Progress 10/01/18 to 09/30/21
Outputs
Target Audience:In this stage of the project, results of several completed papers were shared with some of the faculty, research staff, extension specialists, and graduate students in Agribusiness and Applied Economics Department at NDSU. Same drafts of completed papers were shared informally with academic and government scholars and researchers for their feedback and suggestions. Upon getting the feedback and incorporating some of the suggestions by these audiences, threejournal articles (two research and one outreach) were submitted for publication consideration in top-tier academic peer reviewed journals, Onehasbeen accepted for publication and published before the end of this reporting period. Two more journal articles are in peer reviewstages. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?This project enabled me to have much closer interaction with extension specialists and grain and energy producers and consumers nation- and state-wide. Also, I believe that scholarly rigor and originality of publishedresarchand the importance of findings does and will continue to serve as a basis for future outreach activities. Finally, this research represents an excellent teaching material for graduate and undergraduate students with interest in commodity pricing and risk management. How have the results been disseminated to communities of interest?Yes; research and outreach papers have been published; research seminars nation-wide were held to resent the results of the research; research findings are being incorporated into teaching material at graduate and undergraduate level. References: Goetz, Cole,Dragan Miljkovic, and Nikita Barabanov: "New Empirical Evidence in Support of the Theory of Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets,"Energy Economics(2021), 100: 105375. Miljkovic, Dragan: "Spotlight on Economics: The Effects of Futures Markets on Oil Spot Price Volatility in Regional US Markets," September 2020. Miljkovic, Draganand Cole Goetz: "Destabilizing Role of Futures Markets on North American Hard Red Spring Wheat Spot Prices,"Agricultural Economics(2020), 51(6): 887-897. Miljkovic, Draganand Cole Goetz: "The Effects of Futures Markets on Oil Spot Price Volatility in Regional US Markets,"AppliedEnergy(2020), 273: 115288. Miljkovic, Draganand Cole Goetz: "Futures Markets and Price Stabilization: An Analysis of the US Soybeans Markets,"Agricultural and Resource Economics Review (2021, in review). Miljkovic, Dragan and Frayne Olson: "The Impacts of Futures Markets on Commodity Prices In(Stability) and Resulting Implications on Social Welfare,"Choices (2021, in review). What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
All five major goals have been accomplished including the development of two theoretical models, statistical and econometric models, empirical analysis, and an assessment the futures markets have on formulation process and spot volatility of wheat, corn, and soybeans, and in turn on producer welfare of North Dakota farmers and social welfare overall. More specifically, objective (1) was accomplished and published in the journal article in Energy Economics (Goetz, Miljkovic, and Barabanov, 2021). Wederivedthe most comprehensive economic model following the concept ofrational expectations. Weconsider consumption, production, and storage while explaining the behavior of spot price volatility in the absence of futures markets as well as in the presence of futures markets. Thus, wederivemathematically the decision-making problems faced by risk-averse price-taking consumers, producers, inventory holding dealers, and pure speculators.The key results of the model are as follows. When consumption, production, and inventory disturbances are all equal, we cannot say whether the spot price is stabilized in the presence of a futures market since there is some ambiguity depending on the parameter choice. If the consumption disturbance is dominant, the presence of a futures market stabilizes the volatility of spot price in the short and long term, no matter the risk attitudes of the speculators. When production is the dominant disturbance, we see that spot price is destabilized in the short run but may or may not be stabilized in the long run. Finally, we can see that when the inventory demand disturbance is the main stochastic factor, futures markets tend to destabilize spot priceat both time horizons and speculative risk attitudes. Thus, we cannot make any blanket statements regarding the price stabilizing/destabilizing nature of futures markets. One needs to know the source of primary market disturbance in order to predict this relationship with some accuracy. Objective (2) was accomplished and presented in a series of published manuscripts: Miljkovic and Goetz (2020 a; 2020b); Goetz, Miljkovic, and Barabanov (2021), and a paper currently in review by Miljkovic and Goetz (2021). Theoretical economics model developed in objective (1) has been adopted and adjusted for commodities of interest including corn, soybeans, hard red spring wheat (HRSW), and oil. Objective (3) was accomplished and presentedin a series of published manuscripts: Miljkovic and Goetz (2020 a; 2020b); Goetz, Miljkovic, and Barabanov (2021), and a paper currently in review by Miljkovic and Goetz (2021). Computational technique of acyclic directed graphs has been used to establish causal relations among the futures and spot prices, and storage. An array of time-series econometric/statistical techniques