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From Auckland to Eau Claire: Price Transmission from International Dairy Markets to Local U.S. Milksheds
John Newton
Year: 2016
 

Abstract

The price relationships governing dairy commodity price transmission among the U.S., Oceania, and EU markets are considered using Vector Autoregressive and Vector Error Correction models. Results demonstrate a one-way price relationship for U.S. dry milk powders as price shocks in Oceania and the European Union spread to the U.S. while U.S. price shocks do not spread into those markets. U.S. prices for cheddar and butter are impacted by price shocks in Oceania and the EU, however, U.S. price shocks also spread the Oceania market and may reflect potential arbitrage opportunities. Historically thought to be shielded from international prices through low import quotas and high out-of-quota tariffs these results are the first to empirically demonstrate that U.S. dairy commodity prices and farm-gate milk prices are influenced in both the long-run and short run by international dairy commodity prices.

 
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Relationship of Grain Stocks and Marketing Behavior
Tyler Holmquist, Matthew A. Diersen and Nicole Klein
Year: 2016
 

Abstract

Farmers, merchandisers and end-users are faced with the challenge of allocating stocks of grains and oilseeds throughout the marketing year. Farmers want to obtain the best price subject to storage costs and storage constraints. Merchandisers want to assemble crops, provide storage services and supply end-users with steady quantities. Storage is available and reported at the farm level and across off-farm locations. Percentages marketed by farmers are also reported, but not until the end of the marketing year. Thus, there is information about the physical location of crops and its ownership by farmers. Factors are examined that explain the storage and marketing behavior of farmers and by the entire supply chain. Price expectations are examined, but are dominated by strong seasonal patterns in disappearance and marketings. A disparity between on-farm and off-farm disappearance is identified, the latter being intractable to quantify. A disparity between marketings and on-farm disappearance suggests a large portion of off-farm stocks are owned by farmers, potentially creating storage constraints at off-farm locations.

 
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Hedging the Crack Spread during Periods of High Volatility in Oil Prices
Pan Liu, Dmitry Vedenov, Gabriel J. Power
Year: 2016
 

Abstract

Traditional approach to hedging crude oil refining margin (crack spread) adopts a fixed 3:2:1 ratio between the futures positions of crude oil, gasoline, and heating oil. However, hedging the latter in arbitrary proportions might be more effective under some conditions. The paper constructs optimal hedging strategies for both scenarios during the periods of relatively stable and volatile oil prices observed in recent years. Minimization of downside risk (LPM2) and variance are used as alternative hedging objectives. The joint distribution of spot and futures price shocks is modeled using a kernel copula method. The hedging performance of the constructed strategies is compared using hedging effectiveness, expected profit, and expected shortfall. Results show that allowing for arbitrary proportions in sizes of futures positions generally achieves better hedging performance. The advantage becomes particularly important during periods characterized by a high volatility of the cross-dependence between the prices of individual commodities. In addition, using ??????2 as a hedging criterion can help hedgers to better track downside risk as well as lead to higher expected profit and lower expected shortfall.

 
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Determining the Effectiveness of Exchange Traded Funds as a Risk Management Tool for Southeastern Producers
Will Maples, Ardian Harri, John Michael Riley, Jesse Tack, and Brian Williams
Year: 2016
 

Abstract

This research investigates the use of commodity exchange traded funds (ETFs) as a price risk management tool for agriculture producers. The effectiveness of using ETFs to hedge price risk will be determined by calculating optimal hedge ratios. This paper will investigate the southeastern producer’s ability to hedge their price risk for not only outputs, like corn and feeder cattle, but also for inputs, like diesel fuel and fertilizer. These ratios will be calculated using ordinary least squares (OLS), error correction model (ECM), and generalized autoregressive conditional heteroskedasticity (GARCH) regression models. A utility maximization framework will be used to determine how transaction costs and risk aversion effect the optimal hedge ratio. Being able to use ETFs to hedge price risk would provide a significant tool to small and mid-sized producers who are unable to take advantage of current price risk management practices, such as the use of futures, because of the large size of the futures contracts. ETFs also present a potential tool to manage a producer’s input price risk. A majority of producers are unable to protect themselves from the rising costs of inputs due to producers’ small production size and unavailability of protection methods.

