|Update from the Executive Director|
Update from the 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 three new Industry Advisory Council members; (b) two new GCARD Editorial Advisory Board members; (c) the GCARD Best Article Award; (d) the Center’s outreach and collaboration initiatives; (e) the upcoming Spring 2022 academic classes; (f) the “Leadership in Commodity Trading & Supply Networks” Global Executive Programme; (g) the Center’s Professional Education offerings; and (h) a review of the August 2021 international commodities symposium.
|Executive Director's Commentary|
The Importance of Commodity Education
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
This article discusses why it is essential to prepare the next generation for lucrative employment opportunities across commodity sectors and notes the skills that students will need for a successful career in commodities.
|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 from March 2021 until September 2021. In particular, Dr. Yang discusses (a) the most recent JPMCC international commodities symposium; (b) a study that advances research on commodity futures volatility spillovers; (c) the continuing media attention on the research director’s crude oil and agricultural analyses; and (d) other commodity research publication updates.
|Research Council Corner|
Incorporating Uncertainty into USDA Commodity Price Forecasts: A Review
By Michael Adjemian, Ph.D., Associate Professor, Department of Agricultural and Applied Economics, University of Georgia, Athens, GA; Valentina Bruno, Ph.D., Professor of Finance and Kogod Research Professor, Kogod School of Business, American University, Washington, D.C.; and Michel A. Robe, Ph.D., The Clearing Corporation Foundation Professor in Derivatives Trading, College of ACES, University of Illinois, Urbana-Champaign, IL and Member of the JPMCC’s Research Council
The U.S. Department of Agriculture (USDA) produces monthly marketing-season-average price (SAP) forecasts for major U.S. crops that are closely watched by farmers and commodity market participants. For decades, the USDA published SAP forecast ranges whose upper and lower bounds had no statistical significance. In 2019, the USDA switched to publishing monthly single-point SAP forecasts. This paper argues that conducting and publishing density forecasts, or providing intervals based on those densities, would be very valuable to consumers of the SAP forecasts.
Searching for Asymmetry: The Case of Crude Oil
By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council
This article notes how one can gain considerable insights into market behavior by searching for asymmetry and irregularities in patterns in the price discovery process and uses the crude oil market as an example. The article is based on the author’s keynote presentation at the JPMCC’s August 2021 international commodities symposium.
|Research Digest Article|
Extreme Price Co-movement of Commodity Futures and Industrial Production Growth: An Empirical Evaluation
By Xiaoqian Wen, Ph.D., Southwestern University of Finance and Economics, China; Yuxin Xie, Ph.D., Southwestern University of Finance and Economics, China; and Athanasios A. Pantelous, Ph.D., Monash University, Australia; and Edited by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London (U.K.) and Associate Editor of the GCARD
This article studies whether the extreme price co-movement of commodity futures can be exploited to anticipate future industrial production (IP) growth. For this purpose, an empirical model is estimated to derive a measure that characterizes upside and downside price extremes. The derived price extremes are shown to be positively associated with IP growth over the next quarter. The findings further suggest the presence of an asymmetry: the association corresponding to downside extremes is robust whereas that of upside extremes is weaker. The findings reinforce the informational friction theory as well as those financial studies that emphasize downside risk in financial markets.
|Editorial Advisory Board Analyses|
The Smile of the Volatility Risk Premia
By Ilia Bouchouev, Ph.D., Managing Partner, Pentathlon Investments and Member of the GCARD’s Editorial Advisory Board and Brett Johnson, Vice President, Cboe Global Markets
The paper presents selected results from the comprehensive study of the volatility risk premium (VRP) in the oil market. We introduce the smile of VRP that represents variation in profitability and risk of this systematic strategy across option moneyness and maturities. We identify the structural break in VRP evolution over time driven by behavioral changes among producer hedgers and the securitization of the strategy by financial institutions.
Gold and Bitcoin – A Short Study of Two Carbon Impacts
By Gillis Björk Danielsen, Senior Portfolio Manager, APG Asset Management, The Netherlands and Member of the GCARD’s Editorial Advisory Board
In this article, the author describes how to compare the emissions from bitcoin and gold. The calculations are based on the relevant emissions from production, without delving into later lifecycle emissions. The goal is to give investors useful “rules of thumb” for understanding the orders of magnitude at play.
Volatility, Contango, and Crude Oil Inventories: A Complex Relationship —
The Changing Nature of World Oil Markets
By Jennifer Considine, Ph.D., Visiting Researcher, King Abdullah Petroleum Studies and Research Center (KAPSARC), Saudi Arabia and Senior Research Fellow, Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee, United Kingdom; Abdullah Aldayel, Senior Research Analyst, KAPSARC, Saudi Arabia; and Philipp Galkin, Ph.D., Visiting Researcher, KAPSARC, Saudi Arabia
The general theory of storage suggests that the level of inventories is a key factor in determining the basis over time. The basis is the difference between the price of oil in the futures market and the price of oil in the spot market. As an indicator of future price movements, the basis follows a different dynamic when inventories are in scarce supply or in surplus, implying that there are different market states that reflect different underlying crude oil market conditions. We apply a Markov regime switching model to analyze this complex relationship, using a spread option value of storage metric to represent market structure, which enables us to draw preliminary conclusions on how to potentially impact oil-market-price stability via precise inventory decisions.
Supply-Chain Inflation: Transitory or Durable?
By David Fyfe, Group Chief Economist, Argus Media
Early-2021 saw synchronous gains for commodity prices, prompting predictions of an imminent commodity super cycle. Price increases both resulted from, and contributed to, supply-chain bottlenecks and broader price inflation in the world economy. Looking ahead, while cyclical inflation drivers may ease, policy choices on economic regeneration, the energy transition, and the reshoring of manufacturing could raise supply-chain costs on a more structural basis over the longer term. The article is based on the author’s presentation at the JPMCC’s August 2021 international commodities symposium.
What U.S. Dairy Executives Learned from the Pandemic
By Christina Adams, Partner, McKinsey & Company; Melanie Lieberman, Engagement Manager, McKinsey & Company; Ludovic Meilhac, Partner, McKinsey & Company; and Roberto Uchoa, Senior Partner, McKinsey & Company
In the early days and months of the COVID-19 pandemic, the dairy industry faced challenges—such as shifts in supply and demand—as food service demand fell and retail demand skyrocketed. However, the industry ultimately emerged intact thanks to adjustments such as portfolio simplification and manufacturing flexibility. The authors explore what the experience was like for the dairy industry, and how executives plan to proceed. The authors recommend that the dairy industry expand the talent pool and ways of working, embrace a “One Health” approach, and establish flexible supply chains that can respond to unexpected disruptions.
Open Outcry Traders History Project Captures Traders’ Stories from Bygone Era:
Their Stories Live on Even if They Don’t
By John Lothian, Founder and Publisher, John Lothian News
This article excerpts from interviews, some of which are colorful, that have taken place during the Open Outcry Traders History Project. This project has sought to capture the stories of open outcry traders before they perish for good and has been modeled after the Veterans History Project, which was signed into law in the 1990s.
|Interview with a Leading Innovator and Thought Leader|
Interview with Daniel Jerrett, Co-Founder and Chief Investment Officer, Stategy Capital LP
Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest
In this issue of the GCARD, we are delighted to interview Dr. Daniel Jerrett, who is the Co-Founder and Chief Investment Officer at Stategy Capital LP, a global alternative investment management firm. In this interview, Jerrett describes his career along with providing his view on whether we are in another commodities super cycle. He then discusses his involvement with the JPMCC. The interview concludes with his advice for students and young professionals on the commodity industry.