Futures Market Volatility, Exchange Rate Uncertainty and Cereals Exports: Empirical Evidence from France

This paper investigates the impact of both exchange rate and futures price volatility on bilateral cereals exports from France. Using the Poisson pseudo-maximum likelihood (PPML) estimator developed by Santos Silva and Tenreyro (2006) to deal with the problem of zero trade ows when estimating a gravity equation, we show that exchange rate uncertainty has a strong negative impact on French cereals trade. Surprisingly, we nd also that higher futures price volatility is associated with increased French cereals exports. Since the PPML method allows for commodity specific estimation of this relationship, we demonstrate that these results are rather commodity-specific and not uniform across individual cereals commodities. For example, we nd that realized futures price volatility has a significant and positive impact on French exports of four commodities: barley, durum wheat, maize and oats. We suggest that the storage behaviour of grains elevators and physical traders can explain this seemingly counter-intuitive result. In contrast to currencies, basis variability, i.e. the instability surrounding the spread between commercial spot prices and futures prices, can matter more than price instability, and can lead market participants to reduce their stocks, i.e. to sell, when the level of this instability is high.