 
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The Effect of Pit Closure on Futures Trading
Eleni Gousgounis and Esen Onur
Year: 2016
 

Abstract

Motivated by CME’s decision to close down most of the futures pits in July of 2015, we analyze the changes in a number of important CME futures markets between 2012 and 2016. We find that although futures pit trading has been diminished to very low levels, it has not completely disappeared. While we do not have evidence of futures pit traders transitioning to the electronic market, we see that some futures pit traders are still active in options pit markets. When we explore the changes in daily trading patterns, we observe a shift in the timing of trading hours for a few select markets. In terms of execution costs, we do not observe any definitive effect of the pit closures on execution costs for most commodities in the electronic market. However, effective spreads for random length lumber futures appear to increase around the time of the announcement of the pit closures. A similar effect is observed for trading strategies in treasury futures during the roll periods.

 
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Commodity Price Co-Movements: Back to Normal
Marie Steen and Ole Gjolberg
Year: 2016
 

Abstract

We present evidence overruling the claim that commodity prices over the recent ten years have been moving increasingly and permanently more in sync in the short term. True, correlations across physically unrelated commodities increased during the commodity boom-and-bust and the financial crisis. However, even during this period short-term commodity price changes were far from uniform in terms of covariances and distributions. Applying Principal Component Analysis (PCA) to weekly price changes for 14 different commodities during the period 2007-08, the first principal factor explains less than 50 per cent of total variation and more than five factors are required in order to explain more than 80 per cent. Since 2009 the covariance structure has evolved so that the first principal factor explains far less. After 2012, no single factor explains more than 25 per cent and seven factors are needed in order to explain more than 80 per cent. This is quite similar to the results from the PCA for the period 1990-2006, suggesting that the covariance structure has reverted back to what was normal prior to 2007. The large growth in commodity futures trading and commodity investments – often referred to as commodity “financialization” - has not turned commodities into “one” asset. Prices of different commodities behave differently.

 
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Risk Management: Hedging Potential for U.S. Breweries
Alejandro Prera, T. Randall Fortenbery, and Thomas L. Marsh
Year: 2016
 

Abstract

In this paper we investigate the potential to develop hedging strategies for firms in the U.S. brewing sector. The primary ingredients for beer are hops (grown in many different varieties), grain malt (mostly malted barley but also other grains), wheat, yeast, and water. We test for statistical relationships between hop and barley prices and futures prices wheat, and corn to determine whether price relationships are such that cross hedging hops and barley with existing futures contracts appears feasible. If hops and barley can be effectively hedged then most of the primary inputs used by brewers can be hedged. Using standard multivariate time seriesmodels, we test for stationarity in prices, test for co-integration relationships between the various brewers’ inputs, and report the statistical results. We find the existence of a structural break in the prices associated with beginning of the most recent recession. This created greater instability in commodity prices and a change in their inter-relationships. Insight into these relationships provides relevant information concerning hedging and cross-hedging opportunities for small breweries.

 
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The Economic Impact of the 2015 Avian Influenza outbreak on U.S. Egg Prices
Agnieszka Dobrowolska and Scott Brown
Year: 2016
 

Abstract

This study provides a partial equilibrium approach to quantifying the effect of the Highly Pathogenic Avian Influenza (HPAI) outbreak that occurred in the United States in late 2014 and early 2015. The quarterly model provides an estimate of egg prices that would have occurred over this period without the HPAI outbreak. This research also provides sensitivity analysis around the estimated retail demand elasticity based on a review of the literature surrounding the retail demand for eggs in the United States.

 
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What Drives Volatility Expectations in Grain Markets?
Michael K. Adjemian, Valentina G. Bruno, Michel A. Robe, and Jonathan Wallen
Year: 2016
 

Abstract

We analyze empirically the drivers of grain option-implied volatilities (IVs). Forward-looking uncertainty and risk aversion in equity market (jointly captured by the VIX) and the state of commodity inventories (proxied by the net cost of carry for each grain) have significant impacts on forward-looking volatility in the three largest U.S. agricultural markets: corn, soybeans, and wheat. We also find some evidence that financial speculation has an immediate but short-lived negative impact on grain Ivs.

