|Update from the Executive Director|
Update from the CoBank Executive Director of the J.P. Morgan Center for Commodities
This article provides a brief update from Dr. Thomas Brady on the many events and initiatives that have taken place this year, including (a) the addition of four new Industry Advisory Council members; (b) the appointment of four new GCARD Editorial Advisory Board members; (c) the Center’s outreach & applied research, which has included energy transition webinars with the Commodity Trading Alumni Association (of Geneva, Switzerland); (d) the redesign of graduate and undergraduate courses; (e) the JPMCC’s professional education courses, including the Center’s partnership with Erasmus University Rotterdam in the “Leadership in Commodity Trading & Supply Networks” Executive Program; and (f) the JPMCC’s 5th Annual International Commodities Symposium. The symposium, in turn, was co-organized by Dr. Jian Yang, CFA, the JPMCC’s Research Director, and Dr. Brady with Erica Hyman, the JPMCC’s Assistant Director, providing logistical coordination.
|Executive Director's Commentary|
An Overview of the Lithium Supply Chain
By Thomas Brady, Ph.D., CoBank Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Managing Director and Editor, Commodities Report, Capitalight Research, Canada
This digest article provides an overview of the global lithium supply chain from the mining of ore through the processing of intermediate compounds to the manufacture of lithium-ion batteries. Driven by increasing global demand for batteries, the search for new mine supply sources and processing techniques alongside the evolution of battery chemistries, this supply flow is guaranteed to change in the future.
|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 report, Dr. Jian Yang provides updates about recent JPMCC research activities. In particular, Dr. Yang discusses (a) the JPMCC’s closer collaboration with the World Bank on applied commodity research; (b) a study investigating the price discovery function of China’s crude oil futures contracts; (c) media interviews on commodity prices and inflation; and (d) the JPMCC’s 5th Annual International Commodities Symposium.
|Research Council Corner|
The Day Oil Markets Reacted to Omicron
By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council; and Arthur Yu, Manager, Data Science, CME Group
The authors put in context how the oil markets responded to the Omicron news shock in late November 2021, noting how the markets followed a pattern seen on other event risk days. They also provide useful real-time metrics for interpreting a market’s response during eventful periods.
|Research Digest Articles|
Risk-Neutral Skewness and Commodity Futures Pricing
Research by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London, U.K. and Associate Editor of the GCARD; Zhenya Liu, Ph.D., Renmin University, China; and Weiqing Tang, Ph.D., Senior Quantitative Risk Management Associate, CME Group Inc., U.K.
This paper investigates the predictive content of a risk-neutral skewness (RNSK) signal for the dynamics of commodity futures prices. A trading strategy that buys futures with positive RNSK and sells futures with negative RNSK generates a significant excess return, which suggests a positive RNSK-return nexus. The risk premia that can be extracted through the RNSK signal is more pronounced in the contango than backwardation phase. After accounting for traditional commodity futures predictors, the RNSK signal exhibits a relatively stable and prolonged predictive ability. The directional-learning hypothesis is able to rationalize the positive nexus in terms of arbitrage risks and illiquidity (positive RNSK) and overpricing (negative RNSK).
One Hundred Years of Rare Disaster Concerns and Commodity Prices
By Qunzi Zhang, Ph.D., Shandong University, China
This paper shows that rare disaster concern, deﬁned as the news-implied volatility, performs very well at predicting the return of index commodity futures throughout the whole nearly century period of 1926 to 2016. This result holds after controlling for the current business cycle conditions, the macroeconomic variables, and the Volatility Index (VIX). The paper ﬁnds that rare disaster concern performs very well at predicting index commodity futures returns out-of-sample. The results remain robust while considering diﬀerent macroeconomic conditions such as recession (expansion), contango (backwardation), or increased (decreased) inﬂation.
The Crop with no Futures: Explaining the Absence of Derivatives Trading in the Rice Market
By Sulian Lizé, Ph.D., Research Economist, LMC International
This research explores the reasons behind the low financial development (materialized by the use of derivatives trading) of the rice market, unique within the realm of large commodity markets. Through a comparison with crops with highly liquid futures markets (coffee, sugar and wheat), this article argues that the low financial development of rice is not due to one impeding factor but the accumulation of many instead. Of these, the most prominent are the disincentives for the participation of financially sophisticated actors, and the politicization of rice. The author argues that both factors find their root in the geographical organization of the market, which is highly concentrated in developing economies.
Long-Run Reversal in Commodity Returns: Insights from Seven Centuries of Evidence
By Adam Zaremba, Ph.D., Montpellier Business School, Montpellier, France and Poznan University of Economics and Business, Poland; Robert Bianchi, Ph.D., Griffith Business School, Griffith University, Australia; and Mateusz Mikutowski, Ph.D., Poznan University of Economics and Business, Poland
This study examines the long-term reversal effect in commodity spot markets using seven centuries of data. The research is the longest study of the long-term reversal effect covering 52 agricultural, industrial and energy markets from 1265 to 2017 employing U.K.- and U.S.-based commodity prices. Returns over the previous one-to-three years negatively predict subsequent performance in the cross-section of returns. The long-run reversal effect is strong and robust after surviving a variety of robustness checks. The effect cannot be explained by statistical biases, extreme events, or macroeconomic risks. The study reveals that the long-run reversal effect is driven by supply-and-demand adjustments in physical commodities through time.
