Grain Futures Markets: What Have They Learned?

Taken together, studies that examine how well commodity futures markets perform find that risk premiums are common—and so unbiasedness is not—and markets are not uniformly efficient across commodities or forecast horizons. This large body of research sheds important light on whether and to what extent commodity-futures markets forecast optimally future spot prices and, so, enable commercials to manage price risk by effectively parsing out much of it to speculators, a process that improves the total welfare of an economy with competitive but otherwise-incomplete markets. Nevertheless, that speculators can, in effect, improve welfare in this way has done little to quell popular hostilities toward futures markets. Such hostilities—and, in particular, those directed at speculators—in North America date to the inception of these markets in the nineteenth century, and have contributed to the unflattering depiction of the early futures exchange as an inchoate and poorly managed institution that initially served only the (illegitimate) aspirations of gamblers, an original-sin creation narrative that surely compromises the legitimacy of modern futures markets. Unfortunately, economists’ understanding of early commodity-futures markets is particularly fragmented—the extant literature focuses almost exclusively on the post-World War II era—and, as such, claims regarding the performance of early futures markets remain largely unsubstantiated in any quantitatively measurable sense. In this paper, I test and compare the efficiency properties of wheat, corn, and oats futures prices on the Chicago Board of Trade (CBT) from 1880 to 1890 and from 1997 to 2007. I demonstrate that, on balance, these nascent nineteenth-century grain-futures markets were, like their contemporary counterparts in this case, mostly efficient. As such, these results support the claims of early proponents of futures markets who argued that the development of the futures exchange was shaped primarily by commercial interests who sought to mitigate price risk.