Three essays on commodity markets

This dissertation consists of three essays that investigate issues in agricultural commodity futures and cash markets. The first essay uses price discovery measures and intraday data to quantify the proportional contribution of nearby and deferred contracts in price discovery in the corn and live cattle futures markets. On average, nearby contracts reflect information more quickly than deferred contracts in the corn market but have a relatively less dominant role in the live cattle market. In both markets, the nearby contract loses dominance when its relative volume share dips below 50%, which typically occurs when the nearby is close to maturity. Regression results indicate that the share of price discovery is mainly related to trading volume and time to expiration in both markets. In the corn market, the price discovery share between nearby and deferred contracts is also related to inverse carrying charges, crop year differences, USDA announcements, market crashes, and commodity index position rolls. Differences between corn and live cattle markets are consistent with differences in the contracts’ liquidity and commodity storability. The second essay investigates the effect of algorithmic trading activity, as measured by quoting, on the corn, soybean, and live cattle commodity futures market quality. Using the CME’s limit-order-book data and a heteroskedasticity-based identification approach, we find more intensive algorithmic quoting (AQ) is beneficial in multiple dimensions of market quality. On average, AQ improves pricing efficiency and mitigates short-term volatility, but its effects on liquidity costs are somewhat mixed. Increased AQ significantly narrows effective spreads in the corn and soybean markets, but not in the less traded live cattle futures market. The narrowing in effective spreads emerges from a reduction in adverse selection costs as more informed traders lose their market advantage. There also is evidence that liquidity provider revenues increase with heightened AQ activity in the corn futures market, albeit the effect is not statistically significant in the soybean and live cattle futures markets. The third essay investigates how export prices and sales responses to exchange rate movements are affected by the level of the stocks-to-use ratio. The analysis is performed in the corn, soybean, and wheat export markets using Threshold Vector Autoregressive (TVAR) models and monthly data for the January 1990-December 2019 period. Both importer and exporter exchange rates are considered in our analysis. Results show that the effects of both importer and exporter exchange rates on corn export prices and sales are either insignificant or have small economic value due to the relatively small export share of production. In the more export-oriented soybean and wheat markets, an increase in the value of the dollar relative to other exporters’ currencies causes an expected and significant decrease in the export price, but export sales are not significantly affected which reflects the low substitutability between the U.S. exports and competitors’ exports in terms of marketing seasons and crop classes. The effects of importer exchange rates present significant threshold effects in soybean and wheat markets as export prices and sales are more responsive in the low regime of stocks-to-use ratio. Similar threshold effects are also found in the exporter exchange rate impacts on corn export prices and sales. However, the impacts across regimes are not largely different in economic value