NCCC-134
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The ‘Necessity’ of New Position Limits in Agricultural Futures Markets: The Verdict from Daily Firm-Level Position Data
Dwight R. Sanders and Scott H. Irwin
Year: 2014
 

Abstract

Regulators are proposing new position limits in U.S. commodity futures markets while the actual impact of long-only index funds on futures prices continues to be debated. Researchers have noted the data limitations—frequency and market breadth—associated with using data compiled by the U.S. Commodity Futures Trading Commission (CFTC). This research addresses these shortfalls by using daily position data for a specific long-only index fund. The empirical analysis focuses on the firm-level position data across 13 U.S. agricultural futures markets. The firm-level data are shown to be representative of the overall index fund industry. Empirical tests fail to find any evidence linking the firm’s trading with market returns. However, there does appear to be a consistent negative relationship between the firm’s roll transactions and changes in calendar price spreads. Notably, the direction of this impact is opposite of price-pressure hypothesis. The results of this study, and others, indicate that a clear verdict can be reached—new limits on speculation in agricultural futures markets are unnecessary.

 
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Quantifying Public and Private Information Effects on the Cotton Market
Ran Xie, Olga Isengildina-Massa, Julia L. Sharp, and Gerald P. Dwyer
Year: 2014
 

Abstract

The study evaluates the impact of four public reports and one private report on the cotton market: Export Sales, Crop Progress, World Agricultural Supply and Demand Estimates (WASDE), Perspective Planting, and Cotton This Month. The best fitting GARCH models are selected separately for the daily cotton futures close-to-close, close-to-open, and open-to-close returns from January 1995 through January 2012. In measuring the report effects, we control for the day-of-week, seasonality, stock level, and weekend-holiday effects on cotton futures returns. We find statistically significant impact of the WASDE and Perspective Planting reports on cotton returns. Furthermore, results indicate that the progression of market reaction varied across reports.

 
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Forecasting of Futures Prices: Using One Commodity to Help Forecast Another
Anzhi Li and Jeffrey H. Dorfman
Year: 2014
 

Abstract

Managers of businesses that involve agricultural commodities need price forecasts in order to manage the risk in either the sale or purchase of agricultural commodities. This paper examines whether commodity price forecasting model performance can be improved by the inclusion of price forecasts for other commodities within the model specification. We estimate 760 dfferent models to forecast the prices of hog, cattle, corn, and soybean and find strong support for the inclusion of other commodity price forecasts in the best forecasting models. Unfortunately, the out-of-sample performance of these models is mixed at best. Still, the results suggest more work is called for to determine how best to use other commodity price forecasts to improve forecasting performance.

 
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How Do Agricultural Futures Prices Respond To New Information About Drought Conditions?
Kathleen Brooks, Fabio Mattos, and Karina Schoengold
Year: 2014
 

Abstract

This study tests whether information provided by the U.S. Drought Monitor impacted futures prices for commodities between 2000 and 2012. Results based on the November futures prices for soybeans indicate that there is a statistically significant difference in mean and variance of absolute percentage price changes between days when the Drought Monitor is released and other days. Further analysis suggests that the effect of the Drought Monitor information varies during the year. In particular, absolute percentage price changes are generally smaller on report days than on non-report days during the winter and spring, but are larger on report days than on non-report days during the summer. Finally, focusing on the impact on prices of the magnitude of drought conditions, there is evidence that larger areas under extreme drought conditions lead to larger absolute price changes.

 
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Chewing the Cud on Using Multi-Commodity Hedge Ratios To Manage Dairy Farm Risk
John Newton, Cameron S. Thraen, and Marin Bozic
Year: 2014
 

Abstract

This study examines the risk management opportunities for regional mailbox milk prices and composite income-over-feed-cost margins using alternative milk and input cost risk management strategies. Multi-commodity hedge ratios are estimated using cash and futures market data over 2001 to 2013. Our analysis shows that at sufficient hedging horizons single- or multi-commodity hedge ratios may reduce up to 65% of the margin price risk, 39% of the milk price risk, and may outperform naïve pricing arrangements designed to replicate regulated milk pricing provisions. Cross-hedging using milk and feed futures is an imperfect hedge and remains exposed to basis risk due to the spatial value of feed and the regulatory burden of Federal and State milk pricing and pooling programs.

 
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Spatial Price Efficiency in the Urea Market
Zhepeng Hu and Wade Brorsen
Year: 2014
 

Abstract

Urea fertilizer is widely used in the U.S., however, most urea is not openly traded and formula pricing is common. This study measures the efficiency of spatial urea prices in the New Orleans-Arkansas River urea market and the New Orleans-Middle East urea market. The vector error correction model (VECM) and Baulch’s (1997) parity bound model (PBM) are used. Nonlinearity testing finds no threshold effects. Thus, we do not include threshold values in our vector error correction models. Parameter estimates of vector error correction models show that violations of spatial price equilibrium are corrected faster in the Arkansas River-New Orleans urea market than the New Orleans-Middle East urea market. Results from the parity bound model show that in the New Orleans-Middle East urea market, price spreads are found greater than transportation costs in about 23% of the time. So, the New Orleans-Middle East market is a moderately inefficient market rather than a perfectly efficient market.

