Commodity Markets May Be Creating Own Volatility

New research from the University of Nebraska-Lincoln suggests that commodity markets may be creating up to 80% of their own volatility. This challenges the traditional economic view that price fluctuations are primarily caused by external events such as droughts, wars, and trade policies. The study used nonlinear analytical methods to examine long-term price data from various agricultural commodities.

According to Fabio Mattos, an associate professor at UNL's Department of Agricultural Economics, roughly 70% to 80% of commodity-price volatility can be attributed to internal market dynamics. He explained that individual reactions within the market can create significant price movements even in the absence of major external shocks.

Mattos compared this phenomenon to a traffic jam, where one driver's reaction triggers others to slow down, leading to a larger effect. The researchers analyzed decades of daily futures prices for commodities such as corn, soybeans, wheat, coffee, sugar, orange juice, hogs, and cattle using methods designed to identify patterns within price movements.

The study found that commodity markets contain more structure than their often-random price swings suggest, making them potentially more predictable. However, Mattos cautioned that the research does not mean commodity prices are suddenly predictable, and further investigation is needed to understand how different market participants interact and contribute to price movements.