Long-Dated Agricultural Futures Price Estimates Using the Seasonal Nelson-Siegel Model

Abstract

Over the counter (OTC) forward contracts are regularly traded by hedgers at maturities beyond the longest-dated futures contract. The presence of seasonality in agricultural commodities creates additional uncertainty for obtaining fair prices for OTC forward contract trades beyond the liquid futures strip. This paper employs an augmented Nelson-Siegel function to obtain seasonal agricultural commodity price estimates for OTC forward contracts beyond the longest available maturity of exchange traded futures contracts. A multifactor seasonal Nelson-Siegel model is chosen due to its internally consistent and parsimonious functional form. The Nelson-Siegel approach is used to model seasonally adjusted corn, cotton and sugar forward prices for OTC contracts out to five years maturity calibrated against shorter-dated futures contracts. Residual and contract liquidity testing indicates that the seasonal model provides efficient estimates of contract prices beyond the futures strip which allows agricultural commodity hedgers to obtain fair prices for OTC forward contracts.