The Determinants of Marginal Convenience Yield in Agricultural Commodity Markets

We report a significant downward trend in the convenience yield for holding physical inventory in agricultural commodity futures markets, attributing this negative trend to speculative demand shocks, which in turn, leads in decreasing agricultural convenience yields. Moreover, agricultural convenience yields appear negative on average during the recent financialization (of commodities) period. We additionally show that the response of agricultural convenience yields to commodity price uncertainty and supply shocks is much less pronounced in magnitude and persistence compared to that of hedging demand shocks. Overall, our analysis verifies the Keynesian theory of normal backwardation by showing a long-lasting positive response of agricultural convenience yields to a hedging demand shock, thereby leaving the hedging demand as the most significant factor explaining the less frequently observed backwardations in agricultural futures markets.