Modeling seasonality in agricultural commodity futures

The stochastic behavior of agricultural commodity prices is investigated using observations of the term structures of futures prices over time. The continuous time dynamics of (log‐) commodity prices are modeled as a sum of a deterministic seasonal component, a non‐stationary state‐variable, and a stationary state‐variable. Futures prices are established by standard no‐arbitrage arguments and the Kalman filter methodology is used to estimate the model parameters for corn futures, soybean futures, and wheat futures based on weekly data from the Chicago Board of Trade for the period 1972–1997. Furthermore, in a discussion of the estimated seasonal patterns in agricultural commodity prices, the paper provides empirical evidence on the theory of storage that predicts a negative relationship between stocks of inventory and convenience yields; in particular, convenience yields used in this analysis are extracted using the Kalman filter. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:393–426, 2002

[1]  Eduardo S. Schwartz,et al.  Evaluating Natural Resource Investments , 1985 .

[2]  Eduardo S. Schwartz.  The stochastic behavior of commodity prices: Implications for valuation and hedging , 1997 .

[3]  Guy Laroque,et al.  On the Behaviour of Commodity Prices , 1992 .

[4]  Bryan R. Routledge,et al.  Equilibrium Forward Curves for Commodities , 2000 .

[5]  Brian D. Wright,et al.  Convenience Yield Without the Convenience: A Spatial–Temporal Interpretation of Storage Under Backwardation , 1997 .

[6]  S. Ross,et al.  A theory of the term structure of interest rates'', Econometrica 53, 385-407 , 1985 .

[7]  Bryan R. Routledge,et al.  The "Spark Spread:" An Equilibrium Model of Cross-Commodity Price Relationships in Electricity , 1998 .

[8]  L. Telser.  Futures Trading and the Storage of Cotton and Wheat , 1958, Journal of Political Economy.

[9]  Eduardo S. Schwartz,et al.  Short-Term Variations and Long-Term Dynamics in Commodity Prices , 2000 .

[10]  Eduardo S. Schwartz,et al.  The Valuation of Commodity Contingent Claims , 1994 .

[11]  What Causes Commodity Price Backwardation? , 1999 .

[12]  Marcus J. Chambers,et al.  A Theory of Commodity Price Fluctuations , 1996, Journal of Political Economy.

[13]  The Dynamics of Convenience and the Brazilian Soybean Boom , 1997 .

[14]  N. Kaldor.  Speculation and Economic Stability , 1939 .

[15]  E. J. Hannan,et al.  The Seasonal Adjustment of Economic Time Series , 1970 .

[16]  Eduardo S. Schwartz,et al.  Stochastic Convenience Yield and the Pricing of Oil Contingent Claims , 1990 .

[17]  E. Fama,et al.  Commodity futures prices: some evidence on forecast power , 1987 .

[18]  H. Bessembinder,et al.  Is There a Term Structure of Futures Volatilities? Reevaluating the Samuelson Hypothesis , 1996 .

[19]  S. Ross,et al.  The relation between forward prices and futures prices , 1981 .

[20]  J. Chavas,et al.  Inventory Dynamics Under Transaction Costs , 2000 .

[21]  Commodity Prices Revisited , 2000, Agricultural and Resource Economics Review.

[22]  Jimmy E. Hilliard,et al.  Valuation of Commodity Futures and Options under Stochastic Convenience Yields, Interest Rates, and Jump Diffusions in the Spot , 1998, Journal of Financial and Quantitative Analysis.

[23]  A. Deaton,et al.  Competitive Storage and Commodity Price Dynamics , 1996, Journal of Political Economy.

[24]  H. Bessembinder,et al.  Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure , 1995 .

[25]  Eduardo S. Schwartz,et al.  Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates , 1998, Journal of Financial and Quantitative Analysis.