An analysis of the impact of the changes in the delivery procedure of the fresh shell egg futures contract
Authors:   , Suphaphiphat Phiphit 
Published: May 2024

The relatively recent changes in the delivery system of fresh shell egg futures contract from cold storage warehouse delivery to egg packing plant delivery have met with widespread criticisms in regard to their validity and justification from traders in the shell egg futures market. This study analyzed the changes in the delivery system in terms of their points of impacts: (1) on the cash-futures price relationship in the delivery month, (2) on the futures price as a self-fulfilling forecast of cash price in the delivery month, (3) on the returns to traders, and (4) on the price variation in the cash egg market. The data used in this study were classified into three groups according to the three periods of different delivery procedure from 1969 to 1972. Group I represented the period in which delivery could be made from approved cold storage warehouses only, Group II the period in which delivery could be made from either approved warehouses or approved egg packing plants, and Group III the period in which delivery could be made from approved packing plants only. Cash and futures prices were found to have a tendency to converge in the delivery month during the period of warehouse delivery only. But futures sold during the delivery month at a discount below the cash market in the period when either warehouse or inplant delivery could be made and the period in which delivery could be made from packing plants only. The price differential between cash and futures in the delivery month was attributable to the bias towards the long traders yielded by the inplant delivery provision. No evidence was found that the prediction ability of futures prices was affected by the changes in the delivery procedure. No distant futures prices were generally a good self-fulfilling forecast of cash prices in the delivery month. These cash prices were underestimated when delivery was to warehouse only or packing plant only. When there was delivery to both, cash prices were overestimated. The estimation of gains and losses by classes of traders indicated that traders with long positions gained and those with short positions lost when only warehouse delivery could be made. But the longs lost and the shorts gained during the period of the inplant delivery system. The estimation also provided clear-cut evidence of forecasting skill of large speculators. They adjusted their positions from long to short side when the delivery changes were favorable to the shorts. During the period when only warehouse delivery could be made large and small speculators gained but large and small hedgers lost. However, large speculators, large and small hedgers gained at the expense of small speculators alone during the inplant delivery period. The variation of cash egg prices reflected primarily the changes in fundamental economic conditions. Only a negligible variation in cash egg prices was brought about by the excessive futures price variation due to the imbalance of the futures market. The findings led to the conclusion that the present change in the delivery system of fresh shell egg futures contract from warehouse to inplant delivery was detrimental to the convergence of cash and futures prices in the delivery month and thereby gave rise to an imperfect hedge situation. The change was also favorable to the shorts. However, no strong evidence was found that the change in the delivery system caused unwarrented price fluctuations in cash egg market.