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| Hedging and Speculative Pressures: An Investigation of the Relationships among Trading Positions and Prices in Commodity Futures Markets
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| Georg V. Lehecka |
| Year: 2013 |
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Abstract
This study provides a systematic empirical investigation of lead-lag relationships among trading
positions and prices in commodity futures markets. It employs Toda-Yamamoto Granger-causality
tests applied on a variety of measurements of hedging, speculative, and index trader position
activities and futures prices. Weekly futures market positions from the Commodity Futures
Trading Commission (CFTC) and prices are examined for 24 commodities (1995 to 2011) based
on Commitments of Traders (COT) reports and twelve commodities (2006 to 2011) based on
Commodity Index Trader Supplement (CIT) reports. In particular, this study empirically examines
whether pressures on prices due to hedging and speculative activities can be identified, and
whether they have changed due to structural changes in commodity futures markets. Results
suggest little systematic lead-lag relationship from hedging and speculative activities to prices. In
contrast, there is strong evidence that prices tend to lead traders’ hedging and speculative
activity. These results appear to be generally persistent over commodities, measurements of
hedging and speculation, and periods. In summary, hedging and speculative pressures may not be
helpful in explaining prices in commodity futures markets; to the contrary, prices may cause
traders to change their positions.
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| Determination of Factors Driving Risk Premiums in Forward Contracts for Kansas Wheat
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| Mykel Taylor, Glynn Tonsor, and Kevin Dhuyvetter |
| Year: 2013 |
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Abstract
Forward contracts are a risk management tool used by farmers to eliminate adverse price and
basis movements prior to harvest. Elevators offering these forward contracts will offset their risk
exposure by hedging their position in the futures market. However, the elevators are still exposed
to basis risk and will, in turn, charge a premium to the farmers as compensation. Since 2007,
basis volatility for hard red wheat in Kansas has increased, causing greater risk exposure for
elevators offering forward contracts. The result has been an increase in average risk premiums
of $0.06 to $0.10 per bushel. The primary factors driving this increase in the risk premium are
basis and futures volatility, basis forecasting errors by elevators, and elevator- and time-specific
fixed effects. The impact of this study is an increase in information for farmers on the relative
costs of decreasing their basis risk exposure in a more volatile market.
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Click here for a copy of the paper in Adobe's PDF format.
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| Have Farmers Lost Confidence in Futures Markets?
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| Mark Welch, Rob Hogan, Emmy Williams, John Robinson, David Anderson, Mark Waller, Stan Bevers, Steve Amosson, Dean McCorkle, and Jackie Smith |
| Year: 2013 |
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Abstract
Since 2007, the environment for trading futures contracts has changed significantly. In late 2012 graduates of the Texas A&M AgriLife Extension Master Marketer program were surveyed to assess the degree to which the changing climate of futures and options trading is impacting their confidence in futures markets and their perception of their ability to implement price risk management strategies.
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Click here for a copy of the paper in Adobe's PDF format.
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| How Do Producers Decide the “Right” Moment to Price Their Crop?
An Investigation in the Canadian Wheat Market
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| Fabio Mattos and Stefanie Fryza |
| Year: 2013 |
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Abstract
This research investigated the timing of marketing decisions in the Canadian wheat market. Cox
proportional hazard models were estimated to explore how the timing of producers’ decisions
were affected by market-based variable, which included an indicator showing whether current
prices were above producers’ benchmark on a given day, 10-day average spread between current
prices and producers’ benchmark, 10-day price trend and price volatility over 10 days.
Marketing data for 17,338 producers who executed 59,184 transactions between 2003/04 and
2008/09 were used in the analysis. Overall results indicate that all variables affected timing
decisions in producers’ marketing choices. However, the signs of the estimated coefficients
tended to vary across contracts and years, suggesting that producers could change their pricing
behavior over time and response to the covariates could also depend on characteristics of the
contracts and how they relate to producers’ marketing strategies.
