures prices do tend to converge in the delivery as compared to the non-delivery spot months.^ Kolmogorov-Smirnov tests revealed that the null hypotheses that either of the two subsets come from a normal distribution or that both subsets come from the same distribution must be rejected at the one percent level of significance. Both subsets were skewed; in the delivery months the extreme values were at the left of the mean, while in the non-delivery months the extreme values were at the right of the mean.^ Eighty-five outliers (basis points of over 1350 or below -1350) were identified; they were concentrated in 6 of the 46 futures contracts included in the study. Negative outliers occurred in the delivery months of five of the six futures contracts; positive outliers were concentrated in one non-delivery spot contract.^ Analysis of the outliers, using multiple regression techniques, suggests that the negative outliers in the five deviant delivery month futures were associated with dominant traders, and with control over deliverable supply, two conditions which permit the manipulation of prices so that they are artifically high. The positive outliers were concentrated in one non-delivery spot futures contract, and were associated with a decline in supply, and not with the activity of dominant traders in the futures market. ^
SHAVIRO, FRIEDA WACHS, "AN ANALYSIS OF CASH AND FUTURES PRICES IN THE DELIVERY PERIOD OF MATURING CONTRACTS IN THE COFFEE "C" MARKET, 1972-1981 (COMMODITIES BASIS)" (1984). ETD Collection for Fordham University. AAI8506359.