What the Experts Say

A vast amount of studies, facts, data and research from government agencies, academia and think tanks has been published on the causes of price changes and volatility – and the role of commodity investing.  We’ve listed the work of these experts below, and we’ve also provided relevant excerpts from these sources, in three categories: CommoditiesOil & EnergyFood & Agriculture. (See links to all sources used in CommodityFACT.org.)

Commodities (Multiple Asset Classes)

 “Back to the Futures.” The Economist, September 17, 2011.

  • “There is good reason to worry that position limits will harm markets more than help them…Investors will become pickier about the contracts they enter into as a result of the limits, which may cause markets to become less liquid, worsening volatility rather than reducing it.”

Bohly, Martin T and Patrick M. Stephan. “Does Futures Speculation Destabilize Spot Prices? New Evidence for Commodity Markets.” University of Muenster Working Paper Series (July 24, 2012).

  • “…whether the speculative impact on conditional volatility has increased…with respect to six heavily traded agricultural and energy commodities, we do not find robust evidence that this is the case. We thus conclude that the increasing finanancialization of raw material markets has not made them more volatile.”

Dunn, Michael V. “Public Meeting on Proposed Rules Under Dodd-Frank Act.” Opening Statement, January 13, 2011.

  • “To date, CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation.”
  • “There has been the suggestion by some that once we set position limits on physical commodity derivatives, the price that we pay for gas, bread, milk and other things would inevitably drop, and that volatility in commodities markets would simply cease to exist. I believe this is a fallacy.”
  • “Price volatility exists in markets that have position limits and in markets that do not have position limits. Price volatility exists in markets that have substantial participation from index funds and markets that do not have any index fund participation whatsoever.”
  • “As Nobel Prize winning economist Paul Krugman pointed out in a recent editorial, price volatility exists in our markets because we live in a “finite world” where there is not, at any given moment in time, an inexhaustible supply of oil, wheat, milk or other physical commodities to meet the global demand for such products. Simply put, sometimes prices are higher because the demand for a product around the globe is greater than the supply.”

G-20 Study Group on Commodities. “Report of the G20 Study Group on Commodities under the chairmanship of Mr. Hiroshi NAKASO.” (November 2011): 6, 29-31.

  • “…Greater investor participation can be expected to enhance the functioning of markets by adding depth and liquidity. This should help producers and consumers to hedge price fluctuation risks. Greater participation of financial investors can also aid the development of long-term commodity futures, which would facilitate risk management and planning over longer time horizons. More generally, participation of well-informed financial investors may enhance the quality of price signals.”
  • “Assessments of the impact of financial investors on commodity prices remain inconclusive. Large changes in physical supply and demand provide plausible explanations for commodity price trends over the past several years and existing literature finds limited signs of investors causing sustained deviations from ‘fundamentals’.”
  • “…Greater participation by financial investors in commodity futures markets can bring important economic benefits by improving market functioning. More specifically, markets become deeper to the extent that financial investors take offsetting positions to other market participants or engage in market making. Enhanced market liquidity can also help to accommodate the hedging needs of producers and reduce their hedging costs. Moreover, growing financial activity can promote the development of markets for longer-term futures, facilitating risk management and planning of commodity producers and consumers over longer time horizons.”
  • “The large changes in physical supply and demand conditions provide plausible explanations for commodity price swings…Moreover, the prices of commodities that are only traded OTC and not included in the standard commodity indices — such as coal and iron ore — have risen as much as major commodity index components. This may suggest that changes in physical demand and supply, rather than growing financial investments, have been the main drivers of commodity prices.”
  • “The results of empirical studies are inconclusive regarding the impact of financial investors on the level, volatility and correlation of commodity prices. There is limited evidence that financial investments have had a persistent impact.”

HM Treasury. “Global Commodities: a long term vision for stable, secure and sustainable global markets.” (June 2008): 25.

  • “Nevertheless, taken together the available evidence suggests that derivative investors are not driving price increases and, although there is insufficient evidence to conclusively rule out any impact, it is likely to be only small and transitory relative to fundamental trends in demand and supply for the physical commodities.”

International Monetary Fund (IMF). “World Economic Outlook: Financial Stress, Downturns, and Recoveries.” World Economic and Financial Studies (October 2008).

  • “…the current commodity price boom has, broadly speaking, reflected the interaction of strong demand, low inventory and spare capacity levels, slow supply expansion in key sectors and adverse supply shocks.”
  • “Despite recent financial innovation in commodity markets, such as indexing, which has allowed investors to benefit from rising commodity prices without having to maintain physical inventory holdings, there is little discernable evidence that the buildup of related financial positions [in commodity markets] has systematically driven either prices for individual commodities or price formation more broadly.”
  • “Indeed, many commodities without significant futures markets – such as iron ore and rice – have experienced more price appreciation than those with sizeable future markets, such as gold and crude oil.”
  • “…The results [of research] indicate a positive but weak relationship between return volatilities and the extent of financialization, suggesting that price volatility may be better linked to other variables, such as market tightness, stock levels, or geopolitical risks.”
  • “…although financialization may have led to increases in comovement between some commodities, particularly with respect to gold, no apparent systematic connection is found to either price volatility or price changes. These findings are consistent with recent studies in the area by the CFTC and others. Thus, there is little evidence to suggest that trading in futures markets has driven the price run-up or has destabilized the commodity markets during the first half of 2008.”

Irwin, Scott H. and Dwight R. Sanders. “The Impact of Index and Swap Funds in Commodity Futures Markets.” A Technical Report Prepared for the Organization on Economic Co-Operation and Development (OECD) (June 2010): 3, 30, 69-70.

