GRAIN BROKERS
Market efficiency
In the previous two editions a lot of focus was placed on the different hedging or marketing alternatives , as well as the factors which will affect a producer ' s hedging decisions . This time around we will focus on the findings of the research relating to market efficiency .
By Frans Dreyer Manager : Senwes Grain Brokerage
The concept of market efficiency forms the foundation upon which certain assumptions in respect of price formation in a market are based . Research on market efficiency has been a concept with which analysts and academics have been confronted in the financial world since the turn of the 20th century . Eugene Fama formulated the Efficient Market Hypothesis in 1970 , which formally summarises the principle of market efficiency as follows : An efficient market is one in which the market price fully reflects all the available information at all times . It simply means that all market participants will immediately attempt to adjust the market price to a new market balance price on the basis of the expected impact of new market information . This expected impact on the basis of the new information could , however , differ from one role player to another . The actions of the market participants would normally be based on a profit maximising principle and their decision whether to buy or sell will depend on the valuation of each role player of the current market price , relative to the intrinsic or fundamental value of the underlying grain or oilseed . Various market participants will probably not follow the same market analysis process or valuation principles , which means that the calculation of the new fair or market balance value will differ , based on the new information . The result is that buyers and sellers will meet one another in the market sphere and will establish a new balanced price in the market .
However , role players who are influenced by the current market balance price , often ask the question as to whether the price is a fair reflection of supply and demand . Put simply , is the price not being manipulated by " larger " role players in the market , to their own advantage ? In respect of the Safex market , a lot of research has been done since the establishment of the free market mechanism after 1996 . The main objective of the research was to determine whether it would be possible to establish a price formation model in order to be able to predict price variances . Should it be possible to predict price changes on the basis of historic price data , it would effectively mean that it would be possible to realise above normal yields on an investment in the grain market , since price formation would then not take place in a balanced manner .
Soon after deregulation , Wiseman , Darrock and Ortmann ( 1999 ) found that prices are inclined to trade in a specific trend and that a prediction of price change would be possible . However , market trading was highly illiquid and they found that the accuracy of price change predictions had declined over the course of the first two seasons . Moholwa ( 2005 ) evaluated the white maize market from 1999 to 2003 and Phukubje and Moholwa ( 2006 ) tested the market efficiency of the sunflower and wheat market from 2000 to
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SENWES SCENARIO | WINTER 2018