NCCC-134
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Quality Forecasts: Predicting When and How Much Markets Value Higher Protein Wheat
Anton Bekkerman and R. Trey Worley
Year: 2020
 

Abstract

Wheat markets stand out among other major crop commodity markets because pricing at the first point of exchange - typically a grain handling facility - is differentiated on specific quality characteristics. Moreover, the premiums and discounts that elevators offer to obtain grain of specific quality can be significant. Despite the relative importance of quality premiums and discounts to farm-level production and marketing decisions, almost no research has examined the factors underlying wheat quality pricing schedules. This study develops an informed expectation model of elevators' quality-based pricing strategies and empirically estimates the model a lengthy dataset of weekly price observations. As such, this research provides the first step toward developing a more accurate understanding of the wheat market and an opportunity to develop price forecasts as a function of wheat quality.

 
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Biodiesel Cross-Hedging Opportunities
Jason R. V. Franken, Scott H. Irwin, and Phil Garcia
Year: 2020
 

Abstract

We apply an encompassing framework to assess the viability of hedging spot biodiesel price risk for four U.S. markets with a conventionally used heating oil futures contract and a soybean oil futures contract based on the logic that supply shifts (i.e., price of soybean oil as an input) drive biodiesel prices when binding blending mandates are in place. Results indicate that soybean oil futures should in fact be part of a composite hedge, and that in some instances greater hedging weight should be placed on the soybean oil futures contract than the conventionally used heating oil futures contract.

 
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Short-Term Dynamics and Structural Changes in the United States and Brazil Soybean Basis: Seasonality, Volatility, Structural Breaks and Information Flows
David W. Bullock, William W. Wilson, and Prithviraj Lakkakula
Year: 2020
 

Abstract

Recently, the United States - China trade dispute has emphasized the importance of Brazil as a major export competitor in the global soybean market. In this paper, we examine the time series characteristics of United States and Brazilian soybean basis markets for seasonality, changes in mean level, intermarket information flows, and other time series behavior. We specifically examined basis at 31 origins and 2 export locations in the United States and a primary export market in Brazil. The results strongly support the presence of analog seasonality indicating that seasonal patterns vary greatly from year-to-year at all locations. Time series intervention analysis indicates that the United States - China trade dispute had a significant lasting effect on the basis level in the Brazilian market but not in the United States. Granger causality analysis of information flows between the origin and export basis markets prior to and after the announcement of tariffs in the United States - China trade dispute shows a significant dampening effect upon the information flows between the markets following the announcement of tariffs. These results are useful in that they can provide guidance to market practitioners in modeling basis forecasts and also provide useful information regarding the impact of the recent United States - China dispute upon the behavior of these basis markets.

 
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Corn and Soybean Pricing Strategies Using FAPRI Baselines and Ranges
Emily Scully, Daniel Jaegers, Matthew Green, Melinda Foster, Reece Frizzell, Melvin Brees, and Abner Womack
Year: 2020
 

Abstract

This research model examines the use of FAPRI baselines and ranges to develop marketing strategies for the sale of corn and soybeans. The goal was to create a disciplined and objective approach for selling crop which would ultimately increase prices received over the 2008-2018 10-year period. Three strategies were developed: A Price Objective strategy which makes upside sales, a Trailing Stop strategy which makes downside sales, and a Seasonal Sale strategy which makes structured sales during historically high times. Additional methods for selling were implemented into each strategy including All Time High sales, sales made when there is a Five Percent Drop from the Ten Day High, and End of the Year Trailing Stop sales. Multi-year sales were also considered separately and included the same strategies and methods for selling. Results showed that all strategies out-performed USDA average farm prices received for the period examined. The results of this research could shape future models and increase economic gains for agricultural producers.

 
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The 2019 Government Shutdown Increased Uncertainty in Major Agricultural Commodity Markets
Raghav Goyal and Michael K. Adjemian
Year: 2020
 

Abstract

In January 2019, a government shutdown prevented the U.S. Department of Agriculture from publishing information about the situation and outlook for major U.S. agricultural commodities. We show that, as a result, Chicago Mercantile Exchange Board of Trade markets for corn and soybeans experienced heightened market uncertainty, elevating the cost of hedging. We use historical options data to estimate that the shutdown and publication delay increased the price of hedging, according to two different approaches. If the January 2019 report had been released on time and it had the impact of a normal report at that time of year, ATM corn options would have been 7% ( 6.1% - 8.2%) cheaper, while the price of soybean options would have fallen by 31% (24% - 35%). If the report had instead generated the same IV reduction as the makeup February 2019 publication did, it would have reduced ATM corn and soybean hedging costs by about 22% and 43%, respectively.

 
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Why Grain Merchants Will Never Be So Na´ve to Use Minimum Variance Hedging in Daily Business: a Critical Discussion
Soren Prehn
Year: 2020
 

Abstract

Minimum variance hedging is probably one of the most popular concepts in the literature on agricultural futures markets. It has been applied many times in the literature, and all studies confirmed that minimum variance hedging has the potential to improve the effectiveness of hedging. However, despite this advantage, no grain merchant has ever used minimum variance hedging in daily business. In this paper we show that grain merchants have a good reason for this. Minimum variance hedging prevents them from trading the basis. If grain merchants do not trade the basis, they will not generate the profits that are necessary to cover the costs of grain storage and will go bankrupt sooner or later. In theory, risk avoidance may be a desirable goal, but in reality, it is not affordable. In fact, the only long-term sustainable strategy is basis trading.

 
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Ex-ante and Ex-post Effects of Price Limits in Commodity Futures Markets
Gabriel Blair Fontinelle and Joseph P. Janzen
Year: 2020
 

Abstract

After October 1987, financial crisis, market regulators created dispositive called circuit breaks to contain high levels of volatility. As a type of circuit break, price limits were adopted not only on stock markets but in commodity futures contracts as well, however, its effects are not clear. The present study aimed to evaluate price limit ex-ante effects on the four major wheat futures markets by adopting Brogaard and Roshak (2015) methodology by estimating the probability of extreme movements and limit moves conditional to extreme movements and its ex-post effects on trading activity by contrasting the volume curve on limit days with a counterfactual volume curve that simulates a scenario where price limits were not hit. The results show that tighter limit levels decrease the probability of extreme movements by approximately 0.008% having an overall (four markets included) baseline probability of extreme moves equals 1.11% which agrees with the Holding Back hypothesis assuming extreme movements as a proxy for volatility. On the other hand, the probability of limit moves conditional to extreme movements increases when limit levels are tighter by approximately 0.066% with an overall baseline of 0.05% which supports the "Magnet" hypothesis. Regarding the ex-post effects, longer periods where prices stay at the limit level result in trading activity lost, however, if prices return to limit range but bounce back to a limit lock, the longer the gap between limit locks trading session experience an increase in trading activity. Moreoever, the ex-post effects on trading activity are more intense in Chicago relative to Kansas City because Chicago present a higher trading volume on average.

 
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