Commodity price puzzles

There are many puzzles about the behavior of commodity prices. And things seems to be getting stranger by the day. Mind you, these puzzles aren't new, they just seem more extreme than in the past.

A few of them:

(1) Non-renewable resource prices don't trend up at the rate of interest, or at all, as Hotelling's rule predicts (But they sort of look like asset prices in that they are near random walks).

(2) Agricultural commodity prices display "too much" autocorrelation. Storage should make corn prices behave more like oil prices, but not exactly. But agricultural commodities display about as much autocorrelation as oil does. (See work by Deaton and Laroque)

(3) Firms and/or individuals store commodities even when the futures price is less than the spot price ("backwardation" in commodity jargon). This seems like throwing money away. The academic literature calls it a "convenience yield". I'm guessing it could be a risk premium of some kind--if storage pays off, it tends to do so when the storer really needs the cash, kind of like insurance. In any case, it's weird--cash seems a lot more convenient than a pile of grains expected to lose value every day.

(4) At times, and especially recently, futures prices do not converge to spot prices. This is making it more difficult for farmers to hedge their price risk. Look up Scott Irwin at the University of Illinois for more on this.

(5) And now we have "Super Contango," the extreme opposite of backwardation. Here's Kevin Drum:

Normally, it costs more to buy a barrel of oil for delivery six months from now than it does to buy a barrel of oil today. After all, if you're not going to take delivery of my oil until July, then I'm going to want the spot price of the oil plus the cost of storing it plus the cost of having to wait for my money. So maybe a barrel of oil that costs you $38 today will cost you $41 for delivery six months from now.

But instead of $41, what if the July price is $53? Then anyone who wants to can make a guaranteed killing. Accept the contract, buy a tankerful of oil, store it for six months, and then deliver it. Even after the cost of storage and the interest on the loan you took out to buy the oil, you'll make a quick and easy twelve bucks per barrel profit....

My gut instinct tells me the root cause or causes of these puzzles are in some way related to broader financial puzzles, like the large and highly variable risk premium on stocks. That we observe these strange things becoming stranger in a time of broad financial problems, credit constraints, and a huge risk premium, seems unlikely to be a coincidence.


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