 
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The Information Content in the Term Structure of Commodity Prices
Xiaoli L. Etienne and Fabio Mattos
Year: 2016
 

Abstract

In this paper, we investigate the term structure of agricultural commodity prices. Using corn as an example, we demonstrate that commodity futures price curve can be wellapproximated by three latent factors: level, slope, and curvature obtained from a dynamic latent factor model. Relating the three unobserved factors to observable economic fundamentals, we find that real economic activity and relative scarcity of the commodity play an important role in the evolution of the corn futures price curve. Using Granger causality tests, we find that all three unobserved factors of the futures price curve contain predictive information on real economic activity and the relative scarcity of the commodity. Consistent with the theory of storage, there is a forwardlooking element embedded in the term structure of commodity prices that contain information regarding subsequent market fundamentals.

 
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Valuing Public Information in Agricultural Commodity Markets:WASDE Corn Reports
Philip Abbott, David Boussios and Jess Lowenberg-DeBoer
Year: 2016
 

Abstract

Monthly WASDE reports by USDA estimate current and future global supply-utilization balances for various commodities, including corn. Existing literature has shown that markets respond to WASDE releases (news effects) but has not quantified the value or distribution of benefits from those reports. We use Monte Carlo simulations of a quarterly model of the U.S. Corn market to estimate the value of the WASDE forecast and its components. Our results show significant value to market participants from the WASDE reports, roughly $301 million or 0.55% of overall corn market value. The results also show significant value for each forecasted component of the reports: area ($145 million), yield ($188 million), production ($299 million), demand/stocks ($300 million) and exports ($320 million). The benefits of each component do not strictly sum when new information is added because substantial redistribution of benefits occurs, since specific information components help specific interest groups. The expected benefits or losses realized by consumers, producers or traders is often nearly as large as (and sometimes larger than) the net benefits to society from better information. In the base case benefits from WASDE information largely accrues to producers ($153 million) and consumers ($341 million). Traders lose $192 million, as they are presumed to buy at harvest, before valuable demand, stocks and export data is known. Farmers behave as traders when they choose to store, sell forward, or participate directly in futures markets. Thus, the net trader benefit or loss accrues partially to farmers as traders and partially to commercial agents. These results are sensitive to elasticity assumptions that capture both how agents behave in markets and how their welfare is measured.

 
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Forecasting Quality Grade and Certified Angus Beef Premiums
Jason Franken and Joe Parcell
Year: 2016
 

Abstract

We evaluate the mean squared error and mean absolute percentage error of alternative forecasts of quality grade and Certified Angus Beef (CAB) premiums, which may be of interest to cow-calf producers, feeders, and packers. A supply and demand model and a vector autoregressive model outperform a naïve model accounting for only seasonal effects for all premiums except the strongly seasonal Choice-Select spread. While there is no significant difference between the supply and demand model and the vector autoregressive model in terms of mean squared error, the supply and demand model outperforms the vector autoregressive model in terms of mean absolute percentage error in predicting the CAB-Choice premium.

 
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The Value of USDA Information in a Big Data Era
Olga Isengildina-Massa, Berna Karali, Scott H. Irwin, Michael K. Adjemian, and Xiang Cao
Year: 2016
 

Abstract

The goal of this study is to determine how big data and access to information affects the role and impact of USDA’s situation and outlook programs. Changes in market reaction to various USDA reports including WASDE, Crop Production, Grain Stocks, Prospective Plantings, Acreage, Hogs and Pigs and Cattle on Feed reports over 1970-2016 study period were analyzed. Market reaction was measured as a change in volatility of corn, soybean, wheat, lean hogs, live cattle, cotton and frozen concentrated orange juice returns on report release days. Our findings demonstrate that the impact of USDA reports has not diminished and often increased in crops during the recent decade. On the other hand, the value of USDA reports in livestock markets appears to be decreasing.

 
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Market Concentration in the Wheat Merchandizing Industry
Anton Bekkerman and Mykel Taylor
Year: 2016
 

Abstract

Prices offered to farmers by grain handling facilities have been shown to be affected by the spatial competition structure of the market within which these facilities operate. However, little information exists about how elevators' technological and ownership type characteristics, differences in the demand for grain handling services, and volatility in railcar costs alter grain elevators' pricing behaviors within alternative spatially competitive market structures. This work combines several unique datasets—restricted-access rail waybill sample, daily basis bid information, and elevator-level technological and ownership structure characteristics—to provide an exploratory analysis of the specific factors that can help explain basis bid behaviors across 267 Kansas wheat handling facilities. We provide preliminary evidence that these factors could include variation in the final destination of shipped wheat, increased price variability and uncertainty in secondary railcar markets, differences in the capacity and loading speed, and the business structure (cooperative or investor-owned firm) of the elevator.

