Evaluation of the performance of the Western Canadian flaxseed marketing system

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Date
1993Author
Harvey, Maury Lee
Type
ThesisDegree Level
MastersMetadata
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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.