Futures basis, inventory and commodity price volatility: an empirical analysis

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.

The potential inefficiency of using marketing margins in applied commodity price analysis, forecasting and risk management

This paper examines the implications of using marketing margins in applied commodity price analysis. The marketing-margin concept has a long and distinguished history, but it has caused considerable controversy. This is particularly the case in the context of analyzing the distribution of research gains in multi-stage production systems. We derive optimal tax schemes for raising revenues to finance research and promotion in a downstream market, derive the rules for efficient allocation of the funds, and compare the rules with an without the marketing-margin assumption. Applying the methodology to quarterly time series on the Australian beef-cattle sector and, with several caveats, we conclude that, during the period 1978:2 - 1988:4, the Australian Meat and Livestock Corporation optimally allocated research resources.

Excise taxes and commodity promotion bayesian retrieval of the optimum

This article shows how the solution to the promotion problem—the problem of locating the optimal level of advertising in a downstream market—can be derived simply, empirically, and robustly through the application of some simple calculus and Bayesian econometrics. We derive the complete distribution of the level of promotion that maximizes producer surplus and generate recommendations about patterns as well as levels of expenditure that increase net returns. The theory and methods are applied to quarterly series (1978:2S1988:4) on red meats promotion by the Australian Meat and Live-Stock Corporation. A slightly different pattern of expenditure would have profited lamb producers

Seasonality and the valuation of commodity options

Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.

Commodity futures prices: more evidence on forecast power, risk premia and the theory of storage

In this paper, we examine the temporal stability of the evidence for two commodity futures pricing theories. We investigate whether the forecast power of commodity futures can be attributed to the extent to which they exhibit seasonality and we also consider whether there are time varying parameters or structural breaks in these pricing relationships. Compared to previous studies, we find stronger evidence of seasonality in the basis, which supports the theory of storage. The power of the basis to forecast subsequent price changes is also strengthened, while results on the presence of a risk premium are inconclusive. In addition, we show that the forecasting power of commodity futures cannot be attributed to the extent to which they exhibit seasonality. We find that in most cases where structural breaks occur, only changes in the intercepts and not the slopes are detected, illustrating that the forecast power of the basis is stable over different economic environments.

The dynamics of commodity prices

In this paper we study the stochastic behavior of the prices and volatilities of a sample of six of the most important commodity markets and we compare these properties with those of the equity market. we observe a substantial degree of heterogeneity in the behavior of the series. Our findings show that it is inappropriate to treat different kinds of commodities as a single asset class as is frequently the case in the academic literature and in the industry. We demonstrate that commodities can be a useful diversifier of equity volatility as well as equity returns. Options pricing and hedging applications exemplify the economic impacts of the differences across commodities and between model specifications.

Economic commodity or environmental crisis? An interdisciplinary approach to analysing the bushmeat trade in central and west Africa

Bushmeat is a large but largely invisible contributor to the economies of west and central African countries. Yet the trade is currently unsustainable. Hunting is reducing wildlife populations, driving more vulnerable species to local and regional extinction, and threatening biodiversity. This paper uses a commodity chain approach to explore the bushmeat trade and to demonstrate why an interdisciplinary approach is required if the trade is to be sustainable in the future.

Do long-short speculators destabilize commodity futures markets?

This paper contributes to the debate on the effects of the financialization of commodity futures markets by studying the conditional volatility of long–short commodity portfolios and their conditional correlations with traditional assets (stocks and bonds). Using several groups of trading strategies that hedge fund managers are known to implement, we show that long–short speculators do not cause changes in the volatilities of the portfolios they hold or changes in the conditional correlations between these portfolios and traditional assets. Thus calls for increased regulation of commodity money managers are, at this stage, premature. Additionally, long–short speculators can take comfort in knowing that their trades do not alter the risk and diversification properties of their portfolios.

Agricultural commodity markets : reference point for the real value of a currency

Using monthly time-series data 1999-2013, the paper shows that markets for agricultural commodities provide a yardstick for real purchasing power, and thus a reference point for the real value of fiat currencies. The daily need for each adult to consume about 2800 food calories is universal; data from FAO food balance sheets confirm that the world basket of food consumed daily is non-volatile in comparison to the volatility of currency exchange rates, and so the replacement cost of food consumed provides a consistent indicator of economic value. Food commodities are storable for short periods, but ultimately perishable, and this exerts continual pressure for markets to clear in the short term; moreover, food calories can be obtained from a very large range of foodstuffs, and so most households are able to use arbitrage to select a near optimal weighting of quantities purchased. The paper proposes an original method to enable a standard of value to be established, definable in physical units on the basis of actual worldwide consumption of food goods, with an illustration of the method.

Commodity price dynamics and derivatives valuation: a review

This paper reviews extant research on commodity price dynamics and commodity derivatives pricing models. In the first half, we provide an overview of stylized facts of commodity price behavior that have been explored and documented in the theoretical and empirical literature. In the second half, we review existing derivatives pricing models and discuss how the peculiarities of commodity markets have been integrated in these models. We conclude the paper with a brief outlook on important research questions that need to be addressed in the future.

Booms and busts in commodity markets: bubbles or fundamentals?

This paper considers whether there were periodically collapsing rational speculative bubbles in commodity prices over a 40-year period from the late 1960s. We apply a switching regression approach to a broad range of commodities using two different measures of fundamental values—estimated from convenience yields and from a set of macroeconomic factors believed to affect commodity demand. We find reliable evidence for bubbles only among crude oil and feeder cattle, showing the popular belief that the extreme price movements observed in commodity markets were caused by pure speculation to be unsustainable