2012

International Commodity Market Integrity

International Finance & Trade Project Work

Submitted By: Amit Kumar Chhavi Balana Priyamwada Trivedi IFT- Section C MBA (2011-2013) IBS Hyderabad

Table of Content
1) Introduction 2) Analysis of Internationally Traded Commodities a) Coffee b) Tea c) Palm Oil d) Wheat e) Sugar f) Logs g) Sawn wood h) Cotton i) Rubber 3) Conclusion 4) Bibliography

Introduction
The purpose of this study is to provide a comprehensive evaluation of Integrity among various International Commodity Exchange Traded Indexes.

Along with trading opportunities in Equity & Commodity market there are diversification opportunity together with the advent of deep and highly active commodity Futures markets has led to considerable growth in commodity index investment over the past decade. Commodity index products have a variety of forms including managed funds, ETFs, ETNs, and OTC return swaps. Many are benchmarked to well-diversified and transparent commodity indexes like the Standard & PoorsGoldman Sachs Commodity Index (S&P-GSCI) and the Dow Jones- UBS Commodity Index (DJ-UBSCI) and nearly all of them are based on passive, long only, fully collateralized commodity futures positions. In order to serve the purpose of this project we would be performing correlation study on 9 different commodities being internationally traded across the globe on basis of Pink Data Sheet provided by World Bank Data Center for the period starting January 1960 to December 2011.( A few commodities have been measured on shorter duration of time period due to lack od data). This would help us in establishing relation between prices of these commodities.

Analysis of Internationally Traded Commodities

A) Coffee

COFFEE_ARABIC COFFEE_ROBUS COFFEE_ARABIC 1 COFFEE_ROBUS 0.842055312 1

800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 1960M01 1962M02 1964M03 1966M04 1968M05 1970M06 1972M07 1974M08 1976M09 1978M10 1980M11 1982M12 1985M01 1987M02 1989M03 1991M04 1993M05 1995M06 1997M07 1999M08 2001M09 2003M10 2005M11 2007M12 2010M01 COFFEE_ARABIC COFFEE_ROBUS

Coffee (ICO), International Coffee Organization indicator price, other mild Arabicas, average New York and Bremen/Hamburg markets, ex-dock Coffee (ICO), International Coffee Organization indicator price, Robustas, average New York and Le Havre/Marseilles markets, ex-dock

As shown above both Coffee Robus & Coffee Arabic are quite highly correlated to each other to a extent of 84%.

B) Tea
TEA_AVG TEA_AVG 1 TEA_COLOMBO 0.927261308 TEA_KOLKATA 0.896204137 TEA_MOMBASA 0.936669305 TEA_COLOMBO TEA_KOLKATA TEA_MOMBASA 1 0.700297399 0.835075133

1 0.777958166

450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 1960M01 1962M02 1964M03 1966M04 1968M05 1970M06 1972M07 1974M08 1976M09 1978M10 1980M11 1982M12 1985M01 1987M02 1989M03 1991M04 1993M05 1995M06 1997M07 1999M08 2001M09 2003M10 2005M11 2007M12 2010M01

TEA_AVG TEA_COLOMBO TEA_KOLKATA TEA_MOMBASA

Tea , average three auctions, arithmetic average of quotations at Kolkata, Colombo and Mombasa/Nairobi. Tea (Colombo auctions), Sri Lankan origin, all tea, arithmetic average of weekly quotes. Tea (Kolkata auctions), leaf, include excise duty, arithmetic average of weekly quotes. Tea (Mombasa/Nairobi auctions), African origin, all tea, arithmetic average of weekly quotes.

As shown above Tea Mombasa is highly correlated to Tea Colombo followed by Kolkata. It is also important to note that Tea Average also has a higher inclination.