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Click here for a copy of the paper in Adobe's PDF format.
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| Risk Premiums and Forward Basis: Evidence from the Soybean Oil Market
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| Karen E. Lewis, Mark R. Manfredo, Ira Altman, and Dwight R. Sanders |
| Year: 2013 |
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Abstract
Soybean oil is a primary ingredient in a number of food products, and is also one of the primary oils used in the production of biodiesel. Thus the price volatility of soybean oil represents a major input price risk to food and energy companies. Forward pricing is often extended to end-users by soybean oil processors where the forward price quote is a function of futures price and basis. If the end-user locks in the basis component, the processor assumes the risk of any basis fluctuations. This research examines if soybean oil processors extract a premium for assuming this risk. Using forward basis quotes and realized basis values for soybean oil provided by The Trade News Service, Inc., it was found that soybean oil processors do not charge an embedded cost for their forward pricing services. Furthermore, the results suggest that the absence of a statistically significant embedded cost may be due to the inability of soybean oil processors to adequately forecast soybean oil basis levels.
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Click here for a copy of the paper in Adobe's PDF format.
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| The Quality of Price Discovery Under Electronic Trading: The Case of Cotton Futures
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| Joseph P. Janzen, Aaron D. Smith, and Colin A. Carter |
| Year: 2013 |
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Abstract
We estimate the effect of electronic trade on the quality of price discovery in the Intercontinental
Exchange cotton futures market. Between 2006 and 2009, this market transtioned from
floor-only trade to parallel floor and electronic trade and then to electronic-only trade. We use a
random-walk decomposition to separate intraday variation in cotton prices into two components:
one related to information about market fundamentals and one a “pricing error” related to market
frictions such as the cost of liquidity provision and the transient response of prices to trades. We
find that on a typical day during the electronic-only period, the standard deviation of the pricing
error is half what it was on a typical day during the floor-only period. This drop reflects a substantial
improvement in average market quality, much of which is associated with an increase in the
number of trades per day. We report three additional findings: (i) market quality was significantly
more volatile during the electronic trading period than the prior periods meaning that there were
more days with large deviations from average market quality, (ii) market quality was poor immediately
following the closure of the floor and (iii) market quality was better on days when public
information was released in the form of USDA crop reports but worse on days where prices change
by the maximum imposed by the exchange.
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Click here for a copy of the paper in Adobe's PDF format.
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| A Nonparametric Search for Information Effects from USDA Reports
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| Jeffrey H. Dorfman and Berna Karali |
| Year: 2013 |
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Abstract
The question of report value has been unsettled in the literature with results varying somewhat
across studies and across reports. We employ two nonparametric tests to investigate the
potential information value of USDA crop and livestock reports. If the daily returns on futures
contracts differ on days with report releases when compared to non-announcement days for a
sizeable number of commodities, we consider the report to contain valuable information. Results
indicate value in five of the USDA reports investigated, with six other reports showing little or
no information value in the markets examined. Most of our results confirm and add robustness to
earlier results, but there are some differences both for certain reports and certain commodities.
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Click here for a copy of the paper in Adobe's PDF format.
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| Revisiting the Determinants of Futures Contracts: The Curious Case of Distillers' Dried Grains
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| Anton Bekkerman and Hernan A. Tejeda |
| Year: 2013 |
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Abstract
A futures market for distillers' dried grains (DDGs) was introduced on the Chicago Mercantile Exchange in early 2010, but became inactive only four months after its inception. While many new futures contracts do not develop into high-volume traders, significant interest from DDG cash market participants seemed to indicate that this contract could be successful. This study determines whether factors found in the literature to affect the success of futures contracts may have predicted the ineffectiveness of the DDG contract. We also test the impacts of market participants and the activeness of supporting futures markets, and use the empirical to determine whether the lack of activity in the ethanol futures market may have contributed to the ineffectiveness of the DDG contract. Estimation results indicate that while the existing literature would have predicted a high likelihood of success for a DDG futures contract, accounting for the inactiveness of the ethanol futures market led to the opposite conclusion.
