Evaluation of the performance of the Western Canadian flaxseed marketing system

Abstract

Harvey, M. L., M.Sc. University of Saskatchewan, Saskatoon. September, 1993. Evaluation of the Performance of the Western Canadian Flaxseed Marketing System. Supervisor: Dr. Gary G. Storey. During the 1950's, flaxseed was the most important oilseed crop grown in Western Canada in terms of volume of product ion and value. Since that time, production of flaxseed has declined relative to most other crops grown in Western Canada. Over the past thirty years, end use markets for flaxseed have gradually been eroded by various substitute products and substitute oilseeds. Consumption of linseed oi1, produced by crushing flaxseed, has been decreasing steadily over this time period. Concern has been expressed over the effectiveness and efficiency of the flaxseed marketing system to adequately facilitate the movement and pricing of flaxseed. The general objective of this study was to focus on some of the important performance dimensions of the Canadian flaxseed marketing system. Given the broad and abstract nature of market performance, and the difficulty in quantitatively evaluating the many social dimensions of market performance, the narrower focus of this study is on pricing performance and pricing efficiency of the flaxseed futures contracts traded on the Winnipeg Commodity Exchange, the price discovery mechanism of Canadian flaxseed. Descriptive indicators and quantifiable measures were developed to provide insights into the functioning of the flaxseed marketing system. Tests to assess the pricing efficiency of the flaxseed futures market at the Winnipeg Commodity Exchange included: –Forecastability: Using the mean square prediction error criterion used by Carter (1982), and a test originally suggested by Tomek and Gray (1970), tests of the forecastability of flaxseed futures were carried out using Chicago soybean futures as a benchmark for comparison. –Testing for the presence of bias in flaxseed futures: Is there a structural bias built into flaxseed future prices to induce risk averse speculators into providing liquidity for hedgers.–Martingale hypothesis: Classified as a weak-form efficiency test, price series from flaxseed futures were tested to see if there was any information in historical prices which could be used to form predictions of future prices. –Cointegration: If two economic variables such as spot and futures prices are to be considered efficient, then over the long run, being subject to the same market forces of supply and demand, the two series movements should be quite closely linked. Existence of cointegration is not sufficient for cointegration, but it is necessary. In all of the above tests, with the exception of cointegration, Chicago soybean futures were used as a benchmark of comparison for the results obtained. In order for a price series to be tested for cointegration, the series must first be found to be non-stationary. Chicago soybean futures price series were all stationary preventing tests of cointegration on soybean prices. Since it is difficult to assess efficiency in a vacuum, tests of efficiency are normally assessed relative to a norm of comparison, in this case Chicago soybean futures, which were assumed to be efficient. In all cases, flaxseed futures prices at the Winnipeg Commodity Exchange were found to be just as efficient as soybean futures prices at the Chicago Board of Trade. Failure to reject the null hypothesis of efficiency in any of the tests conducted implies that Canadian flaxseed futures prices are efficient. The marketing system for flaxseed may be losing efficiencies due to the decreasing volumes of the commodity handled relative to large volume substitutes, such as soybeans, but there is no evidence of systematic inefficiencies in the current pricing mechanism for Western Canadian flaxseed, the Winnipeg Commodity Exchange. Other commodities have been removed from trading at the Winnipeg Commodity Exchange due to an insufficient volume of trading in the commodity. Flaxseed is a relatively thinly traded commodity at the Winnipeg Commodity Exchange, but there is no evidence to suggest that the performance of the Exchange as an efficient pricing mechanism is being compromised.