Three Essays On Agricultural Futures Traders

This is a comprehensive study of the growth and impact of agricultural futures market traders. The growth of financial investment in commodities has introduced participants and raised both new questions and warranted revisiting old questions; these include the impact on commodity prices, the profitability of traders, and the existence of trading skill. To address these questions twelve commodity markets are chosen to capture the majority of agricultural trading on organized futures markets and encompass the agricultural commodity index trading activity. The data used are from the proprietary large trader database of the Commodity Futures Trading Commission (CFTC) that details individual trader end of day positions and covers the years 2000 to 2009. The growth of index fund investment from $12 billion in 2002 to over$200 billion by 2008 initiated a debate on whether index funds are ???too big??? for the current size of commodity futures markets. Concerns emerged regarding their adverse effects on prices and volatility. The impact of the financial investment of index traders is analyzed using Granger Causality tests. The analysis investigates three different scenarios: (i) aggregated commodity index trader positions impacts on returns or volatility, (ii) changes in returns or volatility effects on aggregate commodity index trader positions, and (iii) disaggregated commodity index trader positions effects on contract returns or volatility during the roll period. Results show index traders do not have a widespread impact on returns or volatility and in some cases actually decrease volatility bringing stability to the marketplace. The futures markets have adjusted to the presence of the new financial participants and continue to provide price discovery and risk management. The results have important implications for the ongoing policy debate surrounding index investment; in particular, the results do not support limiting participation of index fund investors. The returns to traders are analyzed to determine if a risk premium in agricultural futures markets exists, where hedgers pay speculators for protection against adverse price movements. The existence of a risk premium is often touted as a motivation factor for speculative trading. The long, passive index traders that emerged as major participants in 2004 and 2005 provide a natural experiment to determine if na??vely holding positions opposite of hedgers results in positive profits and thereby evidence of a risk premium. Even in the presence of increased prices and volatility that encourage the transfer of risk, no risk premium is found. CITs do not display evidence of receiving a risk premium by earning consistent positive returns but rather experience large losses in aggregate whereas noncommercial traders experience positive profits. The absence of a risk premium may occur because an infinitely elastic supply of speculative services results in the risk premium being bid to zero or the risk absorbing role is usurped by liquidity demands of index traders. Finally, speculative, noncommercial traders are analyzed to determine if they persist in making profits or if profits are randomly generated. The study focuses on three important and representative commodities; corn for field crops, live cattle for livestock, and coffee for soft commodities. Two methods are used to analyze the persistent ability of traders to generate positive outcomes: (i) the first is the Fisher Exact test, a nonparametric two-way winner and loser rank contingency table analysis, and (ii) the second is the testing of trader by magnitude of profits using the rank of trader profits in the first period to identify top and bottom deciles. The results indicate that the top 10% of traders have substantial ability to persistently perform; this is about 5-8% more traders than identified in other studies of agricultural futures traders. The rigorous out-of-sample procedures used in this essay provide compelling evidence of the importance of skill in trader returns, and may help explain their continued presence in futures markets in the absence of a risk premium

The Marketing Performance of Illinois and Kansas Wheat Farmers

The purpose of this paper is to analyze the marketing performance of wheat farmers in Illinois and Kansas over 1982–2004. The results show that farmer benchmark prices for wheat in Illinois and Kansas fall in the middle third of the price range about half to three-quarters of the time. Consistent with previous studies, this refutes the contention that Illinois and Kansas wheat farmers routinely market the bulk of their wheat crop in the bottom portion of the price range. Tests of the average difference between farmer and market benchmark prices are sensitive to the market benchmark considered. The marketing performance of wheat farmers in Illinois and Kansas is about equal to the market if a 24- or 20-month market benchmark is used, slightly above the market if a 12-month price benchmark is used, and significantly less than the market if the harvest benchmark is used. The sensitivity of marketing performance to the market benchmark considered is explained by the seasonal pattern of prices. While Illinois producers performed slightly better than their counterparts in Kansas, notable differences in performance across these two geographic areas is not observed.benchmarks, Illinois, Kansas, marketing, performance, price, wheat, Agribusiness, Crop Production/Industries, Marketing, Production Economics, Productivity Analysis, Q11, Q13,

Advisory Service Marketing Profiles for Corn over 2002-2004

This report presents marketing profiles and loan deficiency payment/marketing loan gain profiles for the advisory services followed by the AgMAS Project for the 2002, 2003 and 2004 corn crops. Marketing profiles are constructed by plotting the cumulative net amount priced under each program’s set of recommendations throughout the crop year. Loan deficiency payment/marketing loan gain (LDP/MLG) profiles are constructed by plotting the cumulative percentage of the crop on which the LDP/MLG was claimed during the crop year. Marketing profiles provide information to evaluate the style of advisory services in several ways. The percentage of crop priced is a measure of within-crop year price risk. The higher the proportion of a crop priced, the lower the sensitivity of the farmer’s position value to crop price changes. For example, when 100% of the crop is priced there is no price sensitivity, which means that changes in price do not affect the value of the farmer’s position. On the other hand, when the amount priced is 0%, the value of the farmer’s position will vary in the same proportion as the change in price. Marketing profiles, therefore, allow investigating the evolution of price sensitivity under each service’s set of recommendations along the marketing window. Marketing profiles also provide other useful information. The number of steps in the profile lines and the location of these steps in the marketing window provide information about timing, frequency and size of recommended transactions. It is also possible to determine from the marketing profile figures how intensely a program uses options markets, since when options positions are open the profile line is irregular. In the same way, LDP/MLG profiles provide information about the size and timing of LDP/MLG claims.Agricultural Finance,