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Click here for a copy of the paper in Adobe's PDF format.
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| Measuring Asymmetric Price Transmission in the U.S. Hog/Pork Markets:
A Dynamic Conditional Copula Approach
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| Feng Qiu and Barry K. Goodwin |
| Year: 2013 |
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Abstract
This paper introduces the application of copula models to the empirical study of price transmission, with an empirical application to the U.S. hog/pork markets. Our copula approach corrects the potential bias in estimation that results from ignoring the volatility by modeling the marginal distribution of price changes through GARCH models. We also develop and apply a flexible time-varying copula framework to estimate dynamic transmission coefficients /elasticities. The model results confirm the existence of time-varying and asymmetric behaviour in price co-movements between the farm and retail markets. Positive upper and zero lower tail dependences provide evidence that big increases in farm prices are matched at the retail level whereas negative shocks at the farm level are less likely to be passed on to consumers. The application of copula techniques provides multiple, useful extension and generalizations of conventional approaches for modeling asymmetric transmissions processes on the degree of market integration and its response to price shocks under the extreme market conditions.
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Click here for a copy of the paper in Adobe's PDF format.
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| How Much Would It Be Worth to Know the WASDE Report In Advance?
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| Trent T. Milacek and B. Wade Brorsen |
| Year: 2013 |
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Abstract
Past research has shown that prices move in response to WASDE reports, but have only looked at price movements right before and right after the reports. This research seeks to determine the profitability of trading based on knowing the next WASDE report at the time of the current report. The research should help traders evaluate investments in efforts to predict the report. First, a trade and hold model is used to determine the profits of trading based on whether ending stocks will be up or down in the next WASDE report. Second, a price forecast model using an ending stocks regression is used to forecast price at the next WASDE report release. The intercept of the model is calibrated so that the model predicts the current price without error; the slope is based on report data from no more than the last two years of data. Using the forecasted price, the position of the trading model’s profit calculation can change daily based on where the closing price of the commodity is in relation to the price prediction. Profits were averaged on a days-til-report, monthly, and yearly basis. Both models were profitable and the most profitable day to trade was the report release day. However, the trade and hold model outperformed the variable position model which suggests more work is needed to increase the forecasting power of this model. This might be accomplished by using additional years of data or by a form of Bayesian smoothing to improve the forecasts.
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Click here for a copy of the paper in Adobe's PDF format.
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| Asymmetric Price Transmission in the U.S. Beef Market: New Evidence from New Data
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| Veronica F. Pozo, Ted C. Schroeder and Lance J. Bachmeier |
| Year: 2013 |
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Abstract
We examine price transmissions among farm, wholesale and retail U.S. beef markets using two
types of retail level price data, one collected by the Bureau of Labor Statistics (BLS) and the
other one collected at the point of sale using electronic scanners. Although some evidence
suggests that BLS prices are bias (do not account for volume sales and discounted prices), we
find no evidence of asymmetric price transmissions in the response of retail prices to changes in
upstream prices. Our findings have important implications for the U.S. beef market efficiency.
Since retailer price adjustments to farm and wholesale price changes are symmetric, the U.S.
beef market is not as inefficient as found in previous studies.
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Click here for a copy of the paper in Adobe's PDF format.
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| Bubbles in Grain Futures Markets: When are They Most Likely to Occur?
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| Xiaoli L. Etienne, Scott H. Irwin, and Philip Garcia |
| Year: 2013 |
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Abstract
Unprecedented changes in commodity prices since 2004 have had worldwide repercussions,
often acting as a destabilizing economic and political influence. In this paper, we use a recently
developed multiple bubble testing procedures to detect and date-stamp bubbles in corn, soybean,
and wheat futures markets. To account for conditional heteroskedasticity and small sample bias,
inferences are derived using a recursive wild bootstrap procedure. We find that the markets
experienced price explosiveness about 2% of the time. Using a logit model which accounts for
bias due to the rare occurrence of an event, we find that bubbles are more likely to occur in the
presence of large aggregate global demand, low stocks to use ratios, and a weak US dollar.
