commodity market outlook: sources of price volatility ( impacts of price volatility ) t. randall...
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Commodity Market Outlook: Commodity Market Outlook: Sources of Price VolatilitySources of Price Volatility
((Impacts of Price VolatilityImpacts of Price Volatility))
T. Randall FortenberyProfessor
School of Economic SciencesWashington State University
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Volatility PerceptionsVolatility Perceptions
Biofuel production has driven up commodity prices, and increased
commodity price volatility.
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BackgroundBackground
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
300000
320000
340000
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Jul-06 Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07 Jul-07
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Avg. Daily Ethanol Production vs Monthly Corn Price
Avg. Daily Ethanol Produciton
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Preliminary data compiled by D. Zaks at the Center for Sustainability and the Global Environment (SAGE), University of Wisconsin, May, 2008. Funded by NASA Earth Science Program. Do not distribute without explicit permission. For more information, please contact: [email protected].
Millio
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Global Distribution of Grains and Pulses to Food, Feed and Ethanol
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Preliminary data compiled by D. Zaks at the Center for Sustainability and the Global Environment (SAGE), University of Wisconsin, May, 2008. Funded by NASA Earth Science Program. Do not distribute without explicit permission. For more information, please contact: [email protected].
Millio
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f oilse
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Global Distribution of Oilseeds to Food, Feed and Biodiesel
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Actual Corn Price Compared to Price Actual Corn Price Compared to Price
Expected from Supply/Demand SystemExpected from Supply/Demand System
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Actual Corn Price Compared to Actual Corn Price Compared to
Price Expected from Price Expected from
Supply/Demand SystemSupply/Demand System
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Biodiesel Yield from Vegetable Oils
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soyoil camelina safflower sunflower rapeseed castor jojoba jatropha coconut palm
gal
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Is it Really Food vs. Is it Really Food vs. Fuel?Fuel?
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Volatility PerceptionsVolatility Perceptions
Speculative activity in the derivative (especially futures) markets has resulted in
increased price volatility and inefficient price discovery.
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Empirical EvidenceEmpirical Evidence• Work by the CFTC looking at 2008 oil prices
suggested that speculators were not the cause of either price levels or price volatility
• Similar results were found by Irwin et. al looking at soybean markets.
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Volatility PerceptionsVolatility Perceptions
International economic events have become more important than basic market
fundamentals in determining price levels and volatility.
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Malaysia's Land Development Authority FELDA has announced plans to immediately establish 100,000 hectares (250,000) of oil palm plantations in the Brazilian Amazon.
The agency will partner with Braspalma, a local company, to form Felda Global Ventures Brazil Sdn Bhd. FELDA will have a 70 percent stake in the venture.
"As a start, 20,000ha in Tefe will be opened for oil palm planting. After that, between 3,000ha and 5,000ha will be opened yearly," said Deputy Prime Minister Datuk Seri Najib Razak. "Felda wants to emulate Petronas as a global player," he added, referring to Malaysia's national oil company.
Amazon palm oil: Palm oil industry moves Amazon palm oil: Palm oil industry moves into the Amazon rainforestinto the Amazon rainforest
Rhett Butler, mongabay.comRhett Butler, mongabay.comJuly 9, 2008July 9, 2008
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Oil palm plantations and heavily logged forest near Lahad Datu, Malaysia. Photo by Rhett A. Butler
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Malaysia, Indonesia to curtail palm oil production due to low prices(11/8/2008) Malaysia and Indonesia C countries that account for more than 85 percent of global palm oil production — will cut production in an effort to shore up collapsing palm oil prices, reports The Jakarta Post. The decline in palm oil prices is expected to slow expansion of oil palm plantations in Indonesia and Malaysia, a development that will please environmentalists who blame the palm oil industry for large-scale destruction of rainforests across Southeast Asia.
November 11, 2008November 11, 2008Monogabay.comMonogabay.com
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Fundamentals Still Fundamentals Still MatterMatter
• Land Use
• Asian Demand
• Alternatives Uses
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Contract ExpirationsContract Expirations• Sept. 30 2009 2.8 million acres
o Tx 561K, Colo 409K, Ks 331K, NDak 192,o SDak 184K, MT 138K
• Sept. 30, 2010 4.5 million acres
• Sept. 30 2011 4.4 million acres
• Sept. 30 2012 6.5 million acres
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CRP OBJECTIVESCRP OBJECTIVES• Upland Bird Habitat 250,000 acres• Bottomland hardwood trees 500,000 acres• Non-flood plain wetlands 250,000 acres• Flood plain wetlands 500,000 acres• Longleaf pine plantings 250,000 acres• Prairie pot hole duck habitat 100,000 acres• State acres for wildlife 500,000 acres
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OUTLOOKOUTLOOK• We have likely entered a sustained period
of higher average prices, coupled with increased volatility. Sources of volatility vary, and policy strategies to “control” volatility are at risk of causing, not solving, concerns related to market risk.
• Tensions between various use categories will result in considerable political pressure to manage who can and cannot engage in trade, especially in derivative and forward markets.
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ConclusionsConclusionsWe have likely entered a new pricing regime relative to basic commodity prices.
Both price levels and price volatility will continue to exceed levels experienced through 20006/07.
We will likely see several proposed “solutions” to commodity price activity initiated through political institutions. This will be a global phenomenon, and many of the proposals will be short-sighted and off target.
Much of the political motivation for “managing” markets makes overly simplistic assumptions relative to causality.
Creative risk management becomes important
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THANK YOUTHANK YOU