Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum

van Huellen, Sophie

Abstract

The close relationship between commodity future and cash prices is critical for the effectiveness of risk management and the functioning of price discovery. However, in recent years, commodity futures prices, across the board, have appeared increasingly detached from prices on physical markets. This paper argues that while various factors, identified in previous literature, which introduced limits to arbitrage have facilitated non-convergence, the actual extent of non-convergence in these markets is caused by essential differences in the mechanisms of price formation on physical and derivative markets. With reference to the particular case of the CBOT wheat market, the paper shows that the size of the spread between futures and cash prices can be theoretically and empirically linked to the increasing inflow of financial investment into commodity futures markets.

Citation

van Huellen, S. Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum. London

• Working Paper Type: Working Paper
• Deposit Date: Oct 11, 2015
• Publicly Available Date: May 21, 2016
• Pages: 1-31
• Series ISSN: 17535816
• Publisher URL: https://www.soas.ac.uk/sites/default/files/2022-10/economics-wp185.pdf