While commodity index traders had no effect on the probability of an explosive episode,
speculative activity exceeding the minimum level required to absorb hedging activities as
measured by the Working’s T reduces considerably the probability of a bubble.
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Click here for a copy of the paper in Adobe's PDF format.
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| Do Roll Returns Really Exist? An Analysis of the S&P GSCI
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| Paul E. Peterson |
| Year: 2013 |
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Abstract
Roll returns for the S&P GSCI commodity index are analyzed using index calculation procedures for the S&P 500 stock market index. S&P GSCI daily index values are calculated and validated against the official index values for the five-year period January 2007-December 2011. Index values are then calculated using divisor adjustment methods for the S&P 500. Roll returns are found to be caused by the unique index calculation procedures used by the S&P GSCI during roll periods.
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Click here for a copy of the paper in Adobe's PDF format.
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| Smoothing in USDA’s Commodity Forecasts
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| Olga Isengildina, Stephen MacDonald, Ran Xie and Julia Sharp |
| Year: 2013 |
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Abstract
This study investigates the rationality of monthly revisions in annual forecasts of supply, demand, and price for U.S. corn, cotton, soybeans, and wheat, published in the World Agricultural Supply and Demand Estimates over 1984/85 through 2011/12. The findings indicate that USDA’s forecast revisions are not independent across months, and that forecasts are typically smoothed. Adjustment for smoothing in a subset of forecasts (2002/03 – 2011/12) showed weak results: marginal improvements in accuracy were limited to wheat production and cotton production and domestic use while deterioration in accuracy was observed in all other cases. Smoothing coefficients were highly unstable over time. Case studies for corn focused on correction for a structural break and the impact of forecast size and direction, but did not lead to improvements in accuracy. Case studies for October revisions of soybean production forecasts suggest that ten year rolling estimation and correcting for outliers using leverage may help improve accuracy in the adjusted forecasts.
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Click here for a copy of the paper in Adobe's PDF format.
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| The dynamics of the Ukrainian farm wheat price volatility: Evidence from a dynamic conditional correlation GARCH model development
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| Linde Gotz, Kateryna Goychuk, Thomas Glauben and William H. Meyers |
| Year: 2013 |
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Abstract
This paper investigates the development of price volatility in the Ukrainian wheat market from 2005 till 2012 within a dynamic conditional correlation GARCH model. The results indicate that the export controls in Ukraine have not significantly reduced price volatility on the domestic wheat market. On the contrary, our findings suggest that the multiple and unpredictable interference of the Ukrainian government on the wheat export market has substantially increased market uncertainty which led to pronounced additional price volatility in the market.
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Click here for a copy of the paper in Adobe's PDF format.
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| Testing the Effectiveness of Using a Corn Call or a Feeder Cattle Put for Feeder Cattle Price Protection
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| Hernan A. Tejeda and Dillon M. Feuz |
| Year: 2013 |
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Abstract
This paper studies the effect, from an options market perspective, that the substantial increase in corn prices and volatility has had on the feeder cattle market. An empirical study is conducted to compare the effectiveness of a feeder cattle operator using either a corn ‘call’ or a feeder cattle ‘put’ to mitigate the margin risk from price volatility. Specifically, the operator sets feeder cattle price conditions at different periods of the year and applies either option strategy. The period studied is from 2003 to 2012. Results are of higher margin variability for the latter years as anticipated – where corn faced much increased demand. In general, operations using a corn call resulted in a bit higher margin variability than operations using a feeder cattle put for most of the years considered. This is not as anticipated, given the broader and more diversified market for corn options – reflected in the much larger number of ‘at the money’ or nearest ‘in the money’ transactions at expiration - in comparison to the thinner feeder cattle options market. However, this may be due to the much fewer number of ‘at the money’ or nearest ‘in the money’ transactions for feeder cattle puts (i.e. many cases having no puts traded or be all ‘out of the money’), which results in less margin variability. Another finding is that operators who set price conditions in May (instead of July or October) generally through a corn call, did not experience substantial increase of margin variability - especially during a very volatile 2009 year. This may respond to mostly circumventing changing conditions in the corn market during summer and fall season, with the arrival of new crop information.
