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Soybean Inventory and Forward Curve Dynamics

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  • Nguyen, Vu-Nhat
  • Geman, Hélyette
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    Abstract

    We present two results concerning soybean prices. First, we exhibit a simple relationship between stocks and price volatility. The observation of an increasing price volatility with decreasing inventory is often mentioned in the literature, but has so far been documented using a proxy for inventory (see Fama and French 1987, 1988; Litzenberger and Rabinowitz 1995). Instead, we reconstruct a yearly, quarterly, and monthly database of worldwide soybean inventories using aggregate data from the United States, Brazil, and Argentina. We show that under all time scales, price volatility is an increasing linear function of inverse inventory, which we term "scarcity." Second, we show how the addition of the factor scarcity in a state-variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit. We document this property on a 25-year database of CBOT futures contracts and show that the superior accuracy also affects long-maturity futures contracts, an important property for the valuation of long-term origination contracts between producing countries and the agrifood industry.

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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/1937.

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    Date of creation: Jul 2005
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    Publication status: Published in Management Science, 2005, Vol. 51, no. 7. pp. 1076-1091.Length: 15 pages
    Handle: RePEc:dau:papers:123456789/1937

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    Related research

    Keywords: Scarcity-related volatility; State variables; Term structure of soybean forward prices;

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    Cited by:
    1. Sévi, Benoît & Le Pen, Yannick, 2013. "Futures trading and the excess comovement of commodity prices," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/11382, Paris Dauphine University.
    2. Symeonidis, Lazaros & Prokopczuk, Marcel & Brooks, Chris & Lazar, Emese, 2012. "Futures basis, inventory and commodity price volatility: An empirical analysis," MPRA Paper 39903, University Library of Munich, Germany.
    3. Power, Gabriel J. & Turvey, Calum G., 2008. "On Term Structure Models of Commodity Futures Prices and the Kaldor-Working Hypothesis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 37608, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Derivatives Pricing with Forward-Looking Information," Working Papers on Finance, University of St. Gallen, School of Finance 1317, University of St. Gallen, School of Finance.
    5. Ohana, Steve, 2010. "Modeling global and local dependence in a pair of commodity forward curves with an application to the US natural gas and heating oil markets," Energy Economics, Elsevier, Elsevier, vol. 32(2), pages 373-388, March.
    6. Dempster, M.A.H. & Tang, Ke, 2011. "Estimating exponential affine models with correlated measurement errors: Applications to fixed income and commodities," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(3), pages 639-652, March.
    7. Liu, Peng (Peter) & Tang, Ke, 2010. "No-arbitrage conditions for storable commodities and the modeling of futures term structures," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(7), pages 1675-1687, July.
    8. Gonzalo Cortazar & Ivo Kovacevic & Eduardo S. Schwartz, 2013. "Commodity and Asset Pricing Models: An Integration," NBER Working Papers 19167, National Bureau of Economic Research, Inc.
    9. Jaime Casassus & Peng Liu & Ke Tang, 2011. "Relative Scarcity of Commodities with a Long-Term Economic Relationship and the Correlation of Futures Returns," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 404, Instituto de Economia. Pontificia Universidad Católica de Chile..
    10. Alvaro Cartea & Marcelo G. Figueroa & Helyette Geman, 2008. "Modelling Electricity Prices with Forward Looking Capacity Constraints," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0802, Birkbeck, Department of Economics, Mathematics & Statistics.
    11. repec:ipg:wpaper:19 is not listed on IDEAS
    12. Giulio Cifarelli & Paolo Paesani, 2012. "An Assessment of the Theory of Storage: Has the Relationship between Commodity Price Volatility and Market Fundamentals Changed Over Time?," Working Papers - Economics wp2012_12.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    13. Chris Brooks & Marcel Prokopczuk, 2011. "The Dynamics of Commodity Prices," ICMA Centre Discussion Papers in Finance, Henley Business School, Reading University icma-dp2011-09, Henley Business School, Reading University.
    14. Geman, Helyette & Vergel Eleuterio, Pedro, 2013. "Investing in fertilizer–mining companies in times of food scarcity," Resources Policy, Elsevier, Elsevier, vol. 38(4), pages 470-480.
    15. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, Elsevier, vol. 31(4), pages 576-585, July.
    16. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(2), pages 273-290.
    17. Geman, Hélyette & Smith, William O., 2013. "Theory of storage, inventory and volatility in the LME base metals," Resources Policy, Elsevier, Elsevier, vol. 38(1), pages 18-28.
    18. Nicolas Merener, 2012. "Globally Distributed Production and Asset Pricing:the Rise of Latin America in CME Soybean Futures," Business School Working Papers, Universidad Torcuato Di Tella 2012-01, Universidad Torcuato Di Tella.
    19. Svetlana Borovkova & Helyette Geman, 2006. "Seasonal and stochastic effects in commodity forward curves," Review of Derivatives Research, Springer, Springer, vol. 9(2), pages 167-186, September.
    20. Paschke, Raphael & Prokopczuk, Marcel, 2010. "Commodity derivatives valuation with autoregressive and moving average components in the price dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(11), pages 2742-2752, November.

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