 
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Portfolio Investment: Are Commodities Useful?
Lei Yan and Philip Garcia
Year: 2014
 

Abstract

This paper investigates the usefulness of commodities in investors' portfolios within a mean- variance optimization framework. The analysis di ers from previous research by considering multiple investment tools including individual commodity futures contracts, three generations of commodity indices and by controlling for estimation error in portfolio optimization pro- cess. Rather generally, the results demonstrate that including individual commodities or the first- and second-generation commodity indices do little to enhance portfolio performance. Similarly, when an initial portfolio is diversi ed, the risk-reducing ability of agricultural commodities is much weaker than identi ed by previous research. In contrast, including the third-generation indices substantially improves the portfolio's Sharpe ratio by generating higher returns and lower risk.

 
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Bayesian Analysis of a Comprehensive Model for Agricultural Futures
Adam Schmitz, ZhiguangWang, and Jung-Han Kimn
Year: 2014
 

Abstract

Agricultural futures price features stochastic volatility, seasonal spot price volatility, and stochastic cost-of-carry. We propose a single comprehensive model that inludes all these features. We apply the proposed model to analyze the corn futures market from January 3rd, 1989, to December 31st, 2008. We conduct parameter estimation using Markov chain Monte Carlo (MCMC) with a novel dynamic tuning scheme. We also employ a parallel MCMC scheme for state variable estimation. Parameter estimates and model errors indicate the comprehensive model to be e ective for modeling corn futures.

 
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Return and Risk Performance of Basis Strategy: A Case Study of Illinois Corn and Soybeans, 1975-2012 Crop Years
Sanghyo Kim, Carl Zulauf, and Matthew Roberts
Year: 2014
 

Abstract

The study examines if a storage strategy based on the cash-futures basis (the basis strategy) has been profitable over the 1975-2012 crop years for Illinois corn and soybeans. The study first examines the means and standard deviations of annual net storage returns obtained from hedged and unhedged storage when routinely storing each year and when using the basis strat- egy. For both the period of higher commodity prices since 2005 and the pre-2006 period, the basis strategy is found to (1) improve net returns to hedged but not unhedged storage and (2) lower the return risk for both hedged and unhedged storage. Previous studies have not exam- ined the basis strategy's impact on the return risk for unhedged storage. To further investigate the performance of the basis strategy in these two periods, the performance of the expected net return to storage in forecasting the observed net storage return is examined. Given the panel structure of the data, a Fixed E ects (FE) model was chosen to estimate since the re- gion speci c e ects are of interest. However, signi cant cross-equation correlations are found in the disturbances, a characteristic not investigated in previous studies. Thus, a Fixed E ects (FE) Panel Seemingly Unrelated Regressions (PSUR) is estimated. Forecast performance of the observed net storage return by the expected net storage return was found to be unbiased in the pre-2006 period. Forecast performance deteriorated somewhat in the post-2006 period as some forecasts were found to be biased. The decline in forecast performance is consistent with the lack of convergence that has been noted in the soybean and especially corn futures markets during some of the years since 2006.

 
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Soybean Oil Spatial Price Dynamics
JewelwayneS. Cain and Joe L. Parcell
Year: 2014
 

Abstract

We analyze the price relationship of refined-bleached-deodorized (RBD) soybean oil prices among four regional U.S. markets (Central Illinois, U.S. Gulf, West Coast, and East Coast). Econometric time-series methods were used to detect price integration, linkages, and responsiveness for each oil type and among each market. Results show that the four markets have remained price-integrated in the long run. This implies that the markets are spatially efficient. The results, however, also suggest that the level of market efficiency may have decreased to some extent after the U.S. biodiesel production surge in the mid-2000s.

 
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The Competitive Position of the Black Sea Regionin World Wheat Export Markets
Daniel M. O’Brien and Frayne Olson
Year: 2014
 

Abstract

Differences in physical quality characteristics among classes or types of wheat are often reflected in global cash wheat prices in general, and in wheat prices and sales involving major Black Sea Region exporters Russia, Ukraine and Kazakhstan in particular. Black Sea Region wheat export markets appear to be somewhat associated with each in other in terms of price dynamics, while still exhibiting important differences. Differences in wheat class quality characteristics and logistical-transportation factors play an important role in determining the competitive, cointegrated nature of world and Black Sea Region wheat market price relationships, along with the dynamics of changing wheat supply-demand balances. Black Sea Region wheat prices display some degree of price interrelatedness for milling quality wheat, but not complete uniformity. Ukraine milling wheat export prices show evidence of being cointegrated with German milling wheat export prices, but less so with with those of Russia. Russian milling wheat export prices appear to be cointegrated with both U.S. hard red winter and soft red winter wheat export prices, but less so with those of the Ukraine. Kazakhstan milling wheat export prices show evidence of being somewhat associated with Russian milling wheat export prices, but not so with those in Ukraine.

