Source: UNIVERSITY OF ARKANSAS submitted to NRP
PERFORMANCE EVALUATION OF COMMODITY FUTURES AND OPTIONS MARKETS AS PRICE DISCOVERY AND RISK MANAGEMENT TOOLS
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
HATCH
Reporting Frequency
Annual
Accession No.
1010790
Grant No.
(N/A)
Cumulative Award Amt.
(N/A)
Proposal No.
(N/A)
Multistate No.
(N/A)
Project Start Date
Oct 7, 2016
Project End Date
Sep 30, 2021
Grant Year
(N/A)
Program Code
[(N/A)]- (N/A)
Recipient Organization
UNIVERSITY OF ARKANSAS
(N/A)
FAYETTEVILLE,AR 72703
Performing Department
Agricultural Economics & Agribusiness
Non Technical Summary
The project will helpdetermine theimpacts of recent 2014 Farm Bill legislation on risk management strategies for Arkansas row crop farmers. It will show how important USDA reports and futures and options markets are in helping farmers and grain firms make marketing and production decisions. It will shed light on the factors that may be hindering liquidity of U.S. rice futures contract and determine possible solutions to increase volume and open interest.
Animal Health Component
100%
Research Effort Categories
Basic
(N/A)
Applied
100%
Developmental
(N/A)
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
6031530301060%
6031820301020%
6031599301020%
Knowledge Area
603 - Market Economics;

Subject Of Investigation
1599 - Grain crops, general/other; 1820 - Soybean; 1530 - Rice;

Field Of Science
3010 - Economics;
Goals / Objectives
The objectives of this proposal are focused on analyzing the effectiveness of grain and oilseed futures and options markets as price discovery and risk management tools for Arkansas commodity markets.These objectives are further broken down as:Determining impacts of recent 2014 Farm Bill legislation on risk management strategies for Arkansas row crop farmers.Analyze the informational role played by commodity futures and options markets, and the informational content of USDA crop reports.Explore the factors that may be hindering liquidity of U.S. rice futures contract and determine possible solutions to increase volume and open interest.
Project Methods
First, with respect to measuring impact of government programs on risk management strategies of Arkansas farmers, simulation and econometric analysis will be used to analyze risk and returns of portfolio of market based and government supported risk management tools.Second, to evaluate price discovery of options markets around USDA reports, traditional event study approaches will be used to gauge price and volatility reactions to report releases.Third, to evaluate the price discovery role of US rice futures market and USDA reports, traditional event study approaches will be sued along with an innovative modeling approach, first used by McKenzie and Holt (2003) to explore the price discovery role of commodity futures prices in the US broiler market. An enduring issue in commodity market analysis has been the manner in which agents incorporate information to form price and production expectations. McKenzie and Holt's approach is unique as it recognizes that a combination of informational sources may more accurately reflect agents' true price and production expectations. Mckenzie (2008) used this approach to analyze price discovery of futures and USDA reports in US corn market.Fourth, industry surveys and econometric models will be employed to determine the likely factors driving liquidity issues in the US rice futures market and to offer potential market solutions to increase liquidly. A specific focus of the research will be to study the implications of (1) changing delivery mechanism of the contract from warehouse receipts to shipping certificates and (2) moving to a system of variable storage rates as was implemented several years ago in US wheat futures market. These issues have been suggested as potential solutions - by some industry participants - to rice liquidity problems as they may help futures convergence.

Progress 10/07/16 to 09/30/21

Outputs
Target Audience:Producers, agribusiness firms and academics Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest? Nothing Reported What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Goal number (2) Analyzing the informational role played by commodity futures and options markets, and the fundamental information content of USDA reporst was accomplished.

Publications

  • Type: Journal Articles Status: Awaiting Publication Year Published: 2022 Citation: McKenzie, A.M., M.R. Thomsen, and M.K. Adjemian. Characterizing implied volatility functions from agricultural options markets. American Journal of Agricultural Economics
  • Type: Journal Articles Status: Awaiting Publication Year Published: 2022 Citation: McKenzie, A.M., and Y. Ke. How do USDA announcements affect international commodity prices? Journal of Commodity Markets
  • Type: Book Chapters Status: Published Year Published: 2021 Citation: Anderson, J., McKenzie, A. M., Mitchell, J. (2021). Price Determination and Price Discovery in the Fed Cattle Market: A Review of Economic Concepts and Empirical Work. Proceedings of a Workshop on Cattle Markets: Kansas City Missouri, June 3-4, 2021. Agricultural and Food Policy Center Texas A&M University


Progress 10/01/19 to 09/30/20

Outputs
Target Audience:Academic economists, farmers and grain industry Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?McKenzie presented withBrian King, John Morgan, John Owen, and Jason Wheeler, about"Practical Uses of Rice Futures: From Farm to End User."2019 Rice Outlook Conference, Little Rock AR. The presentation was designed to enourage greater use of U.S. rice futures contract by farmers, mills and elevators,through risk management education. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Research is ongoing as to the uncovering the factors hindering liquidity of U.S. rice futures market. McKenzie published an article and accompanying risk management software titled "Options Strategies" in Journal of Economic Education. This body of work will help row crop farmers understand how to use futures and options markets to establish profitable margins.

