Components of Commodity Price Volatility: A Multiple Commodity Comparison

Summary

The research analyzes the factors behind the price volatility corn, soybeans, wheat, and oats futures contracts traded at Chicago Board of Trade.

Situation

Agricultural commodity prices are subject to considerable variability. Identifying the underlying factors explaining price variability is an important issue in agricultural economics because understanding these factors is important to both production decisions and policy making. 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. However, as previously has been argued in the literature, it is difficult, if not impossible, to distinguish time-to-delivery effects from seasonality when a single futures contract is analyzed.

Response

To clearly identify these effects we use data on all futures contracts, applying the Generalized Least Squares (GLS) method we developed before. 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.

Impact

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. Seasonality is prominent in all markets, and price volatility peaks in summer months. Volatility of corn and soybeans futures peaks in July, two months prior harvest, which occurs from early to mid September to late November. Volatility of wheat futures prices peak in the end of June, one month prior to spring wheat harvest. For oats, volatility peaks in mid July, one month prior to harvest, which takes place from mid August through mid October. The largest inventory effect is noted for oats. Holding intrayear seasonal effects and calendar time constant, if oat inventories decline (rise) by the peak range of 0.24 billion bushels, then futures price volatility will increase (decrease) by 1.3 percentage points. The peak range of soybean inventories is 0.94 billion bushels, implying a 0.2 percentage point increase (decrease) in volatility for this amount of decrease (increase) in inventories. Similarly, a decrease (increase) in corn and wheat inventories by their peak range will cause volatility to increase (decrease) by 0.2 and 0.03 percentage points, respectively. The implied changes in volatility due to a change in inventories by the trough range is similar for corn and wheat, and smaller for soybeans and oats. Further, volatility increases as futures contracts approach delivery time supporting the so-called Samuelson effect. 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. Calendar time trends also are found to significantly affect volatility. We also find significant autoregressive effects---lagged volatility is positively related to volatility.

State Issue

Other Issue

Details

• Year: 2008
• Geographic Scope: National
• County: Clarke
• Program Areas:
  • Agriculture & Natural Resources