Measuring Risk Premiums in Corn, Soybeans, and Wheat Using Futures Prices and Forecasts

The magnitude and sign of risk premiums provide relevant information on the structure of a given market. However, there is no consensus on commodity markets if there is a risk premium, and if so, if it is positive or negative. In addition, in recent years, there has been a discussion on the degree of financialization of agricultural commodities, which may impact potential hedgers and speculators.In this paper, we address the problem of measuring commodity risk premiums, propose a 5-factor stochastic model that jointly explains the term structures of risk-neutral and real-world prices, and apply it to corn, soybeans, and wheat. We calibrate the model using futures and analysts´ forecasts with the Kalman filter and maximum likelihood. Risk premiums are inferred from the difference between the expected price and futures curves for each maturity and crop year. The model provides a positive risk premium with lower futures than expected prices, so speculators are long on them. Thus, if the model finds negative risk premiums for a given commodity, speculators are short, while hedgers are long. Among our results, we find that risk premiums are a function not only of contract maturity but also of their marketing crop year. Furthermore, the model shows that some commodities exhibit a positive risk premium, so speculators are long on the futures markets, while for others, the positions are reversed