An Examination of the Shrimp Futures Market
By Josué Martínez-Garmendia and James L. Anderson
ABSTRACT
Two shrimp futures contracts have been traded in the Minneapolis Grain Exchange (MGE) since the beginning of the 1990's. At their inception, these two contracts were considered a significant development for seafood marketing. However, both contracts have suffered from poor trading interest. Such relatively lukewarm reception by the seafood industry can be explained by three circumstances. First, seafood markets in general, and the shrimp cash market in particular, are characteristically opaque. Opaque cash markets are incompatible with efficient and therefore attractive futures contracts. Second, the seafood industry appears to be reluctant to participate in more sophisticated markets. This leads to lack of liquidity in both shrimp futures contracts. And third, the design of the two shrimp contracts at the MGE is a considerable issue, as this exchange grouped shrimp varieties that are independently priced under similar contract specifications. These shrimp varieties cannot therefore be priced correctly within a single futures contract even with the implementation of discounts/premiums. These three factors, opaque cash markets, lack of liquidity, and a questionable contract design lead to poor hedging performance of both shrimp futures contracts. The poor hedging performance enhances the lack of attractiveness of the contracts and, therefore, reduces their liquidity even further. In conclusion, transparent cash markets and a more widespread awareness of the benefits of futures markets among seafood traders are a requirement to develop successful shrimp and potentially other seafood futures contracts. Also, the MGE should consider revising the composition of deliverable shrimp varieties within the two contracts.
KEYWORDS:shrimp, futures contracts, hedging effectiveness, contract
design.
 Market Structure, Conduct, and Performance
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