Recent developments in agri-food commodity prices and the impact of financial speculation

Abstract

Over the past decade the massive increase in trading in agricultural commodity derivatives has been related to the activities of many institutional money managers and investors who use commodity futures and derivatives to hedge the stock market risk of their portfolios. Institutions and individuals invest in commodities through index funds, exchange traded funds and over-the-counter swap agreements. This contribution tests whether the speculative activity in the future market, and of Commodity Index Traders (CIT) in particular, can lead to increasing agricultural commodity prices. Establishing the existence of this relationship has become a priority since the public debate, often quite light heartedly, attributes rising agricultural commodity prices to “excessive speculation” and “bubble-like” arguments. The association between money inflows from index funds and rising commodity futures prices is frequently vaguely determined and, by all means, still controversial in the empirical literature. Bivariate Granger causality regressions provide no convincing evidence that positions held by speculators hamper the responsiveness of global food markets to fundamental changes in supply and demand. The research should have relevant policy implications translating into appropriate national and global arrangements to prevent the development of market failures.