ICFAI University, Dehradun

Student Name ROHAN BAJAJ

IUD No 08PMP03040

IBS No 08BS0002464

Course Code:
Course Name: Commodity Market & Rsik Management
Faculty Name: Prof.

Date: 6th-Jan-2010

Topic of the Assignment

Mean Reversion
( Maize)

Student Signature Faculty Signature

Maize as a commodity:

Maize is the most important crop in the world after wheat and rice. It has
continued to be the leading crop in terms of production and area of land on
which it has been produced during the last decade. It is as much a significant
crop in the American countries like rice and wheat in Asia. Maize has a wide
variety of usage too. It is used as a feed and in the production of alcoholic
beverages and of food sweeteners, starch, oil and proteins. Recently, it has
been discovered that maize or corn can also be used in the production of
fuel. United states of America is a major corn producing country. The states
in US like Iowa, Illinois, Nebraska, Minnesota and Indiana contributes to over
80% of the total production in US. The production of maize was 614.3 million
tons in 2003 and was still rising in the later years. Consumption of corns is
also on an increasing level. It is basically consumed for three uses – as food,
as feed for animals and as raw material for industry. USA and China are the
major maize consuming countries.

Cultivation pattern

Maize is the only crop which has got the highest weight of production even
as compared to rice and wheat. The planting of the maize crop is done in the
spring season so that it could get the benefit of the rains in this season.
Rains for this crop, are very important as maize is very sensitive to drought.
This crop is generally cultivated in a two or three crop rotation. The
cultivation of maize involves the following steps:-

1. Planting – Planting of the crop is when the crop is planted. The

planting of maize is generally done in mid of April to mid of May.
2. Silking – Silking is the most crucial stage in the crop cultivation. It
means pollination of the crop.
3. Doughing – When the maize crop starts to show a thick substance, the
crop is said to be doughed.
4. Denting- During the process of doughing, the plant spends all its
resources in the formation of those dough like substance and this
causes the plant to reduce and a ‘dent’ starts to show, on the end of
the substance. This is called denting.
5. Maturing – When the green foliage is gone and maize appears from the
opening of the foliage, the crop is said to be matured.
6. Harvesting – The crop usually gets matured around the year end and
then it harvested.
 Y X
Prices value value
815.7
5
816.3 0.0006 815.7 811.39
0 74 0.55 5 25 0.55 810.84
816.2 -6.1E- 816.3 808.56
5 05 -0.05 0 16 -0.05 808.61 Below are
-
the data
815.5 0.0008 816.2 808.81
5 6 -0.70 5 9 -0.70 809.52 given on
- Maize for a
814.1 0.0017 815.5 812.42 year.
0 8 -1.45 5 19 -1.45 813.87
816.1 0.0025 814.1 819.88
5 18 2.05 0 52 2.05 817.84
SUMMARY
818.7 0.0031OUTPUT 816.1 809.33
0 24 2.55 5 37 2.55 806.78
Regression -
817.7Statistics
0.0011 818.7 796.20
5
Multiple R 6 -0.95
0.0616 0 85 -0.95 797.16
824.9 0.0088 78 817.7 801.09
5
R Square 05
0.00387.20Interce 55.1471 83 7.20 793.90
828.2 0.0039 04 pt 824.9 08 764.03
0
Adjusted R 4 3.25
- Slope 5 - 91
Long Term3.25Mean
760.79
973.37
831.7 0.0042
Square 0.0001 828.2
0.0052 747.31
Reversion 49
5 86 53.55 0 9 1 3.55 743.76
Standard
836.4 0.0055 4.1093 831.7 729.03
Error0 91 584.65 5 88 4.65 724.39
Observatio
840.0 0.0043 254 836.4 705.10
ns 5 64 3.65 0 47 3.65 701.45
843.7 0.0043 840.0 686.31
0 45 3.65 5 78 3.65 682.67
ANOVA
845.1 0.0017 843.7 667.53
5 19
df 1.45SS 0MS F 08
Significa1.45 666.08
847.1 0.0023 845.1 660.06nce F
0
Regres 07 1 1.95 16.250 5
16.25 75
0.962 0.327544 1.95 658.12
850.0 0.0034
sion 847.1 048
48 650.03 599
317
5
Residu 82252 2.954255.4 0
16.88 07 2.95 647.08
850.1
al 5.88E- 850.0
8 683 634.84
Total0 05253 0.054271.7 5 67 0.05 634.80
- 31
848.3 0.0020 850.1 634.58
5 Coeffici Standar t0Stat
6 -1.75 P- 94
Lower -1.75 636.34
Upper Lower Upper
-
ents d Error value 95% 95% 95.0% 95.0%
844.1 0.0050
Interce 5.14710 4.7698848.3
1.079 643.59
0.281 - 14.54 -
pt 0 1 8 -4.25 81 5 085 68
581 4.246801 -4.25 102
647.854.246 14.541
- 318 8 02
840.6 0.0041 -
X 0.0053844.1 - 665.47
0.327 - 0.005 -
0
Variabl 5
0.00529 -3.50 9 0
0.980 2
545 0.015903 -3.50 328
668.970.015 0.0053
840.6
e 1 840.6 98 683.48 946 9 28
0 0 0.00 0 69 0.00 683.49
-
835.4 0.0061 840.6 683.48
0 9 -5.20 0 69 -5.20 688.69
-
832.0 0.0040 835.4 710.25
5 1 -3.35 0 18 -3.35 713.60
-
825.8 0.0074 832.0 727.49
5 5 -6.20 5 46 -6.20 733.69
Mean Reversion of 1 year

