Understanding commodity spot and futures markets...Understanding commodity spot and futures markets...

17
Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education Event | CAIA The content of this presentation is based on two working papers by Haase & Tobler

Transcript of Understanding commodity spot and futures markets...Understanding commodity spot and futures markets...

Page 1: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 2: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 3: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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.

Page 4: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 5: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 6: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 7: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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.

Page 8: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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).

Page 9: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 10: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 11: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 12: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 13: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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.

Page 14: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 15: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

4. Role of nations –

Were protectionist measures successful?

Study suggests a „YES“

Source: ICTSD.

Page 16: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

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

Page 17: Understanding commodity spot and futures markets...Understanding commodity spot and futures markets Alex Tobler Vice-President, Commodity Club Switzerland Zurich, 16. April 2015 Education

c o n t a c t @ c o m m o d i t y c l u b . c h

w w w . c o m m o d i t y c l u b . c h

MANY THANKS FOR YOUR ATTENTION