 
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Exploring Commodity Trading Activity: An Integrated Analysis of Swaps and Futures
Scott Mixon, Esen Onur, and Lynn Riggs
Year: 2016
 

Abstract

This paper provides the first public analysis of a cross-section of physical commodity swap markets using proprietary position data collected by the Commodity Futures Trading Commission. We find that futures markets are generally larger than swaps markets, as measured by open interest, with WTI crude oil being an exception. By merging data on futures, swaps, and index swaps, we gauge exposures for various types of market participants, products, and tenors across the entire US WTI derivatives market for the first time. We find that, in aggregate, market participants appear to use futures and swaps in tandem – Financial End-Users and Commercial End-Users both have net positions in swaps in the same direction as their net positions in futures. Swap dealers appear to have offsetting swaps and futures net positions. To illustrate the joint nature of these markets, we contrast Working’s T index computed from both futures and swaps data with the index computed solely from futures or swaps. We find that the combined index differs substantially from the index computed using either the futures or swaps data alone, highlighting the potentially incomplete nature of any analysis done using only futures or swaps market data.

 
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The Reference Price Effect on Crop Producer’s Hedging Behavior
Ziran Li, Keri Jacobs, Nathan Kauffman and Dermot Hayes
Year: 2016
 

Abstract

Crop producers’ hedging behavior is at odds with the optimal hedging under expect utility theory. However, there is little consensus on how producers hedge otherwise. In this paper we present an intriguing empirical observation using the Commitment of Traders reports (COT) published by Commodity Futures Trading Commission (CFTC), which shows the hedging behavior of corn and soybean producers may be reference-dependent. We show that producers are likely to hedge when the futures price rises above a reference. Though this reference varies among producers, on the aggregate level, last year’s average price and 20-trading-day moving average of the current futures price are likely candidates. We also discuss the limitation of the data as well as the identification strategies.

 
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The Components of the Bid-Ask Spread: Evidence from the Corn Futures Market
Quanbiao Shang, Mindy Mallory, and Philip Garcia
Year: 2016
 

Abstract

This paper examines whether USDA announcements and commodity index fund rolling activity has an impact of liquidity costs, measured by the Bid-Ask-Spread. Using Huang and Stoll’s (1997) model of liquidity costs, we estimate whether changes to liquidity costs are driven by the adverse selection component, the inventory cost component, or the order processing component. Commodity index fund roll activity reduces the asymmetric information cost component of liquidity cost due to an increased proportion of non-information based trading, but the inventory cost component increases as (mostly long only) commodity index funds sell their nearby position and buy the first deferred contract – raising liquidity providers’ risk of building a position. The sum of these two effects is that liquidity costs remain low during index fund roll periods, averaging very near to one ‘tick’ (0.25 cents). On USDA report release days, we find that informed traders raise the asymmetric information component of liquidity costs in the first hour after release, but the inventory cost component is reduced due to the increase in volume associated with trading the report release. As was the case for commodity index fund roll activity, liquidity costs on USDA report release days remain low, averaging very near to one ‘tick’ (0.25 cents). Our finding that liquidity costs are very minimally changed during USDA report releases and commodity index fund roll periods is similar to other recent research on liquidity costs, but we show that what drives liquidity costs is very different depending on the circumstances surrounding trading on any given day.

 
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Identifying the Impact of Financialization on Commodity Futures Prices from Index Rebalancing
Lei Yan, Scott H. Irwin, and Dwight R. Sanders
Year: 2016
 

Abstract

Attempts to detect the impact of financialization on commodity futures prices are often subject to the criticism of weak identification. This paper addresses the issue by investigating the rebalancing of the S&P Goldman Sachs Commodity Index. Investment flows caused by the rebalancing are predetermined and not based on information about futures prices, providing a clear identification to study the price impact. Results show that average futures returns are not significantly different from zero during the rebalancing period and there is no or a weak negative causal link between index investment flows and commodity futures returns. This finding is consistent with the hypothesis that uninformed and predictable order flows tend to attract natural counterparties and would not disrupt the market.

 
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