|Updates from the JPMCC
Updates from the J.P. Morgan Center for Commodities' Leadership Team
This article provides a brief update on the many events and initiatives that have taken place during the last six months, including (a) new sponsorship for the GCARD; (b) the addition of a new Industry Advisory Council member; (c) the appointment of two new GCARD Editorial Advisory Board members; (d) the latest JPMCC collegiate courses; (e) the upcoming Professional Education courses that are being offered jointly with the CU Denver Global Energy Management program; and (f) the scheduling of the August 2021 international commodities symposium. The JPMCC’s Executive Director is Dr. Thomas Brady, Ph.D.
|Research Director Report
Update from the Research Director of the J.P. Morgan Center for Commodities
By Jian Yang, Ph.D., CFA, J.P. Morgan Endowed Research Chair, JPMCC Research Director, and Discipline Director and Professor of Finance and Risk Management, University of Colorado Denver Business School
In this brief report, Dr. Jian Yang provides updates on the JPMCC’s research activities through February 2021. In particular, Dr. Yang discusses (a) cover story articles in China Futures Magazine, which were written by professionals affiliated with the JPMCC; (b) the Center’s applied research insights, which were cited by the media; and (c) the JPMCC’s upcoming international commodities symposium and other research activities.
|Research Council Corner
Persistence of Commodity Shocks
By John Baffes, Ph.D., Senior Agriculture Economist, Prospects Group, World Bank and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board; and Alain Kabundi, Ph.D., Senior Economist, Prospects Group, World Bank
Based on an analysis of 27 commodities during 1970-2019, this article finds that transitory and permanent shocks contributed almost equally to commodity price variations, although with wide heterogeneity. Permanent shocks accounted for two-thirds of the variability in annual agricultural commodity prices but less than half of the variability in base metals prices. For energy prices, permanent shocks have trended upward, for agricultural prices, downwards, and for metals prices, flat. The volatility triggered in April-to-October 2020 by the COVID-19 pandemic appears to constitute a series of largely transitory shocks for commodity prices.
|Research Digest Articles
On the Negative Pricing of WTI Crude Oil Futures
Research by Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K. and Associate Editor of the GCARD; and Joëlle Miffre, Ph.D., Audencia Business School, France
WTI crude oil futures markets experienced the unprecedented phenomenon of negative prices on April 20, 2020. Several energy market pundits attributed the event to the large United States oil exchange-traded fund (“USO”) due to the rolling of positions out of the May 2020 contract (CLK20) before the contract’s maturity on April 21, 2020. The authors show empirically that USO flows have not influenced the flat price of WTI futures in general, nor of the CLK20 contract in particular.
A blend of macroeconomic/geopolitical conditions, including the sudden demand plunge associated with COVID-19 pandemic-control measures and various supply spikes due to Russia-Saudi Arabia tensions, contributed to a contangoed WTI futures curve that attracted cash-and-carry (C&C) arbitrage, sharply increasing the inventories at Cushing, and feeding into a super-contango, as concerns on storage capacity loomed. That said, a full understanding of the negative WTI price phenomenon of April 20, 2020 will require a formal examination of market microstructure issues on that day.
The New Benchmark for Forecasts of the Real Price of Crude Oil
Research by Amor Aniss Benmoussa, Economist, Bank of Canada; Reinhard Ellwanger, Ph.D., Senior Economist, Bank of Canada; and Stephen Snudden, Ph.D., Assistant Professor, Wilfrid Laurier University, Canada
The authors propose a new benchmark to evaluate forecasts of averaged series, such as the monthly real price of oil. The new benchmark is based on the last high-frequency observation of the underlying series and allows forecasters to test for predictability. The authors also warn that forecast comparisons with the conventional benchmark can introduce spurious predictability. In an application to the real price of crude oil, the authors find that the new benchmark overturns the existing evidence for oil-price predictability: the real price of oil is more difficult to predict and behaves more similar to the prices of financial assets than implied by the academic literature. The authors’ results also highlight that incorporating information from high-frequency observations into forecasting models can yield large gains in forecast-accuracy. Such gains are likely to occur in any setting where forecasters work with averaged data and the underlying series are very persistent.