|Advisory Council Analysis|
Carbon Cap-and-Trade: We See a Compelling Opportunity
By Nic Johnson, Former Head of Commodities at PIMCO and Member of the JPMCC’s Advisory Council; and Klaus Thuerbach, Co-Chief Investment Officer at Klima Capital Advisors
This article discusses potential opportunities in California’s cap-and-trade carbon emissions market. It discusses how cap-and-trade works, California’s Carbon Allowances (CCAs), as well as Environmental, Social and Governance (ESG) considerations of CCA investing. The article also provides two valuation methods and an outlook for the California carbon allowance market.
|Editorial Advisory Board Analysis|
Resources and Diplomacy: Commodity Signposts to a Post-War Economic Order
By Colin Waugh, Editorial Advisory Board Member, Global Commodities Applied Research Digest
The author discusses how a new economic and political reality has engulfed Europe, its populations, policy makers and larger economic actors, regionally as well as internationally, as a result of the outbreak of major conventional warfare on the European continent for the first time in over 80 years. The situation has required a radical re-ordering of resource allocation, with concomitant shocks to corporate, public and personal finances that this will inevitably entail.
What Drives Gold Prices?
By Robert Barsky, Ph.D., Senior Economist and Economic Advisor, Federal Reserve Bank of Chicago; Craig Epstein, Research Assistant, Reserve Bank of Chicago; Adrian Lafont-Mueller, Senior Analyst, Federal Reserve Bank of New York; and Younggeun Yoo, Ph.D. Candidate in Economics, University of Chicago
A half century after gold ceased to play a significant formal role in the international monetary system, it still captures a great deal of attention in the financial press and the popular imagination. Yet there has been very little scrutiny of the primary factors determining the price of gold since its dollar price was first allowed to vary freely in 1971. In this article, the authors attempt to fill in that gap by highlighting three considerations that are commonly cited as drivers of gold prices: inflationary expectations, real interest rates, and pessimism about future macroeconomic conditions.
Assessment of Cryptocurrency Risk for Institutional Investors
By Thomas Blackburn, Ph.D., Senior Risk Analyst, Northfield Information Services; Dan DiBartolomeo, Founder and President, Northfield Information Services; and William Zieff, Director, Northfield Information Services
In this article, the authors note that it is necessary to have methods in place to assess the risk of holding cryptocurrencies and the incremental impact of crypto holdings on overall institutional portfolios. The main portion of their research focuses on key building blocks for understanding the risk of cryptocurrencies and what magnitude of return expectations would justify those risks for a typical investor.
The Problem of Widespread “Basis” and “Flat Price” Risk in Agricultural Commodity Markets
By Michael Nepveux, Senior Protein Analyst, Stable Group Ltd; Paola Luporini, Senior Analyst, Stable Group Ltd; Sam Horsfield, Grains Analyst, Stable Group Ltd; Sakshi Mehta, Junior Analyst, Stable Group Ltd; and Joe Brooker, Vice President, Research, Stable Group Ltd
Stable’s research covers the widespread issue of “basis” and “flat price” risk within the agricultural commodities sector. This article defines the term “basis” to describe the difference between a cash market price and the corresponding futures market price with “flat price” risk defined as the risk where the market operator is exposed to the full spot price of a commodity. The article drills into the level of coverage that liquid futures contracts offer in the agricultural commodity markets and highlights the shortcomings in the sector. Overall, Stable finds that only 16% of global agricultural commodity markets are covered by liquid futures markets. This provides a significant issue for risk management in the sector with widespread “basis” and “flat price” risk occurring. A case study on the organic corn market highlights the challenges of price risk management in a relatively new product within the market where no exchange-traded contract exists. This is in contrast with the conventional corn market, which has some of the most established futures contracts in the agricultural commodities sector. Another case study examines the recent price volatility in beef, which was caused by plant closures during the COVID-19 pandemic. The move in prices has disrupted the once tightly knit relationship between the Chicago Mercantile Exchange (CME) live cattle futures and the price of beef, leaving industry participants without a suitable hedging tool for their price exposure. Stable concludes that the market is in need of a modern, targeted solution for the age-old problem of “basis” and “flat price” risk within the agricultural commodities sector.
|Interview with a Leading Innovator and Thought Leader|
Interview with Sharon (Hyman) Weintraub, Senior Vice President, Gas and Power Trading International at bp
Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest
In this issue of the GCARD, we are delighted to interview Sharon (Hyman) Weintraub, who is the Senior Vice President for Gas and Power Trading International at bp. Weintraub’s career spans commodity derivatives trading, risk management, and chief financial officer duties in positions across the globe, including in Chicago, Houston, London, and Singapore. She is also a member of the JPMCC’s prestigious Advisory Council.
In this issue’s GCARD interview, Weintraub describes her 30+ year career along with her view on the significant changes in the industry that have occurred during her career in the energy markets. She then discusses her current role at bp as well as some of the initiatives of the JPMCC’s Industry Advisory Council. The interview concludes with her advice for students and young professionals interested in a career in the commodities and/or energy markets.