The Information Content in the Term Structure of Commodity Prices

In this paper, we investigate the term structure of agricultural commodity prices. Using corn as an example, we demonstrate that commodity futures price curve can be wellapproximated by three latent factors: level, slope, and curvature obtained from a dynamic latent factor model. Relating the three unobserved factors to observable economic fundamentals, we find that real economic activity and relative scarcity of the commodity play an important role in the evolution of the corn futures price curve. Using Granger causality tests, we find that all three unobserved factors of the futures price curve contain predictive information on real economic activity and the relative scarcity of the commodity. Consistent with the theory of storage, there is a forwardlooking element embedded in the term structure of commodity prices that contain information regarding subsequent market fundamentals