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PhD defense presentation

COMMODITY FUTURES MARKETS
by

Valeri Natanelov

on 28 March 2017

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Transcript of PhD defense presentation

Thank You!
Context
COMMODITY FUTURES MARKETS:
Dynamic interrelationships between financial asset markets, energy markets and traditional agricultural commodity markets

PhD defense for the degree of Doctor (PhD) in Applied Biological Sciences
ir. Valéri Natanelov
Promoters: Prof. Guido Van Huylenbroeck, Prof. Andrew M. McKenzie
Basic Concepts
Futures = (Spot + Forward)
Co-movement of (futures) Price?
What? Why? How? Results Conclusions Implications
Results
Crude oil
Economic activity
Agricultural commodities
Biofuel
Stock markets
Stock markets
Stock markets
Agricultural commodities
Large emerging economy
Research overview
Conclusions
Implications
Co-movement between commodity futures prices?
• Physical causes

• Macro-economic causes

• Intangible - behavioral causes

Need for better understanding of futures markets
• Only in the short-run
(volatility spillover)

• Only if strong (physical) linkages (e.g. soy & corn)
Academic Literature
NO
YES
Applied - Markets & Society
Increased Volatility?

Trade globalization

Common Agricultural Policy (CAP) reform

Speculation (of foodstuff)

Food vs. (bio)Fuel
How to manage price risk?
Even after publication of more than 700 articles there is still a deficiency in understanding the futures markets - (Powers, 1994) Journal of Futures Markets
Universal model of perception
Methodology
Linear cointegration (Johansen)
Cointegration
Analytical design
Threshold cointegration (Seo)
Crude oil - proxy for energy; Relative comparison between time periods; Frequency of data; Economic consistency
May capture asymmetries
Crude oil
Economic activity
Agricultural commodities
Biofuel
Stock markets
Stock markets
Stock markets
Agricultural commodities
Large emerging economy
In general we can conclude that mature and well established commodity futures markets exhibit co-movement with crude oil.


Biofuel policy has buffered the price relationship between corn and crude oil futures, be it until crude oil prices surpass a certain threshold level of 75$/barrel or higher.
Strong relationship between crude oil and corn markets on one side, and crude oil and ethanol on the other.

Ethanol and corn market prices – contrary to common belief – are not strongly bound by a long-run cointegrating relationship.

Ethanol mandated production --> corn markets more prone to volatility



Findings support the hypothesis that fluctuations in stock prices respond to movements of crude oil prices.

The degree and dimension of interaction varies substantially among countries, due to the country specific factors such as:
China’s remarkable economic growth; India’s regulated oil sector;
Russia’s oil reserves; and Brazil’s steady growth.
Crises, Crude oil and BRIC stock markets
Is there Co-Movement of Agricultural Commodities Futures Prices and Crude Oil?
Crude oil – corn – ethanol – nexus: a contextual approach
Indian sugar & Agricultural index futures are mainly affected by external (international) information-flows.

Agricultural futures linkages to global prices and crude oil: the case of India
Policy price interventions generate unintended outcomes such as the impaired functioning of the futures markets.

Traditional raw agricultural commodities are influenced by information related to energy and adjacent markets.

World commodity markets are responsive more than ever to information and experience price and volatility spillover effects among themselves.

Co-movement of commodity prices is a temporal (dynamic) concept and should be treated accordingly.


The complete process must be understood as the joining of the parts into a systematic chain and at every stage the whole process has to be kept in mind.
• Physical causes

• Macro-economic causes

• Intangible - behavioral causes

Information Flow Theory
Policy recommendations
Main priority: subsidizing education to improve and spread the knowledge around commodities futures markets outside the financial industry

Easily accessible quality information is required to facilitate the cooperatives and producer organizations in their price risk management strategies.

Next to price risk management --> Ameliorate current issues of market power asymmetry in agro-food sector, and unclear price transmission issues.
Initial concept of commodity futures:
--> need of farmers (or producers in general) and processors to protect themselves (i.e. hedge) against price risk

The reality: most market participants are from the financial sector
--> relatively little affinity with the physical side
99% Market Participants = Speculators
Decision = Buy - Sell - Hold (!?!)
No scarcity in futures markets
Full transcript