Cotton Futures Dynamics: Structural Change, Index Traders and the Returns to Storage
Gabriel Power and
No 53044, 2009 Conference, April 20-21, 2009, St. Louis, Missouri from NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management
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.
Keywords: Agribusiness; Agricultural Finance; Crop Production/Industries; Demand and Price Analysis; Farm Management; Financial Economics; Marketing; Research Methods/ Statistical Methods; Risk and Uncertainty (search for similar items in EconPapers)
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