Do Interest Rates Explain Disaggregate Commodity Price Growth? (original) (raw)
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SSRN Electronic Journal, 2000
Using a restricted version of the BEKK model it is tested an implication of the theory of storage that supply-and-demand fundamentals affect the price dynamics of agricultural commodities. The commodities under analysis are corn and wheat. An interest-storage-adjusted-spread was used as a proxy variable for supply-and-demand fundamentals to test the aforementioned implication for both commodities. It is also tested the Samuelson hypothesis that spot prices have higher volatility than futures prices. It is found that the interest-storage-adjusted-spread has had a statistically significant positive influence on the spot and futures returns for both commodities. Likewise, the results also show that spot price returns have higher volatility compared to futures price returns which is consistent with the Samuelson hypothesis. The results of the aforementioned tests are consistent with both theories and with the existing literature related to commodity futures.
Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil
The Energy Journal, 2017
Refiners have an incentive to hold inventories even if they anticipate falling crude oil prices. This paper develops a model of the convenience yield arising from holding inventories. Using data on inventories and futures contract prices, I show that the convenience yield is inversely related to inventories, and positively related to oil prices. In addition to exhibiting seasonal and procyclical behaviors, I show that the historical convenience yield averages about 19% of the oil price from March 1989 to November 2014. Although some have argued that a breakdown of the relationship between crude oil inventories and prices following increased participation by financial investors after 2003 was evidence of an effect of speculation, I find that the proposed price-inventory relationship is stable over time. In light of this evidence, I conclude that the contribution of financial investors' activities to the crude oil market is weak.
Lecturas de Economía, 2016
Is the interest rate more important than inventories? The case of agricultural commodities in the context of the financialization process Abstract: In the context of the "Asian economic miracle", changes in commodity prices between 2004 and 2014 may have been dominated by the effects of the entry of portfolio investors as major participants in commodity index positions and new financial products. That situation raises the question of whether interest rates have a deeper effect on prices compared to fundamental variables such as commodity inventories. The aim of this paper is therefore to test if the prices of some commodities (soybean and maize) have become more sensitive to interest rate changes compared to the incidence of inventories in the last ten years. Using a vector autorregression, it was found that during the period 2004-2014 there was a stronger relation between interest rates and soybean and maize futures prices than in the years 1990-2003. This empirical evidence has special relevance for some Latin American countries heavily reliant on such commodity exports.
STOCHASTIC INTEREST RATES AND PRICE DISCOVERY IN SELECTED COMMODITY MARKETS
1995
The temporal relationship between Chicago corn and soybean cash prices, nearby futures prices, and interest rates is examined using daily 1980-1989 data. Johansen cointegration tests suggest joint movement of the three series over the data period considered. In addition, analyses of individual crop years, which is consistent with previous work, shows co-movement between cash, futures, and interest rates in years when bivariate cointegration between cash and futures prices was not found. The results provide initial empirical evidence that a potential limitation of previous research in the study of cash-futures simple efficiency has been the exclusion of the interest rate as a common stochastic factor explaining equilibrium in models of cash and futures prices.
How market efficiency and the theory of storage link corn and ethanol markets
Energy Economics, 2012
In this article we use the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explore statistical evidence for the link. We propose that a long-run no-profit condition is established in distant futures markets for ethanol, corn, and natural gas and then use the theory of storage to define an inter-temporal equilibrium among these prices. The relationship
Food Policy
Grain futures contracts that permit physical delivery do so through an exchange of delivery instruments. Because delivery instruments can be held indefinitely, extant research shows that futures contracts that assign inflexible and low storage rates relative to the market price of storage facilitate basis nonconvergence. In response to the notable episode of non-convergence in the midto late-2000s, the Chicago Mercantile Exchange (CME) introduced variable storage rate (VSR) policies in the soft red winter (SRW) wheat and hard red winter wheat markets. The VSR mechanism functions by adjusting the storage rate to the price spread between sequential futures contract deliveries in the period right before the expiration of the nearby contract. In contrast, CME did not introduce a VSR to corn and soybean markets but chose to increase their fixed storage fees in 2008 and later in 2020. We study convergence performance for each of these markets from 2006-2020 and use time series techniques to show that flexible storage fee policies like the VSR reduce the magnitude and therefore the expected duration of nonconvergence in wheat markets. On the other hand, we do not find evidence that CME's higher fixed storage rates likewise reduce the expected duration of nonconvergence episodes in corn and soybeans markets-although perhaps not enough time has passed to evaluate the effectiveness of the most recent changes-or that index trader activity causes basis nonconvergence.
