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

  •  Jason West    


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.

This work is licensed under a Creative Commons Attribution 4.0 License.