Advisory Service Marketing Profiles for Soybeans over 2002-2004

This report presents marketing profiles and loan deficiency payment/marketing loan gain profiles for the advisory services followed by the AgMAS Project for the 2002, 2003 and 2004 soybean crops. Marketing profiles are constructed by plotting the cumulative net amount priced under each program’s set of recommendations throughout the crop year. Loan deficiency payment/marketing loan gain (LDP/MLG) profiles are constructed by plotting the cumulative percentage of the crop on which the LDP/MLG was claimed during the crop year. Marketing profiles provide information to evaluate the style of advisory services in several ways. The percentage of crop priced is a measure of within-crop year price risk. The higher the proportion of a crop priced, the lower the sensitivity of the farmer’s position value to crop price changes. For example, when 100% of the crop is priced there is no price sensitivity, which means that changes in price do not affect the value of the farmer’s position. On the other hand, when the amount priced is 0%, the value of the farmer’s position will vary in the same proportion as the change in price. Marketing profiles, therefore, allow investigating the evolution of price sensitivity under each service’s set of recommendations along the marketing window. Marketing profiles also provide other useful information. The number of steps in the profile lines and the location of these steps in the marketing window provide information about timing, frequency and size of recommended transactions. It is also possible to determine from the marketing profile figures how intensely a program uses options markets, since when options positions are open the profile line is irregular. In the same way, LDP/MLG profiles provide information about the size and timing of LDP/MLG claims.Agricultural Finance,

Returns to Individual Traders in Agricultural Futures Markets: Skill or Luck?

Using individual trader data from the CFTC reporting system for the period January 2000 to September 2009, the paper investigates whether non-commercial traders in the corn, live cattle, and coffee futures markets persist in making profits. Two out-of-sample measures of skill—the Fisher Exact ranking test and a test to assess significant differences in the magnitude of profits of the top and bottom traders—are used to analyze trader’s ability to consistently perform well for monthly, quarterly, and annual time horizons. The findings identify significant persistence in rankings—traders in the top half of the profit distribution in a time period tend to stay in the top half in the next period. Differences in magnitude of profitability between the top and bottom deciles also provide support that persistent skill exists among the top 10% of traders. Detailed examination of annual rankings for those traders who were most continuously in the markets further reveals persistence in profits for a smaller subset of traders, and some indication of persistence in the face of losses

Returns to Traders and Existence of a Risk Premium in Agricultural Futures Markets

This paper analyzes the existence of a risk premium following the Keynesian theory of normal backwardation. A natural experiment using actual trading observations of commodity index traders is used to determine if passively holding long positions opposite hedgers earns a risk premium. Daily profits of traders are calculated in 12 markets from 2000-2009 using data from the CFTC internal large trader reporting system. Results show the commodity index traders have negative profits in 9 out of 12 commodities, resulting in an approximate net loss of -$6.9 billion. A measure of monthly return on investment does not show consistent positive profits and on average the return is negative. The evidence does not support the existence of a positive risk premium

The Price Impact of Index Funds in Commodity Futures Markets: Evidence from the CFTC’s Daily Large Trader Reporting System

This paper analyzes the price impact of long-only index funds in commodity futures markets for the January 2004 through July 2008 period. Daily positions of index traders in 12 markets are drawn from the internal large trader reporting system used by the CFTC. Granger causality test results provide negligible evidence that index traders impact commodity future returns regardless of the measure of market participation considered. The signs of the relatively few significant coefficients are as likely to be negative as positive and the magnitudes of the economic effects are very small. Some evidence is found that volatility has been influenced by the presence of index traders in several markets, but only using one of the measures of index position changes. These effects appear to be small in economic magnitude, except in several traditionally less liquid markets. While the overall balance between significant positive and negative signs is nearly equal, index positions appear to have had a dampening effect on volatility during 2004-2005 particularly in the soft commodity contracts, followed by a heightening effect during 2006-2008 in deferred contracts

The Impact of Measurement Error on Estimates of the Price Reaction to USDA Crop Reports

This paper investigates the impact of USDA crop production reports in corn and soybean futures markets. The analysis is based on all corn and soybean production reports released over 1970-2006. The empirical analysis compares the typical OLS event study approach to the new Identification by Censoring (ITC) technique. Corn and soybean production reports are analyzed both separately and together for impact in corn and soybean futures prices. ITC proves to be the more useful method because it avoids the pitfalls of errors in variables that cause downward bias in OLS coefficients. Price reaction coefficients estimated via ITC are one to four times larger than OLS estimates for a one price and one event analysis. In the two price, two event case, ITC estimates are one to six times larger. Market reaction to the unanticipated information in USDA forecasts is substantially larger than estimated in previous studies

The Price Impact of Index Funds in Commodity Futures Markets: Evidence from the CFTC’s Daily Large Trader Reporting System

This paper analyzes the price impact of long-only index funds in commodity futures markets for the January 2004 through July 2008 period. Daily positions of index traders in 12 markets are drawn from the internal large trader reporting system used by the CFTC. Granger causality test results provide negligible evidence that index traders impact commodity future returns regardless of the measure of market participation considered. The signs of the relatively few significant coefficients are as likely to be negative as positive and the magnitudes of the economic effects are very small. Some evidence is found that volatility has been influenced by the presence of index traders in several markets, but only using one of the measures of index position changes. These effects appear to be small in economic magnitude, except in several traditionally less liquid markets. While the overall balance between significant positive and negative signs is nearly equal, index positions appear to have had a dampening effect on volatility during 2004-2005 particularly in the soft commodity contracts, followed by a heightening effect during 2006-2008 in deferred contracts