C) Palm Oil
PALM_OIL PLMKRNL_OIL

1 PLMKRNL_OIL 0.92652677
PALM_OIL

2500.00 2000.00 1500.00 1000.00 500.00 0.00 1996M01 1996M09 1997M05 1998M01 1998M09 1999M05 2000M01 2000M09 2001M05 2002M01 2002M09 2003M05 2004M01 2004M09 2005M05 2006M01 2006M09 2007M05 2008M01 2008M09 2009M05 2010M01 2010M09 2011M05 Palm oil (Malaysia), 5% bulk, c.i.f. N. W. Europe Palmkernel Oil (Malaysia), c.I.f. Rotterdam

As shown above Palm Oil Malaysia is highly correlated to Palm Kernel Oil in terms of prices as compared for last 16 years..

D) Wheat
WHEAT_CANADI WHEAT_US_SRW WHEAT_US_HRW WHEAT_CANADI WHEAT_US_SRW WHEAT_US_HRW

1 0.927867172 0.954952379

1 0.964639673

800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00

Wheat (Canada), no. 1, Western Red Spring (CWRS), in store, St. Lawrence, export price Wheat (US), no. 1, hard red winter, ordinary protein, export price delivered at the US Gulf port for prompt or 30 days shipment Wheat (US), no. 2, soft red winter, export price delivered at the US Gulf port for prompt or 30 days shipment

Wheat considered to be staple food for majority of nations across the globe enjoys higher correlation in terms of prices across the globe as depicted above.

1979M01 1980M05 1981M09 1983M01 1984M05 1985M09 1987M01 1988M05 1989M09 1991M01 1992M05 1993M09 1995M01 1996M05 1997M09 1999M01 2000M05 2001M09 2003M01 2004M05 2005M09 2007M01 2008M05 2009M09 2011M01

E) Sugar
SUGAR_EU SUGAR_US SUGAR_WLD

SUGAR_EU 1 SUGAR_US 0.70498015 1 SUGAR_WLD 0.348768281 0.780609247

140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 1960M01 1963M02 1966M03 1969M04 1972M05 1975M06 1978M07 1981M08 1984M09 1987M10 1990M11 1993M12 1997M01 2000M02 2003M03 2006M04 2009M05 SUGAR_EU SUGAR_US SUGAR_WLD

Sugar (EU), European Union negotiated import price for raw unpackaged sugar from African, Caribbean and Pacific (ACP) under Lome Conventions, c.I.f. European ports Sugar (US), nearby futures contract, c.i.f. Sugar (world), International Sugar Agreement (ISA) daily price, raw, f.o.b. and stowed at greater Caribbean ports

Although European Sugar & American Sugar Show significant correlation but Sugar World has lower correlation. Possible reason for this effect could be sugar subsidiary been provided by various nations across the globe.

F) Logs

LOGS_CMR LOGS_MYS

1 LOGS_MYS 0.848821301
LOGS_CMR

600.00 500.00 400.00 300.00 Series1 200.00 100.00 0.00 1970M01 1972M04 1974M07 1976M10 1979M01 1981M04 1983M07 1985M10 1988M01 1990M04 1992M07 1994M10 1997M01 1999M04 2001M07 2003M10 2006M01 2008M04 2010M07 Series2

Logs (West Africa), sapele, high quality (loyal and marchand), 80 centimeter or more, f.o.b. Douala, Cameroon beginning January 1996; previously of unspecified dimension Logs (Malaysia), meranti, Sarawak, sale price charged by importers, Tokyo beginning February 1993; previously average of Sabah and Sarawak weighted by Japanese import volumes

On Considering the data available for Logs for last 41 years we find significant correlation among the prices of the logs been traded across various exchanges of the globe.