Dry Bulk Shipping and the Evolution of Maritime Transport Costs, 1850-2020
Research by David S. Jacks, Ph.D., J.Y. Pillay Professor of Social Sciences, Yale-NUS College, Singapore, Professor, Simon Fraser University, Canada and Member of the GCARD’s Editorial Advisory Board; and Martin Stuermer, Ph.D., Senior Research Economist, Federal Reserve Bank of Dallas
This paper evaluates the dynamic effects of fuel price shocks, shipping demand shocks, and shipping supply shocks on real maritime transport costs in the long run. The authors first analyze a new and large dataset on dry bulk freight rates for the period from 1850 to 2020, finding that they followed a downward but undulating path with a cumulative decline of 79%. Next, the authors turn to understanding the drivers of booms and busts in the dry bulk shipping industry around this trend, finding that shipping demand shocks strongly dominate all others as drivers of real dry bulk freight rates. Furthermore, while shipping demand shocks have increased in importance over time, shipping supply shocks in particular have become less relevant.
|Advisory Council Analyses
ESG Comes to Town
By Kartik Ghia, Ph.D., Co-Head of the Systematic Strategies Team, Index and ESG Research Group, Bloomberg LP and Member of both the JPMCC’s Advisory Council and the GCARD’s Editorial Advisory Board; A.J. Lindeman, Ph.D., Head of the Index and ESG Research Group, Bloomberg LP; and Michael Zhang, CFA, Quantitative Analyst, Index and ESG Research Group, Bloomberg LP
In recent years, environmental, social and governance (ESG) themes have rapidly risen to prominence within equities and fixed income. In commodities however, this discussion is still in its infancy. In this article, the authors (a) highlight the unique interpretation issues for commodities investors with regard to ESG investing; (b) provide a summary of the factors that need to be considered when estimating GHG emissions for metals production; (c) outline a rules-based approach for estimating GHG emissions per metal; and (d) construct sample portfolios incorporating GHG-based scores.
How Super is the Commodity Cycle?
By Daniel Jerrett, Ph.D., Chief Investment Officer, Stategy Capital LP and Member of the JPMCC’s Advisory Council
The reemergence of the commodity super-cycle discussion has important implications for the global economy and capital markets. Mineral producers, policymakers, and investment managers are all trying to better understand commodity prices to make more informed, long-term decisions. The author proposes a statistical methodology that could help support this decision-making process and provide a framework to discuss super cycles in commodities as well as other macroeconomic and financial questions.
|Editorial Advisory Board Analysis
Gold Price Relationships Before and After the Global Financial Crisis
By Daniel Murray, Ph.D., Deputy Chief Investment Officer and Global Head of Research, EFG Asset Management, U.K. and Member of the GCARD’s Editorial Advisory Board
There are several commonly held beliefs in the investment community regarding the relationship between gold and other variables: namely, the U.S. dollar, the 10-year Treasury yield, the oil price, inflation and market volatility or risk. At the same time, we know that central banks have adopted widespread large-scale asset purchase programs during and since the period that began with the Global Financial Crisis (GFC) in 2008/09, over which time monetary authority balance sheets expanded at a dramatic rate. This paper explores the nature of the relationships between gold and the other variables before and after the GFC in this context. The paper shows that the relationships have indeed changed since the GFC in terms of both significance and direction of causality.
A Review of Global Silver Supply Trends
By Thomas Brady, Ph.D., Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School and Managing Director and Editor, Commodities Report, Capitalight Research, Canada; and Chantelle Schieven, Managing Director and Research Head, Capitalight Research, Canada
This article provides a broad sweep review of both the long-term trends in global silver mining supply and in global silver supply concentration. The authors anticipate mine supply growth to remain very challenged. Lower processed grades, which in turn result from longer-term downward trends in exploration success, will pressure operating costs as well as production levels. Over the near term, COVID-19 restrictions will also potentially impact production levels going forward. The authors also anticipate industry concentration levels to marginally increase in both silver and gold mine supply. As a consequence of the continuing mining challenges of lower processing grades and limited exploration success, the authors expect that companies will be forced to look towards mergers-and-acquisitions to sustain production profiles.