including unit root tests; cointegrations; vector autoregression; impulse response function analysis; and, Blanchard-Quah variance decomposition method were utilized in the analyses. Objective (4) was analyzed in the same papers. Main finding isthatin spot and futures prices have beenendogenous and storage being an exogenous variable for all four commodities considered. Additionally, impulse response and variance decomposition specifications suggest destabilizing impacts of futures markets on all agricultural (corn, soybeans, and HRSW) spot prices and stabilizing impacts on oil spot prices. Objective (5) has been presented by Miljkovic (2020) and in the joint work with Frayne Olson in an outreach type of paper (Miljkovic and Olson, 2021,currently in review). The overal social welfare implications and producer welfare implications in particular are discussed considering the destabilizing impact of futures markets on agricultural commodity prices. References: Goetz, Cole, Dragan Miljkovic, and Nikita Barabanov: "New Empirical Evidence in Support of the Theory of Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets," Energy Economics (2021), 100: 105375. Miljkovic, Dragan and Cole Goetz: "Destabilizing Role of Futures Markets on North American Hard Red Spring Wheat Spot Prices," Agricultural Economics (2020), 51(6): 887-897. Miljkovic, Dragan and Cole Goetz: "The Effects of Futures Markets on Oil Spot Price Volatility in Regional US Markets," Applied Energy (2020), 273: 115288. Miljkovic, Dragan and Cole Goetz: "Futures Markets and Price Stabilization: An Analysis of the US Soybeans Markets," Agricultural and Resource Economics Review (2021, in review). Miljkovic, Dragan and Frayne Olson: "The Impacts of Futures Markets on Commodity Prices In(Stability) and Resulting Implications on Social Welfare," Choices (2021, in review).
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2021
Citation:
Goetz, Cole, Dragan Miljkovic, and Nikita Barabanov. "New empirical evidence in support of the theory of price volatility of storable commodities under rational expectations in spot and futures markets." Energy Economics (2021): 105375.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2021
Citation:
Miljkovic, Dragan, and Cole Goetz: Futures Markets and Price Stabilization: An Analysis of the US Soybeans Markets," Agricultural and Resource Economics Review.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2021
Citation:
Miljkovic, Dragan, and Frayne Olson: "The Impacts of Futures Markets on Commodity Prices In(Stability) and Resulting Implications on Social Welfare," CHoices.
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Progress 10/01/19 to 09/30/20
Outputs
Target Audience:In thisstageof the project, results of several completed papers were shared with some of the faculty, research staff and graduate students in Agribusiness and Applied Economics Department at NDSU. Samedrafts of completed papers were shared informally with academic and government scholars and researchers for their feedback and suggestions. One formal research seminar/presentation was conducted in November of 2019 in the Department of Agricultural Economics at Purdue University with more than 30 faculty and graduate students in attendance. Upon getting the feedback and incorporating some of the suggestions by these audiences, two journal articles were submitted for publication consideration in top-tier academic peer reviewed journals, Both have been accepted for publication and published before the end of this reporting period. Two more journal articles are in final stages of completion. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Both the scientist and the graduate student working on the projects (he completed his degree in May of 2019) had to learn considerable amount of computational and statistical theory to perform DAGs analysis. Developing economic models required interaction with mathematicians specialized in stochastic differential equations in order to pursue and derive the economic model. How have the results been disseminated to communities of interest?Drafts of two journal articles have been completed and submitted for peer review to two top-tier journals: Agricultural Economics (the journal of the International Association of Agricultural Economists or the IAAE) and Applied Energy (highest ranked energy research and energy economics journal globally). Both manuscripts have been accepted for publication and are already published both on-line and in print. Dragan Miljkovic was invited to give a research seminar on this topic at Purdue University in West Lafayette, IN, on November 8, 2019. The seminar was well received, and lively discussion ensued with attending Purdue faculty and graduate students following the presentation. Finally, two more manuscripts have being completed and ready for submission to two top-tier journals: Energy Economics and Applied Economics. What do you plan to do during the next reporting period to accomplish the goals?One more manuscript has already been completed (since October of 2020) and sent for peer review to Energy Economics, a major, tier-1 journalin general economics. One more manuscript is being written during this reporting period, and will be completed by February or March of 2021. A conference paper will be presented at either WAEA or AAEA annual meeting, although that is contingent upon the COVID-19 situation developments. The work began on accomplishing objective 5 through writing a comprehensive outreach paper.
