Understanding commodity spot and futures markets
A l e x T o b l e r
V i c e - P r e s i d e n t , C o m m o d i t y C l u b S w i t z e r l a n d
Z u r i c h , 1 6 . A p r i l 2 0 1 5
Education Event | CAIA
The content of this presentation is based on two working papers by Haase & Tobler
Schedule
1. Introduction – speculation in food commodities
2. Role of investors in commodity markets
3. Drivers of agricultural commodity prices
4. Role of nations during food crises
5. Conclusion
1. Introduction –
Increase in food prices and AuM
Grain prices
Commodity-related AuM
0
100
200
300
400
500
600
700
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
Corn nearby Wheat nearby Soybean nearby
Source: Bloomberg, 1st generic price.
0
50
100
150
200
250
300
350
400
450
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Commodity AuM (USD billion)
Source: Barclays 2014.
2. Role of investors –
Can financial speculation influence spot markets?
• Difference between spot and futures markets
• Physical trading vs paper trading (derivatives)
• Bilateral negotiation vs standardized contracts
• No single quality, spot price or spot market
• Investors act on agricultural futures markets and thus don‘t have a direct impact on spot prices
• But may financial speculation influence spot markets?
• YES it can, but only if storage responds
Buy and store commodity
Riskless profit
P
F
T
S*
S
F* Buy
Cost of carry
Buy
Riskless profit
Buy
F*
F*
By Futures
By Futures
Sell Futures
Sell
2. Role of investors –
Speculative storage holder links spot and futures prices
Source: M. Haase
2. Role of investors –
Short summary financial speculation
• Speculative storage holder links spot and futures prices
• Price transmission channel between spot and futures requires (simultaneously):
• A storable commodity
• Sufficient storage capacity
• Futures price >> spot price (arbitrage opportunity)
• Were all these conditions met during the recent spikes?
• NO, hence we have not seen stock building
• Weak evidence that financial speculation had an impact on prices
2. Role of investors –
Storing grains is expensive
Corn futures curve and carry costs (USd/bu), March 08
500
550
600
650
700
750
800
Mrz 08 Jun 08 Sep 08 Dez 08 Mrz 09 Jun 09 Sep 09 Dez 09 Mrz 10 Jun 10 Sep 10 Dez 10
Price Curve carry costs
Source: M. Haase based on data of CBOT.
Production vs consumption
3. Price Drivers –
Empirical observations
Deficit and global stocks
800
1000
1200
1400
1600
1800
2000
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Global Production (corn, wheat and soy)
Global Demand (corn, wheat and soy)
-100
-80
-60
-40
-20
0
20
40
60
80
100
10
15
20
25
30
35
40
45
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Production minus consumption of corn,
wheat and soybean combined (RHS)
Global stocks-to-use ratio of corn, wheat
and soybean combined (LHS)
Source: USDA. Million tons. Source: USDA. Million tons (market balance) and % (Stocks-to-Use).
3. Price Drivers –
Empirical observations
Production growth
Components of growth
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
Production growth
Wheat, Corn and Soybean combined. Source: USDA. Wheat, Corn and Soybean combined. Source: USDA.
-0.2%
0.8%
1.8%
2.8%
3.8%
1985 1989 1993 1997 2001 2005 2009 2013
Yield growth Area harvested growth
3. Price Drivers –
Drivers of commodity prices during recent price spikes
Growth rate of production < growth rate of consumption
Compensation of shortage in supply by an outflow of global inventories
Rising production costs and weak US Dollar
National protection programs
4. Role of nations –
Policy responses to food crises
Reduce domestic food prices during food crises
Export taxes
Export bans
Government food imports
Consumer subsidies
Import tariffs/taxes (decrease)
0
10
20
30
40
50
60
Export
restrictions
Reduce taxes
on food
Price controls
/ consumer
subsidies
Increase
supply using
stocks
None
Source: FAO.
Policy actions to address high food prices
4. Role of nations –
Nature of policy responses
• Governments use their own market power to intervene in domestic markets
• Market interventions are mostly considered a legitimate policy instrument to promote social welfare
Break transmission channel from international spikes being transmitted to domestic markets
Curb price spikes in domestic markets
Problem: Decrease global availability of commodities
4. Role of nations –
Government responses to higher prices
Example - Wheat 2006-08
-
200.00
400.00
600.00
800.00
1'000.00
1'200.00
01.06 04.06 07.06 10.06 01.07 04.07 07.07 10.07 01.08 04.08 07.08 10.08
Ukraine introduces
export licencing
Ukraine introduces
export quotas
India bans
exports
India extends
export bans
Russia imposes
export tax
China removes
VAT rebate
Russia raises export tax
Ukraine cancels
export quota
Ukraine re-introduces
export quotas
Argentina introduces
sliding/variable export tax
Kazakhstan bans exports
Argentina abolishes
sliding/varibale tax
Kazakhstan
removes ban
China lowers
export tax
Source: CBOT wheat prices from Bloomberg, policy measures from FAO.
4. Role of nations –
Attention: Risk of Manipulation!
Manipulators change market prices for their own benefit
Necessary condition: Manipulator must control a large fraction of the market
Impact on spot prices:
• Direct if manipulator acts in spot markets
• Indirect if manipulator acts in futures markets (storage)
-
200.00
400.00
600.00
800.00
1'000.00
1'200.00
01.06 04.06 07.06 10.06 01.07 04.07 07.07 10.07 01.08 04.08 07.08 10.08
Ukraine introduces
export licencing
Ukraine introduces
export quotas
India bans
exports
India extends
export bans
Russia imposes
export tax
China removes
VAT rebate
Russia raises export tax
Ukraine cancels
export quota
Ukraine re-introduces
export quotas
Argentina introduces
sliding/variable export tax
Kazakhstan bans exports
Argentina abolishes
sliding/varibale tax
Kazakhstan
removes ban
China lowers
export tax
4. Role of nations –
Were protectionist measures successful?
Study suggests a „YES“
Source: ICTSD.
5. Conclusion
• Only if certain conditions are simultaneously met, financial speculation may have an impact on spot prices
• Weak evidence that financial speculators did cause the recent food price spikes
• Prices spiked due to supply and demand imbalances
• National protection programs likely exacerbated price increases
• Low inventories didn’t fulfil their role as buffers against production shortfalls and increased the impact
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