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Click here for a copy of the paper in Adobe's PDF format.
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| Actuarially Fair or Foul? Asymmetric Information Problems in Dairy Margin Insurance
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| John Newton, Cameron S. Thraen, and Marin Bozic |
| Year: 2013 |
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Abstract
There is a wide consensus in the academic literature that asymmetric information in the form of
adverse selection and moral hazard has resulted in sizable financial outlays for governmentsponsored
crop insurance programs - ultimately becoming a costly means of transferring risk
from farmers to the government. In this analysis we combine simulation and structural modeling
techniques to forecast dairy income-over-feed-cost margins and show how asymmetric
information problems may drive industry consolidation, production growth, and unforeseen
program costs for a recently proposed government-sponsored dairy producer margin insurance
program. We conclude by presenting second-best solutions in contract design to the insurance
problems of moral hazard and adverse selection.
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Click here for a copy of the paper in Adobe's PDF format.
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| Pricing and Hedging Calendar Spread Options on Agricultural Grain Commodities
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| Adam Schmitz, Zhiguang Wang, and Jung-Han Kimn |
| Year: 2013 |
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Abstract
The calendar spread options (CSOs) on agricultural commodities, most notably
corn, soybeans and wheat, allow market participants to hedge the roll-over risk of
futures contracts. Despite the interest from agricultural businesses, there is lack of
both theoretical and empirical research on pricing and hedging performances of CSOs.
We propose to price and hedge CSOs under geometric Brownian motion (GBM) and
stochastic volatility (SV) models. We estimate the model parameters by using implied
state-generalized method of moments (IS-GMM) and evaluate the in-sample and out-
of-sample pricing and hedging performances. We find that the average pricing errors of
the SV model are 0.79% for corn, 0.75% for soybeans and 1.2% for wheat; the pricing
and hedging performance of the SV model are mostly superior to the benchmark GBM
model, both in and out of sample, with only one exception where the out-of-sample
hedging error for the GBM model for market makers is slightly better than the SV
model.
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Click here for a copy of the paper in Adobe's PDF format.
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| Information Transmission between Livestock Futures and Expert Price Forecasts
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| Jason Franken, Philip Garcia, Scott H. Irwin, and Xiaoli Etienne |
| Year: 2013 |
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Abstract
We evaluate dynamic interaction between four expert forecasts, futures prices, and realized cash
hog prices. Lag structures of three variable vector autoregression indicate dynamic interaction
among futures and cash markets and that past forecasts impact cash prices. Causal analysis of
model residuals reveals contemporaneous causation of cash prices by futures prices and by some
forecasts, and in all cases indicates causal structures consistent with the chronological ordering
of prior day futures, subsequent forecasts, and cash prices realized one quarter later. Error
decompositions following this ordering indicate expert forecasts are somewhat more important
to futures and cash markets than previously believed.
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Click here for a copy of the paper in Adobe's PDF format.
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| Price Density Forecasts in the U.S. Hog Market: Composite Procedures
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| Andres Trujillo-Barrera, Philip Garcia, and Mindy Mallory |
| Year: 2013 |
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Abstract
We develop and evaluate quarterly out-of-sample individual and composite density forecasts
for U.S. hog prices using data from 1975.I to 2010.IV. Individual forecasts are generated from
time series models and the implied distribution of USDA outlook forecasts. Composite density
forecasts are constructed using linear and logarithmic combinations, and several straightforward
weighting schemes. Density forecasts are evaluated on goodness of fit (calibration) and
predictive accuracy (sharpness). Logarithmic combinations using equal and mean square error
weights outperform all individual density forecasts and all linear combinations. Comparison
of the USDA outlook forecasts to the best logarithmic composite demonstrates the consistent
superiority of the composite procedure, and identifies the potential to provide hog producers
and market participants with accurate expected price probability distributions that can facilitate
decision making.
