Do agricultural swaps co-move with equity markets? Evidence from the COVID-19 crisis

Using proprietary data reported by swap dealers to the Commodity Futures Trading Commission, we first present new evidence on the size and composition of 13 over-the-counter agricultural swaps markets. We then utilize our novel dataset to show the existence of linkages with the equity markets. We use the spike in the Chicago Board Options Exchange Volatility Index in early 2020 to show that swaps trader positions were significantly impacted by the financial market volatility created by the COVID-19 pandemic. Following similar methods as Cheng et al. (2015), we find index swaps traders reduce their net long positions in response to tightening financial conditions, while commercial swaps traders absorb some of this risk by decreasing their net short positions. This internal swap market netting occurs in three of the four largest agricultural markets: corn, soft red winter wheat, and sugar. Concurrently, we observe a limited swap dealer hedging response in the futures market, especially when compared to other financial traders, consistent with swap market netting. Our results confirm that equity market shocks can affect financial traders in both commodity swaps and futures markets.