G) Swanwood

SAWNWD_CMR SAWNWD_MYS SAWNWD_CMR SAWNWD_MYS

1 0.813382791

1200.00 1000.00 800.00 600.00 Series1 400.00 200.00 0.00 1995M01 1995M12 1996M11 1997M10 1998M09 1999M08 2000M07 2001M06 2002M05 2003M04 2004M03 2005M02 2006M01 2006M12 2007M11 2008M10 2009M09 2010M08 2011M07 Series2

Sawnwood (Cameroon), sapele, width 6 inches or more, length 6 feet or more, f.a.s. Cameroonian ports Sawnwood (Malaysia), dark red seraya/meranti, select and better quality, average 7 to 8 inches; length average 12 to 14 inches; thickness 1 to 2 inch(es); kiln dry, c. & f. UK ports, with 5% agents commission including premium for products of certified sustainable forest beginning January 2005; previously excluding the premium

Sawn Wood has depicted a greater degree of correlation for the given data of last 17 years.

H) Cotton

COTTON_A_INDX COTTON_MEMPH COTTON_A_INDX COTTON_MEMPH

1 0.995596944

450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00

2006M01

Cotton (Cotton Outlook "CotlookA index"), middling 1-3/32 inch, traded in Far East, C/F beginning 2006; previously Northern Europe, c.i.f. Cotton (US), Memphis/Eastern, middling 1-3/32 inch, Far East , C/F beginning October 2008; previously c.i.f. Northern Europe

Cotton price has shown significantly higher correlation as compared to any other commodity which is almost 1 in last 6years.

2010M10

2006M04

2006M07

2006M10

2007M01

2007M04

2007M07

2007M10

2008M01

2008M04

2008M07

2008M10

2009M01

2009M04

2009M07

2009M10

2010M01

2010M04

2010M07

I) Rubber

RUBBER1_US RUBBER1_MYSG RUBBER_TSR20 RUBBER1_US RUBBER1_MYSG RUBBER_TSR20

1 0.998319239 0.995870615

1 0.994991747

700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 1999M01 1999M08 2000M03 2000M10 2001M05 2001M12 2002M07 2003M02 2003M09 2004M04 2004M11 2005M06 2006M01 2006M08 2007M03 2007M10 2008M05 2008M12 2009M07 2010M02 2010M09 2011M04 2011M11 Rubber (Asia), RSS3 grade, Singapore Commodity Exchange Ltd (SICOM) nearby contract beginning 2004; during 2000 to 2003, Singapore RSS1; previously Malaysia RSS1 Rubber (any origin), Ribbed Smoked Sheet (RSS) no. 1, in bales, Rubber Traders Association (RTA), spot, New York Rubber (Asia), TSR 20, Technically Specified Rubber, SGX/SICOM nearby futures contract

Rubber has also shown a significant correlation with its counterpart traded across the globe.

Conclusion
It would be interesting to note that although these commodities are been traded at various exchanges across the globe but on an average they are all highly correlated to each other as depicted in above graphical representation & Data Analysis Chart. Our suggestions for improving International Commodity Market Integration are as follows:

a review of the recent history of commodity price movements and the evidence concerning the factors affecting them in an attempt to dispel some of the uncertainty and misconceptions concerning the current situation and remedial actions

assessment of the implications of depressed commodity prices and a balanced view of the interests of food importing developing countries and commodity exporting developing countries

a reasoned consideration of the case, if any, for international action to reverse short term declines in prices and to slow the rate of secular decline

specific recommendations, based on a review of past experiences and current proposals for effective forms of international action compatible with the current international trade regulatory framework and including workable and sustainable funding and coordination mechanisms.

BIBLIOGRAPHY:

1) World Bank Pink Data Sheet 2) http://www.fao.org/docrep/006/Y4344E/y4344e03.htm (Last accessed on 10th October 2012). 3) http://data.worldbank.org/ (Last accessed on 10th October 2012). 4) http://en.wikipedia.org/wiki/Commodity_market (Last accessed on 10th October 2012). 5) http://www.fao.org/docrep/006/Y4344E/y4344e0a.htm (Last accessed on 10th October 2012). 6) www.sciencedirect.com (Last accessed on 10th October 2012).