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Click here for a copy of the paper in Adobe's PDF format.
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| Price Discovery in the U.S. Fed Cattle Market
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| Kishore Joseph, Philip Garcia, and Paul E. Peterson |
| Year: 2013 |
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Abstract
We study price discovery in the U.S. fed cattle market, examining the interaction among
weekly live cattle futures, negotiated cash fed cattle, and boxed beef cutout prices. Extensive
testing and innovation accounting based on directed acyclic graphs of error-correction resid-
uals indicates that the futures price continues as the dominant source of information in the
fed cattle market. While the cash cattle price has a strong predictive in
uence on the boxed
beef price, the boxed beef price plays only a marginal role in price discovery.
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Click here for a copy of the paper in Adobe's PDF format.
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| Have Extended Trading Hours Made Agricultural Commodity Markets More Risky?
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| Nathan S. Kauffman |
| Year: 2013 |
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Abstract
In May 2012, the Chicago Mercantile Exchange extended trading hours for several agricultural commodities, including corn. Since then, trading during the release of a key U.S. Department of Agriculture report known as the World Agricultural Supply and Demand Estimate has been possible. Some concerns have been expressed that trading through the release of important market information might generate higher price volatility in agricultural commodity markets. The purpose of this paper is to examine the effect of extended trading hours on intraday price volatility in corn futures markets. The results suggest that trading during the information releases in 2012 has led to brief periods of excessive volatility immediately after the reports were released, but the higher volatility did not persist much beyond 60 minutes. The paper also highlights the role of higher liquidity in absorbing potential market shocks.
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Click here for a copy of the paper in Adobe's PDF format.
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| How Could We Have Been So Wrong?
The Puzzle of Disappointing Returns to Commodity Index Investments
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| Scott Main, Scott H. Irwin, Dwight R. Sanders,
and Aaron Smith |
| Year: 2013 |
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Abstract
Investments into commodity-linked investments have grown considerably since their popularity exploded—along with commodity prices—in 2006 through 2008. Numerous individuals and institutions have embraced alternative investments for their purported diversification properties and “equity-like” returns; yet, real-time performance has been disappointing. As an example, Morningstar reports that the iShares S&P GSCI Commodity Index Trust lost an annualized 9.1% in the 5 years ending December 31, 2012. The puzzling aspect of this poor performance is that it occurred at a time when the overall trend in commodity prices was sharply upward. In this paper, we explicitly show that the disappointing returns for commodity index investments were not directly caused by the futures market structure, i.e., “contango.” Rather, the implicit—and unavoidable—cost of holding physical commodities is inherent in futures prices and thereby creates a necessary performance “gap” between the returns to long-only futures positions and observed spot market prices.
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Click here for a copy of the paper in Adobe's PDF format.
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| Impacts of Crop Conditions Reports on National and Local Wheat Markets
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| Ryan Bain and T. Randall Fortenbery |
| Year: 2013 |
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Abstract
The USDA releases crop condition reports that contain crop progress and growing conditions
estimates for various crops including corn, soybeans, and winter wheat. Previous work has
investigated national market impacts from various USDA reports. However, this work is new
because it investigates crop conditions report releases for price impacts on winter wheat at both
the local and national level. The primary tools for analysis are parametric tests and the nonparametric
Savage scores test. The results suggest that crop conditions reports may be
anticipated by the futures markets prior to release, with similar though non-significant impacts
felt in local cash markets. These results contrast significantly with those found in similar studies
for corn and soybeans.
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Click here for a copy of the paper in Adobe's PDF format.
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