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Spot and Futures Prices of Agricultural Commodities: Fundamentals and Speculation

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  • Baldi, Lucia
  • Peri, Massimo
  • Vandone, Daniela

Abstract

This paper investigates the long-run relationship between spot and futures prices for corn and soybeans, for the period January 2004 -September 2010. We apply cointegration methodology in the presence of potentially unknown structural breaks in the commodities prices and we then study the causality relationships between spot and futures prices within each specific sub-period identified, with the aim to analyze where changes in spot and futures price originate and how they spread. Empirical estimates highlight the following evidence: i) breaks relate to events that have significantly affected the supply and demand of corn and soybeans for food and energy purposes; ii) subperiods consequently identified express different dynamics in the causal relationship between spot and futures prices and support the idea that many factors contributed to the 2007-2008 food price increase

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Bibliographic Info

Paper provided by International European Forum on Innovation and System Dynamics in Food Networks in its series 2011 International European Forum, February 14-18, 2011, Innsbruck-Igls, Austria with number 122002.

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Date of creation: Nov 2011
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Handle: RePEc:ags:iefi11:122002

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Web page: http://www.fooddynamics.org/

Related research

Keywords: commodity; futures markets; price discovery; cointegration; structural breaks; Agribusiness; Agricultural and Food Policy; Productivity Analysis; C32; G13; G14; Q11;

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References

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  1. W. Erno Kuiper & Joost M. E. Pennings, 2002. "Identification by full adjustment: evidence from the relationship between futures and spot prices," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(1), pages 67-84, March.
  2. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  3. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  4. Hakkio, Craig S. & Rush, Mark, 1989. "Market efficiency and cointegration: an application to the sterling and deutschemark exchange markets," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 75-88, March.
  5. Philip J. Dawson & Ana I. Sanju�n & Ben White, 2006. "Structural Breaks and the Relationship between Barley and Wheat Futures Prices on the London International Financial Futures Exchange," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(4), pages 585-594.
  6. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  7. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May.
  8. Massimo Peri & Lucia Baldi & Daniela Vandone, 2013. "Price discovery in commodity markets," Applied Economics Letters, Taylor & Francis Journals, vol. 20(4), pages 397-403, March.
  9. Kaufmann, Robert K. & Ullman, Ben, 2009. "Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices," Energy Economics, Elsevier, vol. 31(4), pages 550-558, July.
  10. Maslyuk, Svetlana & Smyth, Russell, 2009. "Cointegration between oil spot and future prices of the same and different grades in the presence of structural change," Energy Policy, Elsevier, vol. 37(5), pages 1687-1693, May.
  11. Sushil Mohan & James Love, 2004. "Coffee futures: role in reducing coffee producers' price risk," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(7), pages 983-1002.
  12. Fleming, Jeff & Ostdiek, Barbara, 1999. "The impact of energy derivatives on the crude oil market," Energy Economics, Elsevier, vol. 21(2), pages 135-167, April.
  13. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
  14. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  15. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  16. Philip Garcia, 2004. "A selected review of agricultural commodity futures and options markets," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 235-272, September.
  17. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series WP2005-017, Boston University - Department of Economics.
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Cited by:
  1. Ling-Yun He & Wen-Si Xe, 2012. "Who has the final say?: Market power versus price discovery in China's sugar spot and futures markets," China Agricultural Economic Review, Emerald Group Publishing, vol. 4(3), pages 379-390, October.

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