Impacts
What was accomplished under these goals?
First four goals have all been addressed and accomplished. Theoretical economic models have been developed (objectives 1 and 2). I derived in full detail and transparently an economic model explaining the behavior of spot price volatility in the absence of futures markets as well as in the presence of futures markets. It accounts for consumption, production, storage and pure speculation in commodity marketing as well as for different price risk attitudes among decision makers. Theoretical results on variance of spot prices with and without futures markets present differ from results in famous Kawai's model. However, numerical simulation yields exactly same (qualitative) outcomes thus confirming his original finding that the impact of futures markets on spot price volatility of storable commodities can be either stabilizing or destabilizing. That is dependent on if the dominant/prevailing disturbance in commodity market is coming from consumption, production or inventory holding. Appropriate computational, statistical and econometric models (objective 3) have also been developed. Directed Acyclic Graphs (DAGs) are used as computational/statistical/mathematical modeling tool. DAGs represent principled, nonparametric framework for causal inference, in which diagrams are queried to determine if the assumptions available are sufficient for identifying causal effects from non-experimental data. If so, the diagrams can be queried to produce mathematical expressions for causal effects in terms of observed distributions; otherwise, the diagrams can be queried to suggest additional observations or auxiliary experiments from which the desired outcomes can be obtained. DAG present an alternative to the Granger causality tests insofar as DAGs explore non-time sequence asymmetry in causal relations as opposed to the Granger test which exploits the time sequence asymmetry. Next, the dynamic structure of the models was examined using variance decomposition, which breaks down the variance of the forecast errors for every endogenous variable into the percentage of the variance that can be credited to the other endogenous variables. This can be useful in identifying how large a role a shock to one endogenous variable has in effecting the variation of other endogenous variables over time. Therefore, this method is well suited to address the question of interest to us, i.e., do commodity futures prices have stabilizing or destabilizing impact on volatility of commodity spot prices. Specifically, we follow Blanchard and Quah variance decomposition procedure. Empirical directed acyclic graphs (DAGs) analysis for most heavily traded commodities in the US and in North Dakota: oil, hard red spring wheat, corn and soybeans, is used to determine endogeneity among spot and futures prices, and exogeneity between storage and both spot and futures prices. Resulting variance decomposition specification and results for major energy and agricultural commodities conform with the theoretical model postulates. Empirical analysis was fully completed between the end of the reporting period. Two peer reviewed paperspublished contain this informtion in full, as well as the two journal articlesthat are in final stages of the refinement. Objective 5 was addressed in implications section of each of the papers. Indeed, the consequences for North Dakota farmers' welfare is similaras for other US wheat, corn, or soybeans farmers as increased commodity price volatility and destabilizing imact of futures prices on spot prices require additional policy actions to ensure small- and medium-size farms.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2020
Citation:
Miljkovic, Dragan and Cole Goetz: The Effects of Futures Markets on Oil Spot Price Volatility in Regional US Markets, Applied Energy (2020), 273: 115288.
- Type:
Journal Articles
Status:
Published
Year Published:
2020
Citation:
Miljkovic, Dragan and Cole Goetz: Destabilizing Role of Futures Markets on North American Hard Red Spring Wheat Spot Prices, Agricultural Economics (2020), 51(6): 887-897.
