Commodity Price Volatility

Agricultural commodity prices are subject to considerable variability. Price variability has been attributed to a number of factors. Its level has been explained by reaction to information flows, by the level of physical inventories, by time to delivery, by seasonality in the production cycle, by persistence in variability, and by trade volume. To clearly identify these effects, UGA agricultural and applied economists use data on all futures contracts, applying the Generalized Least Squares (GLS) method. This econometric method accounts for the contemporaneous correlation among price observations from the same day and allows one to efficiently use data on simultaneously traded contracts. Research results illustrate that price volatility in these futures markets is time varying and using simultaneously traded futures contracts makes it possible to clearly distinguish various components of price volatility. Holding all other variables constant, price volatility increases by 0.3 percentage points for corn, 0.1 for soybeans, 0.3 for wheat, and 0.4 for oats over the life of a contract.