Market Inversion In Commodity Futures Prices
AbstractAs 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 InfoPaper 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.
Date of creation: 2001
Date of revision:
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Web page: http://www.agebb.missouri.edu/ncrext/ncr134/
Demand and Price Analysis;
Other versions of this item:
- Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
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- 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.
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