2014
The storage-at-a-loss paradox—stocks despite inadequate price growth to cover storage costs—is an unresolved issue of long-standing interest to economists. Alternative explanations include risk premiums for futures market speculators, convenience yields from holding stocks, and mismeasurement/aggregation of data. Statistical analyses of regional and elevator corn and soybean price growth in Illinois suggest limited aggregation effects and reveal a pattern of regional- and elevator-level backwardations in the presence of Illinois corn stocks that is inconsistent with aggregation explanations for storage at a loss. Interviews with elevator managers support the existence of convenience yields.
Futures Prices in Supply Analysis Reconsidered
2013
Are futures prices exogenous to agricultural supply? It depends. We argue that crop yield shocks were predictable during the 1961-2007 period because high planting-time futures prices tended to indicate that yield would be below trend. This feature of the data implies that regressions of production on futures prices would underestimate the supply elasticity, i.e., endogeneity in the futures price biases the regression coefficient down. However, this predictability has only a small effect on planted acreage. Thus, estimating supply models with regressions of planted acreage on futures prices entails a small endogeneity bias. Moreover, this small bias is mitigated by adding the realized yield shock as a control variable to such a model as a proxy for the expected yield shock. The marginal contribution of an instrumental variable to bias reduction is thus small.
A speculative bubble in commodity futures prices? Cross-sectional evidence
Agricultural Economics, 2010
Recent accusations against speculators in general and long-only commodity index funds in particular, include: increasing market volatility, distorting historical price relationships, and fueling a rapid increase and decrease in commodity inflation. Some researchers have argued that these market participants-through their impact on market prices-may inadvertently prevented the efficient distribution of food aid to deserving groups. Certainly, this result-if substantiatedwould counter the classical argument that speculators make prices more efficient and thus improve the economic efficiency of the agricultural and food marketing system. Given the very important policy implications, it is crucial to develop a more thorough understanding of long-only index funds and their potential market impact. Here, we review the criticisms (and rebuttals) levied against (and for) commodity index funds in recent U.S. Congressional testimonies. Then, additional empirical evidence is added regarding cross-sectional market returns and the relative levels of long-only index fund participation in 12 commodity futures markets. The results suggest that index fund positions across futures markets have no impact on relative price changes across those markets. The empirical results provide no evidence that long-only index funds impact commodity futures prices.
SSRN Electronic Journal, 2013
This paper takes an innovative look at the relationship between commodity futures prices and speculation. Contrary to other studies, we analyze the effect of speculation on temporary and permanent futures price shocks estimated from a cointegrated system of pairwise short-and long-dated contracts. Where cointegration is found, the long-term equilibrium is determined by the long-dated contract, while the adjustment toward equilibrium is restored by the short-dated contract (except for cotton). Granger causality tests cannot reject the null hypothesis that speculation as measured by Working's T index has no effect on squared permanent price shocks for 7 out of 9 commodities. Where the null hypothesis is rejected, the relationship exhibits a negative sign, i.e., speculation has a stabilizing effect. Keywords Commodity futures prices • Speculation • Cointegration • Temporary and permanent price shocks JEL Classification C22 • G13 • Q02 We acknowledge the critical comments and suggestions of two anonymous referees of this Journal who have improved the paper substantially. An earlier version of the paper was presented in seminars at the Swiss Bankers Association (SBVg), the Swiss Financial Market Supervisory Authority (FINMA), and the Economics Lunch at the Bank of International Settlements (BIS).