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Market Inversion In Commodity Futures Prices

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  • Yoon, Byung-Sam
  • Brorsen, B. Wade

Abstract

As opposed to a normal market, an inverted market has a negative price of storage or spread. Market inversions in nearby spreads rarely occur during early months of the crop year since stocks are usually abundant after harvest. However, market inversions frequently occur when the spreads are observed across crop years near the end of the crop year. The regressions of spreads on the logarithm of U.S. quarterly stocks show that there exists a positive relationship between the spread and the level of stocks, and further implies that when stocks are scarce, markets will be inverted. Simulations are conducted to determine whether a market inversion is a signal to sell the stocks. The results of the paired-difference tests reveal that as the crop cycle advances towards the end of the crop year, market inversions clearly reflect the market's signal to release stocks in anticipation of new crop supplies. The regressions of actual returns to storage on predicted returns to storage clearly show that a market inversion is a signal to sell. The results support the behavioral finance hypothesis that producers are choosing to hold excess stocks because of some type of biased expectations.

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Bibliographic Info

Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2001 Conference, April 23-24, 2001, St. Louis, Missouri with number 18962.

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Date of creation: 2001
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Handle: RePEc:ags:ncrone:18962

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Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

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Keywords: Demand and Price Analysis;

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References

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  1. Jackson, Thomas E. & Irwin, Scott H. & Good, Darrel L., 1998. "1996 Pricing Performance Of Market Advisory Services For Corn And Soybeans," AgMAS Project Research Reports 14787, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Brorsen, B. Wade & Anderson, Kim B., 2001. "Implications of Behavioral Finance for Farmer Marketing Strategy Recommendation," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18952, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  3. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
  4. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-22, July.
  5. Kastens, Terry L. & Dhuyvetter, Kevin C., 1999. "Post-Harvest Grain Storing And Hedging With Efficient Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
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Cited by:
  1. Siaplay, Mounir & Anderson, Kim B. & Brorsen, B. Wade, 2007. "Using Basis and Futures Prices as a Barometer in Deciding Whether to Store Grain or Not," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37575, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  2. Klumpp, Joni M. & Brorsen, B. Wade & Anderson, Kim B., 2005. "The Impact of Marketing Strategy Information on the Producer's Selling Decision," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19036, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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