Mean Reversion of 3.5 Year

 Analysis on Mean Reversion:

A theory suggesting that prices and returns eventually move back towards the mean or average.
This mean or average can be the historical average of the price or return or another relevant
average such as the growth in the economy or the average return of an industry.

The mean reversion strategy is based on the mathematical premise that all prices will eventually
move back towards the mean or average return. Thus, if a stock is underperforming, its price
will move towards its average value when the market rebounds.
Thus from the above two chart we can depict that the Lone term mean reversion for the Maize
from the recent data is somewhere around 973. And if we take only the recent year analysis it
suggest that the short term mean reversion is around and 950.
Increased biofuel demand has been the largest contributor to the overall surge
in world grain prices. Concerns over oil prices, energy security and climate change
have prompted governments to encourage production and use of bio-fuels.5 This has
led to increased demand for bio-fuel crops, such as maize, soybeans and palm oil. Almost all of
the increase in global maize production from 2004 to 2007 (a period when grain prices rose
sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an
increase in global consumption for other uses.6 Land use changes due to increased use of maize
and oilseeds for biofuels led to reduced plantings of wheat, the subsequent depletion of world
wheat stocks to record lows, and a surge in wheat prices.

The impact of biofuel use on rice prices is less direct than for other grains or oilseeds,
since rice is not used for biofuel production and rice land is not easily switched to other biofuel
crops. However the surge in wheat prices is being reflected in rice prices because wheat and
rice are substitutes in consumption and imports. As Figure 2 indicates, rice prices had recently
fallen to exceptionally low levels compared to wheat. This has led to increasing substitution of
rice for wheat in consumption which in turn has contributed to the underlying firmness in rice
prices and their rising trend during 2007
Based on the historical relationship between wheat and rice prices since 1990, the high level of
wheat prices in early 2008 (itself largely reflecting increased use of biofuels) would suggest rice
prices around $600 a ton, up from $326 in 2007. (Mitchell, 2008). That however is rather less
than the further rise in rice prices to over $1000 in April, for which recent changes in trade
policies are more of a factor.

References:

http://siteresources.worldbank.org/EASTASIAPACIFICEXT/Resources/EA_Rising
_Food_Prices050508.pdf

Data collected from NCDEX for the Maize.