University:
University of Houston
Course:
BUSI 1301 | Business Principles
Academic year:

2022
Views:

82

Pages:

10
Author:

Yasmine Burch

Crude Prices vs. Total US Stocks Prices vs. Variance & Carry-In Carry-Out vs. Variance Spreads vs. Variance & Carry-In Inventory-Spread Scatter Volatilities & Backwardation Seasonal Commodities • The previous analysis focuses on continuously produced commodities—they are easier to handle and understand • Seasonal commodities (such as grains) are more challenging Forward Curves for Seasonals • The basic economic insight about intertemporal allocation suggests that prices should be at full carry for delivery dates prior to the next harvest, but “new crop” forward prices are likely to be less than “old crop” prices • Big slug of new supply due to harvest: should want to consume current inventory before that new supply is available • Only if expected harvest is expected to be really small should it be optimal to carry inventory to the new crop year; only then should there be a carry between old crop and new crop prices Empirical Evidence • Foregoing provides a pretty good rough characterization of seasonals forward curves • But there are some anomalies: old crop-old crop prices sometimes fall below full carry • Aggregation phenomenon that reflects spatial dispersion of stocks and costs of transportation? An Anomaly • The basic story suggests that old crop and new crop prices should not be that highly correlated, and that old crop prices should not respond much to news about the coming harvest • New crop prices driven by anticipated crop size, but old crop price should not be because little or no storage between old and new crop • But: (a) old crop and new crop prices are highly correlated, and (b) old crop prices respond almost as much to government crop forecasts as new crop prices

Commodity Forward Curves Models and Data Pirrong Geneva Slides 5

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