Dynamic Commodity Valuations
By Nick Vasserman, Founder and Chief Investment Officer, Integrated Portfolio Intelligence, LLC
Historically speaking, commodities balance sheet entries were not observable in a timely fashion. Lagged data is typically published by government agencies and often substantially revised in later releases. This lack of uniformity severely hinders the efforts to gauge international commodities balances and determine individual commodity valuations. Further complicating this effort are the different accounting standards and principles adopted by different agencies and analysts.
This paper proposes that in today’s information age, it is possible and necessary to construct a globally consistent investment framework that integrates all available fundamental data and technology into dynamic stocks-to-use ratios to assess commodity valuations in near real-time.
The Impact of the Energy Transition on Wholesale Power Pricing and Market Risk
By Nazim Osmancik, Energy Risk Management Expert
Low carbon power generation is gaining market share in many key markets around the world. Underpinned by displacing traditional thermal power generation with renewables like wind and solar, this trend introduces supply intermittency that drives new pricing patterns and changes the profile of risk. The scale and complexity of the intermittency challenge will increase as the share of renewable generation rises in energy systems. Understanding these challenges are key to investment, strategy, and policy decisions. This article explores these trends using evidence from the U.K. power market, followed by a discussion on future implications and recommendations.
Volatility in Dairy Markets: Towards a Dynamic Value at Risk Model for Dairy Commodity Trading
By Vincent Almering, Group Treasurer, Interfood Holding B.V., The Netherlands; Herbert Rijken, Ph.D., Full Professor in Corporate Finance, Vrije Universiteit Amsterdam, The Netherlands; and Frans Cleton, Senior Manager, KPMG Advisory, The Netherlands and Program Manager and Instructor, Postgraduate Program, Treasury and Corporate Finance, Vrije Universiteit Amsterdam, The Netherlands
Commodity prices are subject to extreme price volatility and are a prominent source of risk for treasurers. The current geopolitical uncertainty is one of the main causes behind the recent uptick in volatility in many markets, complicating the ability of a treasurer to manage risk. Inevitably, the dairy sector is also affected by these developments and is on the lookout for more advanced market risk management tools. One promising tool is volatility modeling. This paper focuses on how volatility modeling can benefit commodity traders by dynamically managing price risk in the European Union (EU) dairy market with time series models.
Commodity Portfolio Management: Strategy Structuring Considerations
By Vito Turitto, Lead Quantitative Analyst, S&P Global Platts, U.K.
This article expands on research into commodity portfolio management that was published in the Winter 2019 edition of the Global Commodities Applied Research Digest. Commodity markets are often used to diversify portfolio risk and as a hedge against inflation but, in order to maximize returns and hedging effectiveness, it is necessary to develop an approach that examines each commodity market separately. Accordingly, this article analyzes individual commodity returns and provides guidance on how extreme returns can impact commodity portfolio strategies.
|Interview with a Leading Innovator and Thought Leader
Interview with Jodie Gunzberg, CFA
Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest
In this issue of the GCARD, we have the pleasure of interviewing Jodie Gunzberg, CFA. Gunzberg is the Managing Director and Chief Institutional Investment Strategist for Morgan Stanley Wealth Management. Previously Gunzberg was the Managing Director and Head of U.S. Equities at S&P Dow Jones Indices (S&P DJI). She had originally joined S&P DJI as the Director of Commodities product management. In addition to her impressive track record of professional achievement, Gunzberg has retained a strong passion for education, whether it concerns early-childhood tutoring, university-level mentoring, or professional development for young finance professionals. In this interview, we ask Gunzberg about advice regarding career development, and we also explore both commodity- and education-based themes with her as well.