Fundamental Surprises, Market Structure, and Price Formation in Agricultural Commodity Futures Markets

Abstract

Our study seeks to provide a better understanding of price formation process and determining factors of price volatility in agricultural commodity markets. We focus on corn and soybean futures traded in CBOT (Chicago Board of Trade). We innovatively construct two sets of variables to represent fundamental changes and market structure of the commodity markets. Fundamental changes are captured by the deviations of the supply and demand condition estimates released by USDA from the pre-announcement analysts’ forecasts published by Bloomberg. We employ the transaction databases of CFTC (Commodity Futures Trading Commission) to construct the percentage shares of detailed participation group trading in the market. While fundamental changes are based on public observations and analysis, transaction percentage shares of trader groups are private information of individual traders. Both the fundamental surprises and the market structure related variables are found to have statistically significant effects on price and price volatility. Furthermore, the impacts vary across quantiles of the conditional distributions.

Keywords: log return, realized volatility, trader groups, WASDE report

JEL Classification: C22, G13, G14