Publications

  • Type: Journal Articles Status: Awaiting Publication Year Published: 2021 Citation: McKenzie, A. M., Ellis, B., Smartt, J., Yang, W. OPTIONS STRATEGIES. Journal of Economic Education


Progress 10/01/18 to 09/30/19

Outputs
Target Audience:Academic economists, farmers and grain industry Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?In journal article format What do you plan to do during the next reporting period to accomplish the goals?Publish articles and present results at academic and industry conferences

Impacts
What was accomplished under these goals? McKenzie published work on the interactions between US and Chinese futures markets under objective 2. McKenzie continues to do as of yet unpublished research with respect to objectives 1 and 3.

Publications

  • Type: Journal Articles Status: Accepted Year Published: 2019 Citation: Isbell, B.J., A.M. McKenzie, and B. Wade Brorsen. The Cost of Forward Contracting in the Mississippi Barge Freight River Market. Agribusiness and International Journal, May 2019
  • Type: Journal Articles Status: Accepted Year Published: 2019 Citation: Ke, Y., C. Li, A. M. McKenzie, and P. Liu. Risk Transmission between Chinese and U.S. Agricultural Commodity Futures Marketsa CoVaR Approach. Sustainability, Volume 11, Issue1, Special Issue: Application of Time Series Analyses in Business, January 2019
  • Type: Journal Articles Status: Accepted Year Published: 2019 Citation: McKenzie A. M., Bradley J. Isbell, and B. Wade Brorsen. The cost of forward contracting in the CIF NOLA export bid market. Journal of Agricultural and Applied Economics, 51(1) 164  181, February 2019


Progress 10/01/17 to 09/30/18

Outputs
Target Audience:Academic economists, farmers and grain industry Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?Presentations atacademic conferences and published journal articles and conference proceedings What do you plan to do during the next reporting period to accomplish the goals?I am going to work with a PhD student to investigate farmer marketing decisions taking into account govt programs, crop insurance and hedging tools.

Impacts
What was accomplished under these goals? Chicago Mercantile Exchange(CME) storage rates and carry futures spreads were found to have an impact on non-convergence in US rice futures market.The next step is to analyze to what extend non-convergence is a contributing factor in hindering liquidity in US rice futures market. Risk premiums were found to exist for delivering grain on forward contracts to the Gulf export market during fall harvest season. This means that grain elevators must pay an inherent cost to forward contract with grain exporters to mitigate the price risk associated with delivering grain at harvest time to the Gulf.

Publications

  • Type: Journal Articles Status: Published Year Published: 2018 Citation: Pede, V.O., G. Barboza, H. Valera, J. McKinley, A. M. McKenzie, and Mohammad J. Alam. ⿿Nonlinearities in Regional Rice Price Dynamics in the Philippines: Evidence from a Smooth Transition Autoregressive (STAR) Approach.⿝ International Journal of Applied Economics, Volume 15, Number 2, September 2018
  • Type: Conference Papers and Presentations Status: Other Year Published: 2018 Citation: McKenzie, A.M. and Darby, J.L. ⿿Non-Convergence in Rice Futures Market.⿝ Selected paper accepted for 2018 Rice Technical Working Group Meetings, Long Beach.
  • Type: Conference Papers and Presentations Status: Published Year Published: 2017 Citation: McKenzie, A.M., B. Isbell and W. Brorsen ⿿The Cost of Forward Contracting in CIF NOLA Export Bid Market⿝ A M. McKenzie, B. Isbell and W. Brorsen. Selected paper presented at NCCC-134 ⿿Applied Commodity Price Analysis, Forecasting and Market Risk Management⿝ conference in St. Louis, April 2017


Progress 10/07/16 to 09/30/17

Outputs
Target Audience:Academic economists, government, farmers, grain industry Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?Goal 2. was targeted by the journal article (Michael K. Adjemian, Robert Johansson,Andrew McKenzie, and Michael Thomsen. "Was the Missing 2013 WASDE Missed?"Applied Economic Perspectives and Policy, November 2017). Progress on Goal 3 was targeted by the journal article (McKenzie A. M.and Darby, Jessica L. "Information Content of USDA Rice Reports and Price Reactions of Rice Futures."Agribusiness an International Journal, 2016). What do you plan to do during the next reporting period to accomplish the goals?Continue resarch in these areas and apply for grant funding to aid in this process.

Impacts
What was accomplished under these goals? McKenzie has shown the economic value of USDA crop reports in helping to guide futures prices to their equilibrium values. McKenzie has shown that their is a lack of information contributes to the lack of liquidity in US rice futures and that only nearby contracts attract trading interest.

Publications

  • Type: Journal Articles Status: Published Year Published: 2016 Citation: McKenzie A. M. and Darby, Jessica L. Information Content of USDA Rice Reports and Price Reactions of Rice Futures. Agribusiness an International Journal, 2016.
  • Type: Journal Articles Status: Published Year Published: 2017 Citation: Michael K. Adjemian, Robert Johansson, Andrew McKenzie, and Michael Thomsen. Was the Missing 2013 WASDE Missed? Applied Economic Perspectives and Policy, November 2017