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Progress 10/01/18 to 09/30/19
Outputs
Target Audience:In this early stages of the project, preliminary results were presented to the faculty, research staff and graduate students in Agribusiness and Applied Economics Department at NDSU in form ofan MS thesis. Early drafts of papers were shared informally with academic and government scholars and researchers for their feedback and suggestions. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Both the scientist and the graduate student working on the projects had to learn considerable amount of computational and statistical theory to perform DAGs analysis. Developing economic models required interaction with mathematicians specialized in stochastic differential equations in order to pursue and derive the economic model. How have the results been disseminated to communities of interest?MS thesis by Mr. Cole Goetz was completed and deposited in May of 2019. The thesis was also presented to the audience of professors, researchers, extension specialists and graduate students at a thesis seminar in April of 2019. Finally, early drafts of three journal articles have been drafted and sent to several well reputed scholars nation-wide for feedback. Dragan Miljkovic was invited to give a research seminar on this topic at Purdue University (note: the seminar was held in West Lafayete, IN, in November, past this reporting period and will be formally reported next year). What do you plan to do during the next reporting period to accomplish the goals?Three manuscripts have already been completed (since October of 2019) and sent for peer review to major, tier 1 journals in agricultural economics and general economics. One more manuscript will be written during next reporting period. A research seminar is to be held (at Purdue University) to receive feedback from top-level scholars in the US. Another research seminar is being discussed and will likely happen. A conference paper will be presented at either WAEA or AAEA annual meeting. The work will begin on accomplishing objective 5.
Impacts
What was accomplished under these goals?
First four goals have all been addressed and accomplished. Theoretical economic models have been developed (objectives 1 and 2).I derived in full detail and transparently an economic model explaining the behavior of spot price volatility in the absence of futures markets as well as in the presence of futures markets. It accounts for consumption, production, storage and pure speculation in commodity marketing as well as for different price risk attitudes among decision makers. Theoretical results on variance of spot prices with and without futures markets present differ from results in famous Kawai's model. However, numerical simulation yields exactly same (qualitative) outcomes thus confirming his original finding that the impact of futures markets on spot price volatility of storable commodities can be either stabilizing or destabilizing. That is dependent on if the dominant/prevailing disturbance in commodity market is coming from consumption, production or inventory holding. Appropriate computational, statistical and econometric models (objective 3) have also been developed. Directed Acyclic Graphs (DAGs) are used as computational/statistical/mathematical modeling tool. DAGs represent principled, nonparametric framework for causal inference, in which diagrams are queried to determine if the assumptions available are sufficient for identifying causal effects from non-experimental data. If so, the diagrams can be queried to produce mathematical expressions for causal effects in terms of observed distributions; otherwise, the diagrams can be queried to suggest additional observations or auxiliary experiments from which the desired outcomes can be obtained. DAG present an alternative to the Granger causality tests insofar as DAGs explore non-time sequence asymmetry in causal relations as opposed to the Granger test which exploits the time sequence asymmetry. Next, the dynamic structure of the models was examined using variance decomposition, which breaks down the variance of the forecast errors for every endogenous variable into the percentage of the variance that can be credited to the other endogenous variables. This can be useful in identifying how large a role a shock to one endogenous variable has in effecting the variation of other endogenous variables over time. Therefore, this method is well suited to address the question of interest to us, i.e., do commodity futures prices have stabilizing or destabilizing impact on volatility of commodity spot prices. Specifically, we follow Blanchard and Quah variance decomposition procedure. Empirical directed acyclic graphs (DAGs) analysis for most heavily traded commodities in the US and in North Dakota: oil, hard red spring wheat, corn and soybeans, is used to determine endogeneity among spot and futures prices, and exogeneity between storage and both spot and futures prices. Resulting variance decomposition specification and results for major energy and agricultural commodities conform with the theoretical model postulates. Empirical analysis was during this stage of the project in the refining stage, and in large completed between the end of the reporting period and now. Objective 5 was not addressed in this reporting period.
Publications
- Type:
Theses/Dissertations
Status:
Published
Year Published:
2019
Citation:
Goetz, Cole Louis. "The Effects of Futures Markets on the Spot Price Volatility of Storable Commodities." MS thesis, North Dakota State University, 2019.
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