 
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Sources of Roll-Related Returns in the S&P GSCI Excess Return Index
Di Hu and Paul E. Peterson
Year: 2014
 

Abstract

Standard & Poor’s Goldman Sachs Commodity Index (S&P GSCI) is the largest tradable commodity index fund in the world with more than $80 billion in S&P GSCI-related investments. Investors have been led to believe that investing in the S&P GSCI during periods of rising commodity prices will be profitable. However, the return performance of the S&P GSCI rarely equals the price change of its underlying spot commodities over the long run. This paper examines the historical excess returns of S&P GSCI futures holdings from 2007 to 2013, duplicating the official S&P GSCI trading methods, and finds that S&P GSCI excess returns differ from returns on corresponding investments in commodity futures due to the interaction between term structure effects and futures returns.

 
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The Performance of U.S. Ethanol Futures Markets on the World Stage
Roger A. Dahlgran, Waldemar Antônio da Rocha de Souza, Jingyu Liu, and Xiaoyi (Dora) Yang
Year: 2014
 

Abstract

This study examines the feasibility of Brazilian ethanol dealers using the U.S. ethanol futures contract as a price-risk management vehicle. This application is appropriate given that the U.S. and Brazil are the world’s largest and second largest ethanol producers. This specific application is part of a larger consideration as to how U.S. futures markets perform for hedging international commodities. This study considers the reasons why U.S. ethanol contracts might and might not work as hedging vehicles for Brazilian ethanol inventories prior to conducting an empirical investigation. Our empirical hedge ratio model formulates three components of price risk for international users of U.S. futures markets. These are (1) the risk of commodity price change given the initial currency exchange rate, (2) the risk of exchange rate change, given the commodity’s initial price, and (3) the risk of covariation between the commodity’ price and the currency exchange rate. Based on these sources of price risk, the hedging portfolio consists of the U.S. ethanol futures contract and the Brazilian real futures contract. Our analysis reveals that the U.S. ethanol futures contract provides little price-risk protection for Brazilian ethanol holder while the Brazilian real futures contract offers some protection. In contract, we present results from crude oil futures markets where the U.S. crude oil futures contract gives the bulk of price risk protection and the currency futures contract provides much less. We conclude (1) that the ethanol findings are not universal and depend on the provisions of the U.S. ethanol futures contract and (2) the contracts traded on the Brazilian futures exchange do not compete directly with the U.S. contracts.

 
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A Structural Approach to Disentangling Speculative and Fundamental Influences on the Price of Corn
Xiaoli L. Etienne, Scott H. Irwin, and Philip Garcia
Year: 2014
 

Abstract

Corn prices experienced enormous volatility over the last decade. In this paper, we apply a structural vector autoregression model to quantify the relative importance of various contributing factors in driving corn price movements. The identification of structural parameters is achieved through a data-determined approach—the PC algorithm of Directed Acyclic Graphs. We find that, in general, unexpected shocks in aggregate global demand and speculative trading activities do not have a statistically significant effect on corn price movements. By contrast, shocks in the crude oil market have large immediate effects that persist in the long-run. The forecast error variance decomposition suggest that at the two-year horizon, variations in crude oil prices account for over 50% of the total corn forecast error variances. We also find that, consistent with theory, unexpected shocks in market-specific fundamentals also have large negative effects on price movements. In addition, unexpected residual shocks play an important role in corn price movement, especially in the short-run.

 
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How Large Is the Agricultural Swaps Market?
Paul E. Peterson
Year: 2014
 

Abstract

This study is the first detailed examination of trading activity in the agricultural swaps market, covering 22 major agricultural commodities during the first 13 months of reporting under the Dodd-Frank Act. It is also the first to quantify the size of the agricultural swaps market using actual transaction data and three different metrics. The notional value of U.S. agricultural swaps traded during this period was $51 billion, or approximately 22% of the gross market value for “other commodities” reported by the Bank for International Settlements. However, the volume of agricultural swaps trading is equivalent to a small fraction of the volume for exchange-traded futures and options on the same commodities.

 
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Competing for Wheat in the Great Plains: Impacts of Shuttle-Loading Grain Facilities on Basis Patterns
Anton Bekkerman, Mykel Taylor, Gage Ridder, and Brian Briggeman
Year: 2014
 
No Abstract Available

 
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Marketing Strategies for Soybeans in 1997-2012: Performance Persistence and Risk-return Tradeoffs
Fabio Mattos and Kathleen Brooks
Year: 2014
 

Abstract

This working paper discusses preliminary ideas of a research project that explores the performance of marketing strategies. In this first step only strategies using futures contracts for soybeans are examined. A set of 26 marketing strategies was simulated between 1997 and 2012 based on November futures prices and cash prices in Nebraska. Initial findings suggest that mean returns tend to be higher (lower) when larger (smaller) portions of crop are sold with futures contracts, and when those sales happen in the summer (spring and fall). However, those strategies that yield higher returns also bring larger dispersion of returns, which raises the need to discuss tradeoffs between risk and return. Finally, it was investigated whether a group of strategies could consistently outperform the others, but no evidence was found to support this idea.

 
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