Structural Breaks and the Relationship between Barley and Wheat Futures Prices on the London International Financial Futures Exchange

Co‐movement between futures prices can arise when commodities are substitutes. Counterintuitively, Dawson and White fail to find a significant long‐run link between feed barley and wheat prices on the London International Financial Futures Exchange. This relationship is re‐examined using Johansen, Mosconi, and Nielsen's co‐integration procedure that permits structural breaks. Results show evidence of co‐integration and hence price discovery. There is a significant break in October 2000 following Common Agricultural Policy intervention price reductions, the barley–wheat futures market is perfectly integrated, and the barley price Granger‐causes the wheat price. Modeling structural breaks in price relationships appears important.