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Is the Supply Curve for Commodity Futures Contracts Upward Sloping?

Last Updated on 10 February, 2024 by Rejaul Karim

In their extensive research, Lei Yan of Yale University, Scott H. Irwin of the University of Illinois at Urbana-Champaign, and Dwight R. Sanders of Southern Illinois University unravel the question “Is the Supply Curve for Commodity Futures Contracts Upward Sloping?” Their study, dated February 7, 2019, leverages the annual rebalancing of the S&P GSCI index to provide a novel and robust identification for estimating the shape of supply curves for commodity futures contracts.

Focusing on the 24 commodities included in the S&P GSCI for the period 2004–2017, the findings are revealing: cumulative abnormal returns (CARs) surge to a peak of 59 basis points during the week following the rebalancing period, only to rapidly diminish to near zero within the subsequent week.

These results offer compelling evidence that while the supply curve for commodity futures contracts exhibits an upward slope in the short run, it tends to flatten significantly in the longer term. This study bears significant implications for understanding the dynamics of commodity futures markets and sheds light on the interplay of factors influencing short- and long-term trading behaviors.

Abstract Of Paper

Annual rebalancing of the S&P GSCI index provides a novel and strong identification to estimate the shape of supply curves for commodity futures contracts. Using the 24 commodities included in the S&P GSCI for 2004–2017, we show that cumulative abnormal returns (CARs) reach a peak of 59 basis points in the middle of the week following the rebalancing period, but the impact is temporary as it declines to near zero within the next week. The findings provide clear evidence that the supply curve for commodity futures contracts is upward sloping in the short-run but almost flat in the longer-run.

Original paper – Download PDF

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Author

Lei Yan
Yale University

Scott H. Irwin
University of Illinois at Urbana-Champaign

Dwight R. Sanders
Southern Illinois University – Agribusiness Economics

Conclusion

The comprehensive study by Lei Yan, Scott H. Irwin, and Dwight R. Sanders on the shape of supply curves for commodity futures contracts yields compelling insights. Leveraging the annual rebalancing of the S&P GSCI index as a novel identification strategy, the analysis of 24 commodities from 2004–2017 elucidates intriguing dynamics.

The research unveils that cumulative abnormal returns (CARs) surge to a peak of 59 basis points in the immediate aftermath of the rebalancing, only to swiftly diminish to near zero within the subsequent week.

These patterns solidify the evidence, indicating an upward-sloping supply curve for commodity futures contracts in the short term, evolving into a nearly flat trajectory over the long run.

Such findings not only enhance our understanding of the complex dynamics within commodity futures markets but also offer valuable considerations for market participants and policymakers navigating the underlying forces that shape trading behaviors.

Related Reading:

Alternative Beta Strategies in Commodities

Technical Analysis, Spread Trading and Data Snooping Control

FAQ

Q1: What is the unique approach used in the study to estimate the shape of supply curves for commodity futures contracts?

A1: The study leverages the annual rebalancing of the S&P GSCI index as a novel and robust identification strategy to estimate the shape of supply curves for commodity futures contracts. This approach provides a unique opportunity to analyze the short- and long-term dynamics of commodity markets.

Q2: What are the key findings regarding the shape of the supply curve for commodity futures contracts based on the study’s analysis?

A2: The study’s findings indicate that the supply curve for commodity futures contracts exhibits an upward slope in the short run. Cumulative abnormal returns (CARs) reach a peak of 59 basis points during the week following the rebalancing period. However, the impact is temporary, as CARs rapidly decline to near zero within the subsequent week. This suggests that, in the longer run, the supply curve becomes almost flat.

Q3: What implications do the study’s findings have for understanding the dynamics of commodity futures markets?

A3: The study’s findings provide valuable insights into the short- and long-term dynamics of commodity futures markets. The evidence of an upward-sloping supply curve in the short run, transitioning to a nearly flat trajectory in the longer run, contributes to a nuanced understanding of the factors influencing trading behaviors. This has implications for market participants and policymakers seeking to comprehend and navigate the complexities of commodity futures markets.

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