In this paper we focus on the relationship between spot and futures commodity prices. According to theory, while in the short-run spot and futures prices might significantly diverge, over the long-run spot and futures prices are expected to be correlated, that is they should move together across time to avoid arbitrage opportunities. Changes in spot and future prices may be due by both changes in market fundamentals that affect the supply/demand balance for the commodity, and/or speculation. In the first case price changes (innovation) appear first in spot prices, while in the second case price changes (innovation) appear first in future markets. Moreover, changes in prices can appear simultaneously in different spot/futures markets for substitute or complement commodities as new information about the supply/demand balance becomes available or because of the effect of speculation; alternatively, changes may first appear in the price (spot or futures) of one commodity and subsequently spread through other markets. In fact, co-movement between prices arises particularly when commodities are substitutes or complementaries on the supply and/or demand side, but other reasons include the common impact of speculator behaviours. The way in which prices appear and spread through the market lies behind the notion of price discovery, which is the process by which supply, demand and speculative expectations determine the price of the commodity. This notion can be used to investigate the relationship between prices in the spot and futures market. In turn, the causal relationships among commodities spot and future prices and among prices of commodities can be used to evaluate hypothesis about the role of market fundamentals and speculation in prices increase or decrease. The aim of the paper is to analyse where changes in spot and futures prices of corn and soybean originate and how they spread. To this end we utilize weekly prices drawn from a 10-year period from 2000 to 2010. We adopt a recent methodology to test the presence of potentially unknown structural breaks that can occur in the cointegrating relationships between spot and futures and then we study the causality relationships within the sub-periods and for each commodity. Results show that, allowing for the presence of breaks, there is a steady state relationship between spot and futures prices both for corn and soybean. In particular a remarkable break occurs in proximity of the financial crisis during 2007 and others structural changes occur in different periods. These breaks define sub-periods where different directions of causality in spot and futures prices are present and where, alternately, prevail the role of market fundamentals or speculation. Within the contest of price relationship between the two commodities considered the study offers new insights into how corn and soy markets relates at an industry level; the findings may also be important for producers, in order to better manage price risk, and for traders, in order to exploit speculative and/or arbitrage opportunities.

Spot and futures prices of agricultural commodities : fundamentals and speculation / L. Baldi, D. Vandone, M. Peri. ((Intervento presentato al 5. convegno International European Forum on System Dynamics and Innovation in Food Networks tenutosi a Igls/Innsbruck, Austria nel 2011.

Spot and futures prices of agricultural commodities : fundamentals and speculation

L. Baldi
Primo
;
D. Vandone
Secondo
;
M. Peri
Ultimo
2011

Abstract

In this paper we focus on the relationship between spot and futures commodity prices. According to theory, while in the short-run spot and futures prices might significantly diverge, over the long-run spot and futures prices are expected to be correlated, that is they should move together across time to avoid arbitrage opportunities. Changes in spot and future prices may be due by both changes in market fundamentals that affect the supply/demand balance for the commodity, and/or speculation. In the first case price changes (innovation) appear first in spot prices, while in the second case price changes (innovation) appear first in future markets. Moreover, changes in prices can appear simultaneously in different spot/futures markets for substitute or complement commodities as new information about the supply/demand balance becomes available or because of the effect of speculation; alternatively, changes may first appear in the price (spot or futures) of one commodity and subsequently spread through other markets. In fact, co-movement between prices arises particularly when commodities are substitutes or complementaries on the supply and/or demand side, but other reasons include the common impact of speculator behaviours. The way in which prices appear and spread through the market lies behind the notion of price discovery, which is the process by which supply, demand and speculative expectations determine the price of the commodity. This notion can be used to investigate the relationship between prices in the spot and futures market. In turn, the causal relationships among commodities spot and future prices and among prices of commodities can be used to evaluate hypothesis about the role of market fundamentals and speculation in prices increase or decrease. The aim of the paper is to analyse where changes in spot and futures prices of corn and soybean originate and how they spread. To this end we utilize weekly prices drawn from a 10-year period from 2000 to 2010. We adopt a recent methodology to test the presence of potentially unknown structural breaks that can occur in the cointegrating relationships between spot and futures and then we study the causality relationships within the sub-periods and for each commodity. Results show that, allowing for the presence of breaks, there is a steady state relationship between spot and futures prices both for corn and soybean. In particular a remarkable break occurs in proximity of the financial crisis during 2007 and others structural changes occur in different periods. These breaks define sub-periods where different directions of causality in spot and futures prices are present and where, alternately, prevail the role of market fundamentals or speculation. Within the contest of price relationship between the two commodities considered the study offers new insights into how corn and soy markets relates at an industry level; the findings may also be important for producers, in order to better manage price risk, and for traders, in order to exploit speculative and/or arbitrage opportunities.
feb-2011
Settore AGR/01 - Economia ed Estimo Rurale
Settore SECS-P/11 - Economia degli Intermediari Finanziari
Spot and futures prices of agricultural commodities : fundamentals and speculation / L. Baldi, D. Vandone, M. Peri. ((Intervento presentato al 5. convegno International European Forum on System Dynamics and Innovation in Food Networks tenutosi a Igls/Innsbruck, Austria nel 2011.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/163636
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