IDEAS home Printed from https://ideas.repec.org/p/ags/nccc09/53044.html
   My bibliography  Save this paper

Cotton Futures Dynamics: Structural Change, Index Traders and the Returns to Storage

Author

Listed:
  • Power, Gabriel J.
  • Robinson, John R.C.

Abstract

The commodity bull cycle of 2006-2008 and subsequent dramatic price decline have been a source of hardship for traditional commodity market participants such as producers and merchant/shippers. The usefulness of futures markets has been called into question, especially given that some market movements did not appear to be justified by economic fundamentals. An emerging research literature examines the possible influence of futures traders, and particularly the non-traditional Index Traders, on the well-functioning of futures markets and underlying commodity markets. Cotton is a relatively under-studied commodity that is of particular importance for producers in the South and Southwest. To this end, this paper asks the following questions : (1) What role have (primarily long-only) Index Traders played, if we simultaneously account for important ongoing changes in cotton economic fundamentals? (2) Have seasonal and long-run patterns of convenience yield and price volatility changed during or since the commodity bull cycle? (3) How well do the data support a theory of storage model using the concept of convenience yield, and has the relationship changed with the commodity bull cycle? The results presented in this paper suggest that traditional, well-established economic relationships for cotton futures markets clearly have been disrupted during the period 2006- 2009. However, we find no direct evidence to support the claim that Index Traders are responsible for changes in prices or volatility.

Suggested Citation

  • Power, Gabriel J. & Robinson, John R.C., 2009. "Cotton Futures Dynamics: Structural Change, Index Traders and the Returns to Storage," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53044, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc09:53044
    DOI: 10.22004/ag.econ.53044
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/53044/files/confp10-09.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.53044?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Colin A. Carter & Cesar L. Revoredo Giha, 2007. "The Working Curve and Commodity Storage under Backwardation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 864-872.
    2. Aaron Smith, 2005. "Partially overlapping time series: a new model for volatility dynamics in commodity futures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 405-422.
    3. Robinson, John R.C & Fuller, Steven C. & Lai, Pei-Chun & Vadali, Sharada, 2009. "Impact of Global Recession in Containerized Agricultural Shipments: A Case Study of Texas Cotton," 50th Annual Transportation Research Forum, Portland, Oregon, March 16-18, 2009 207600, Transportation Research Forum.
    4. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    5. Irwin, Scott H. & Garcia, Philip & Good, Darrel L. & Kunda, Eugene L., 2008. "Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 23(2), pages 1-6.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barham, E. Hart Bise & Robinson, John R.C. & Richardson, James W. & Rister, M. Edward, 2011. "Mitigating Cotton Revenue Risk Through Irrigation, Insurance, and Hedging," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 43(4), pages 1-12, November.
    2. Apperson, George P., 2014. "Agricultural Commodity Futures Market Volatility: A Case for Punctuated Equilibrium," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196760, Southern Agricultural Economics Association.
    3. Apperson, George P., 2017. "Agricultural Commodity Futures Price Volatility: A Market Regulatory Policy Study," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258210, Agricultural and Applied Economics Association.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Arroyo Marioli, 2020. "Old crop versus new crop prices: Explaining the correlation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1192-1208, July.
    2. Gabriel J. Power & John R. C. Robinson, 2013. "Commodity futures price volatility, convenience yield and economic fundamentals," Applied Economics Letters, Taylor & Francis Journals, vol. 20(11), pages 1089-1095, July.
    3. Atle Oglend & Vesa-Heikki Soini, 2020. "Equilibrium Working Curves with Heterogeneous Agents," Computational Economics, Springer;Society for Computational Economics, vol. 56(2), pages 355-372, August.
    4. Suenaga, Hiroaki, 2013. "Measuring bias in a term-structure model of commodity prices through the comparison of simultaneous and sequential estimation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 53-66.
    5. Mark W. French, 2005. "Why and when do spot prices of crude oil revert to futures price levels?," Finance and Economics Discussion Series 2005-30, Board of Governors of the Federal Reserve System (U.S.).
    6. Power, Gabriel J. & Turvey, Calum G., 2008. "On Term Structure Models of Commodity Futures Prices and the Kaldor-Working Hypothesis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37608, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    7. repec:dau:papers:123456789/2274 is not listed on IDEAS
    8. Hiroaki Suenaga, 2013. "A flexible model of term-structure dynamics of commodity prices: a comparative analysis with a two-factor Gaussian model," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 509-526, March.
    9. Prilly Oktoviany & Robert Knobloch & Ralf Korn, 2021. "A machine learning-based price state prediction model for agricultural commodities using external factors," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1063-1085, December.
    10. Unterschultz, James R., 2000. "New Instruments For Co-Ordination And Risk Sharing Within The Canadian Beef Industry," Project Report Series 24046, University of Alberta, Department of Resource Economics and Environmental Sociology.
    11. Chiarella, Carl & Kang, Boda & Nikitopoulos, Christina Sklibosios & Tô, Thuy-Duong, 2013. "Humps in the volatility structure of the crude oil futures market: New evidence," Energy Economics, Elsevier, vol. 40(C), pages 989-1000.
    12. Chuong Luong & Nikolai Dokuchaev, 2016. "Modeling Dependency Of Volatility On Sampling Frequency Via Delay Equations," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 1-21, June.
    13. Alain Monfort & Olivier Féron, 2012. "Joint econometric modeling of spot electricity prices, forwards and options," Review of Derivatives Research, Springer, vol. 15(3), pages 217-256, October.
    14. Luis M. Abadie, 2009. "Valuation of Long-Term Investments in Energy Assets under Uncertainty," Energies, MDPI, vol. 2(3), pages 1-31, September.
    15. Guedes, José & Santos, Pedro, 2016. "Valuing an offshore oil exploration and production project through real options analysis," Energy Economics, Elsevier, vol. 60(C), pages 377-386.
    16. Delphine Lautier & Franck Raynaud, 2012. "Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis," The Energy Journal, , vol. 33(3), pages 215-240, July.
    17. Bühler, Wolfgang & Korn, Olaf, 1998. "Hedging langfristiger Lieferverpflichtungen mit kurzfristigen Futures: möglich oder unmöglich?," ZEW Discussion Papers 98-20, ZEW - Leibniz Centre for European Economic Research.
    18. Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
    19. Jilong Chen & Christian Ewald & Ruolan Ouyang & Sjur Westgaard & Xiaoxia Xiao, 2022. "Pricing commodity futures and determining risk premia in a three factor model with stochastic volatility: the case of Brent crude oil," Annals of Operations Research, Springer, vol. 313(1), pages 29-46, June.
    20. Bai, Yizhou & Xue, Cheng, 2021. "An empirical study on the regulated Chinese agricultural commodity futures market based on skew Ornstein-Uhlenbeck model," Research in International Business and Finance, Elsevier, vol. 57(C).
    21. Boyarchenko Svetlana & Levendorskii Sergei Z, 2006. "General Option Exercise Rules, with Applications to Embedded Options and Monopolistic Expansion," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-53, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:nccc09:53044. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/dauiuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.