Topic ID No.: 2026-G14

Title of research topic:

Price discovery dynamics in South African commodity markets

Description:

Price discovery refers to the process through which markets incorporate information into asset prices. In commodity markets, this usually involves understanding how spot and futures prices jointly reflect expectations about supply, demand, risk, and market fundamentals. South Africa operates well-established commodity futures contracts on platforms such as the JSE (formerly SAFEX), covering maize, wheat, and other key agricultural products. These markets are strategically important because staple food price fluctuations directly affect food security, input costs for livestock, and the profitability of agricultural value chains. Despite their economic importance, there is limited research focusing specifically on price discovery dynamics in South African commodity futures markets.

At the same time, global pressure to reduce greenhouse gas (GHG) emissions is reshaping commodity production systems. Agriculture is a major contributor to national emissions through livestock, fertilizer use and land use change. Climate change affects yields, rainfall variability and extreme weather losses. New climate-related risks are emerging, including carbon pricing on exports, sustainability certification, shifts to low-emission inputs and consumer pressure for greener supply chains. All of these factors influence expected fundamentals that should be reflected in market prices when information becomes available.

This project links these two issues by evaluating how effectively South African commodity futures markets incorporate climate-related information. If futures prices respond faster than spot prices to changes in expected production or emission policy, they act as information leaders. If spot markets respond first, fundamental news is likely originating from the physical supply chain or public policy announcements. Understanding this leadership reveals whether futures markets serve as a useful early signal for climate risk and carbon policy shocks.

Modern price discovery approaches go beyond traditional Hasbrouck information shares or Garbade-Silber measures. Newer econometric techniques incorporate heterogeneous volatility regimes, high-frequency data, or structural components of the market microstructure. For instance, unique information shares based on volatility-regime mixtures identify leadership even when spot and futures prices exhibit strong contemporaneous correlation. Other recent methods include information shares for overlapping trading hours and, in particular, Putnins' information leadership share.

The project aims to evaluate how environmental information flows into agricultural commodity prices in South Africa and how markets may evolve as sustainability pressures intensify. The findings can help policymakers, producers, and investors understand whether current market signals provide reliable guidance for climate-aligned decision making.

Target region or country (if applicable):

South Africa

Topic background information / scientific relevance:

South African commodity markets operate in a climate-stressed agricultural environment. Droughts, heat stress, and shifting rainfall patterns have heightened yield volatility, especially in maize production. This has already driven episodes of sharp food inflation and affected household affordability. As South Africa progresses toward its national decarbonization commitments, including mitigation in agriculture, pricing mechanisms may be influenced by regulatory changes such as carbon budgeting and potential future carbon border adjustments. Accurate price discovery is therefore critical for risk management and investment planning throughout food systems.

International research shows that the price discovery process varies by commodity, market liquidity and storability. Some studies find that futures markets incorporate information more efficiently, while others demonstrate dominant leadership from spot markets, especially when fundamentals are driven by physical supply disruptions. Little evidence exists for the South African context, even though its commodity futures markets play a leading role in the region.

Research objectives:

1) Measure price discovery between South African spot and futures markets for key agricultural commodities using modern econometric techniques.

2) Assess how climate-related information (emission trends, carbon policies, climate shocks) affects leadership dynamics in price discovery.

3) Identify whether futures markets act as early indicators of climate-driven changes in expected fundamentals.

4) Provide evidence on whether current price signals support low-carbon transition decisions in agricultural value chains.

Required skills and qualifications of the applicant:

• Econometrics, in particular, cointegration and market microstructure models
• Time-series modelling and high-frequency data analysis
• Use of R or Python for empirical finance
• Knowledge of commodity markets and agricultural systems

Contact person and institute in charge:

Prof. Dr. Thomas Dimpfl. University of Hohenheim. Department of Business Mathematics and Data Science.

thomas.dimpfl@uni-hohenheim.de