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Information Rich Wheat Markets in the Early Days of COVID-19

COVID-19 Research Area(s): Economics & Business, Food & Nutrition

Project Summary
This paper (forthcoming in the Canadian Journal of Agricultural Economics) shows how market beliefs about the impact of COVID-19 on food supply chains can be obtained by examining futures and options prices in the North American wheat market. The market is effective at distinguishing between the current surge in short run demand that is due to consumer hoarding of staple foods, from the weak long market prospects which can be attributed to plentiful wheat stocks and a likely COVID-19 induced global recession.

Project Details
This paper uses the information implicit in commodity futures and option prices to infer market beliefs about the impact of early-stages COVID-19 on commodity market fundamentals. The particular commodity examined is soft red winter (SRW) wheat, and the timeframe is early February to late March 2020. The analysis highlights various adjustments in the cash and futures price of SRW wheat in light of surging short run demand from consumer hoarding of staple food products, and a weakening long run market from growing wheat stocks and an emerging global recession. This split is causing the forward curve to flatten and basis levels to invert. The change over time in the price of options on wheat futures reveals increased price volatility in response to growing uncertainty about the COVID-19 impacts. Similarly, changes in the skewness of the option’s volatility smile illustrates a shift in traders’ perception about risk in the right versus left tail of the price distribution.