Spatial Competition, Arbitrage, and Risk in U.S. Soybeans

SPATIAL COMPETITION, ARBITRAGE, AND RISK IN U.S. SOYBEANS

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Cargill, Vancouver B.C

This is the high quality research by Dr. Bill William, a world class Professor, and the AG-Econ team at North Dakota State University published in the Journal of Agricultural and Resource Economics40(3):442–456

The purpose of their study is to analyze spatial arbitrage for a trading firm handling soybeans with terminal facilities in both the U.S. Gulf and Pacific Northwest. A risk-constrained optimization model using Monte Carlo simulation with a copula joint distribution was specified to maximize arbitrage payoffs.

The portfolio consists of origin and destination prices as well as shipping costs for rail, barge, and ocean shipping.

I skimmed through their paper and found it absolutely interesting.

As the authors suggest, this methodology can be expanded on with international markets, basis calculation…etc.

“Simon (2015) reports several examples of simple commodity spatial arbitrage, while Pirrong (2014, p. 8) provides analysis of the trading industries and indicates that “commodity trading firms are all essentially in the business of transforming commodities in space (logistics). . . / Their primary function is to ‘perform physical arbitrages’ which enhance value through these various transformations.” In the process of arbitrage they conduct an “optimization process” (p. 8), accounting for shipping costs”.

“Simon (2015) provides numerous simple examples of location arbitrage”.

“Conceptually, traders arbitrage price differences until markets have equal basis adjusted for shipping costs. In fact, location arbitrage is a “trading strategy to profit from market inefficiencies in price differences” (Simon 2015)”.

“Simon’s 2015 representation of the solution to spatial arbitrage refers to both an optimization problem and a stochastic problem.”

Kristopher D. Skadberg is former graduate student in Agribusiness and Applied Economics, William W. Wilson is a university distinguished professor, Ryan Larsen is assistant professor, and Bruce Dahl is research scientist, all at North Dakota State University.

Key words: copula, spatial arbitrage, spatial competition, trading strategies

Sources: 

Skadberg, K. , William W., Larsen, R. (2015), Spatial Competition, Arbitrage,and Risk in U.S. Soybeans, Journal of Agricultural and Resource Economics 40(3):442–456

retrieved from

http://ageconsearch.umn.edu/bitstream/210550/1/JARE,September2015,%236,Skadberg,pp442-456.pdf

and

Navigating the Commodity Markets with Freight and Spreads (2015).”Simon, J.

retrieved from “Commodity Trading Case: The Location Arbitrage.

 

 

 

© 2016 Navigating the commodity markets with Freight and Spreads

 

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