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The weather premium in the U.S. corn market

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  • Ziran Li
  • Dermot J. Hayes
  • Keri L. Jacobs

Abstract

We show that the weather premium, an anecdotal phenomenon in the U.S. corn futures market, can arise from a convex demand function. We further show that the magnitude of the weather premium depends on the carryout and expected yield at harvest. We use data from 1968 to 2015 to evaluate the accuracy of the December futures price as a forecast of the harvest price. A predictable component in the forecast error is consistent with the existence of a time‐varying weather premium. We demonstrate that a passive strategy of routinely shorting the corn December futures does not provide an attractive risk‐adjusted return.

Suggested Citation

  • Ziran Li & Dermot J. Hayes & Keri L. Jacobs, 2018. "The weather premium in the U.S. corn market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(3), pages 359-372, March.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:3:p:359-372
    DOI: 10.1002/fut.21884
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    References listed on IDEAS

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    Cited by:

    1. Janzen, Joe, . "The Weather Risk Premium in New-Crop Corn Futures Prices," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 11(88).
    2. repec:ags:aaea22:335663 is not listed on IDEAS
    3. Tianyang Zhang & Ziran Li, 2022. "Can a rational expectation storage model explain the USDA ending grain stocks forecast errors?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 313-337, March.

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