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Trilogy for troubleshooting convergence: Manipulation, structural imbalance, and storage rates

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  • Irwin, Scott H.

Abstract

Historically unprecedented episodes of non-convergence occurred during 2005–2010 in Chicago Board of Trade (CBOT) corn, soybean, and wheat futures contracts and Kansas City Board of Trade (KCBOT) wheat futures contracts. A trilogy of explanations has been offered to troubleshoot these episodes—manipulation, structural imbalances, and low storage rates. Theoretical and empirical analysis shows that convergence failures were generated by a disequilibrium between the higher market value of storage in the physical market for grain compared to the storage rate paid to holders of the delivery instrument for grain futures contracts. How to adjust storage rates higher in recognition of this market reality is a highly contentious issue in the grain industry.

Suggested Citation

  • Irwin, Scott H., 2020. "Trilogy for troubleshooting convergence: Manipulation, structural imbalance, and storage rates," Journal of Commodity Markets, Elsevier, vol. 17(C).
    • Handle: RePEc:eee:jocoma:v:17:y:2020:i:c:s2405851318301053
    DOI: 10.1016/j.jcomm.2018.11.002
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    Cited by:

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    2. Etienne, Xiaoli L. & Farhangdoost, Sara & Hoffman, Linwood A. & Adam, Brian D., 2023. "Forecasting the U.S. season-average farm price of corn: Derivation of an alternative futures-based forecasting model," Journal of Commodity Markets, Elsevier, vol. 30(C).
    3. Burns, Christopher B. & Kane, Stephen, 2022. "Arbitrage breakdown in WTI crude oil futures: An analysis of the events on April 20, 2020," Resources Policy, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Convergence; Delivery; Grain futures; Storage; VSR;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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