  • “…a number of economists have expressed skepticism about the bubble argument, citing logical inconsistencies in bubble arguments and contrary facts. These economists argue that commodity markets were driven by fundamental factors that pushed prices higher. The main factors cited as driving the price of crude oil include strong demand from China, India, and other developing nations, a leveling out of crude oil production, a decrease in the responsiveness of consumers to price increases, and U.S. monetary policy. In the grain markets, the diversion of row crops to biofuel production and weather-related production shortfalls are cited, as well as demand growth from developing nations and U.S. monetary policy.”
  • “In sum, the weight of the existing evidence clearly tilts in favor of the argument that index funds did not cause a bubble in commodity futures prices.”
  • “There is no convincing evidence that positions held by index traders or swap dealers impact market returns.”
  • “The policy implication of the available evidence on the market impact of commodity index funds is straightforward: current regulatory proposals to limit speculation—especially on the part of index funds—are not justified and likely will do more harm than good. In particular, limiting the participation of index fund investors would rob the commodity futures markets of an important source of liquidity and risk-absorption capacity at a time when both are in high demand. More ominously, tighter position limits on speculation in commodity futures markets combined with the removal of hedge exemptions could force commodity index funds into cash markets, where truly chaotic results could follow. The net result is that moves to tighten regulations on index funds are likely to make commodity futures markets less efficient mechanisms for transferring risk from parties who don’t want to bear it to those that do, creating added costs that ultimately are passed back to producers in the form of lower prices and to consumers as higher prices.”

Irwin, S. H. and D. R. Sanders (2010), “The Impact of Index and Swap Funds on Commodity Futures Markets: Preliminary Results,” OECD Food, Agriculture and Fisheries Working Papers, No. 27, OECD Publishing:

  • “…While the increased participation of index fund investments in commodity markets represents a significant structural change, this has not generated increased price volatility, implied or realised, in agricultural futures markets. Based on new data and empirical analysis, the study finds that index funds did not cause a bubble in commodity futures prices. There is no statistically significant relationship indicating that changes in index and swap fund positions have increased market volatility.”

Irwin, Scott H., Dwight R. Sanders and Robert P. Merrin. “Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust).” Invited paper presented at the Southern Agricultural Economics Association Meetings, Atlanta, Georgia, January 31-February 3, 2009.

  • “..Simply observing that large investment has flowed into the long side of commodity futures markets at the same time that prices have risen substantially (or the reverse) does not necessarily prove anything. This is more than likely the classical statistical mistake of confusing correlation with causation. One needs a test that accounts for changes in money flow and fundamentals before a conclusion can be reached about the impact of speculation.”
  • “There is little evidence that the recent boom and bust in commodity prices was driven by a speculative bubble. If speculation by long-only index funds did impact commodity futures prices, it is not evident in the empirical evidence available to date. Economic fundamentals, as usual, provide a better explanation for the movements in commodity prices. The main factors driving prices up in the energy markets included strong demand from China, India, and other developing nations, a leveling out of crude oil production, a decrease in the responsiveness of consumers to price increases, and U.S. monetary policy.”
  • “The complex interplay between these factors and how they impact commodity prices is often difficult to grasp in real-time and speculators have historically provided a convenient scapegoat for frustration with rapidly rising and falling prices.”
  • “…limiting the participation of index fund investors would rob the markets of an important source of liquidity and risk-bearing capacity at a time when both are in high demand. The net result is that commodity futures markets will become less efficient mechanisms for transferring risk from parties who don’t want to bear it to those that do, creating added costs that ultimately get passed back to producers in the form of lower prices and back to consumers as higher prices.”

Lane, Timothy. “Financing Commodity Markets.” Remarks to the CFA Society of Calgary, Calgary, Alberta, September 25, 2012, 1-3.

  • “…the financial system is linked with the commodities markets. Here, I mean the intricate web of global markets in which commodities are bought and sold, prices determined and the producers and end-users of commodities hedge against unexpected movements in those prices. These markets are very important in determining the returns that producers earn for their output, as well as the risks they face.”
  • “…I’ve stressed that arbitrage and market-making are critical to tying global commodities markets together. These activities provide significant liquidity to commodities markets and, when they work properly, they also help bring commodity prices into line with the fundamentals of supply and demand – by which I mean, not just current supply and demand but expectations of how supply and demand will evolve in the future. There is strong evidence that broad movements in commodity prices over the longer term indeed reflect these fundamentals at a global level.”
  • “…There is no clear evidence that this trend toward greater financialization has been significant determinant of the overall level of commodity prices. As I have already discussed, the preponderance of evidence indicates instead that commodity prices have been driven by fundamentals – primarily by rising demand from EMEs (emerging market economies)…”

Markham, Jerry W. From the Pharaohs to Paul Volcker—A Short History of the War Against Speculation.” Address before the 2013 ABA Derivatives and Futures Committee Meeting, January 25, 2013.

  • “A New York Times columnist claimed in 2008 that ‘[h]igh oil prices have helped bring down the American economy and to devastate Detroit.’ However, an interagency task force (CFTC, FTC, Dept. Energy, SEC, Fed, treasury and SEC) was formed in 2008 to investigate and determine what was driving up crude oil prices concluded that increases in oil price increases between 2003 and 2008 were largely the result of fundamentals of supply and demand, rather than speculation.”
  • “Politics often do not permit the actions necessary to deal with fundamental factors that adversely affect prices. For example, economists agree that energy prices can be lowered by increasing production, but this truism conflicts with political concerns over the environmental effects of oil spills and nuclear plant meltdowns. In order to divert attention away from these messy fundamentals, those seeking to restrict production blame high prices on speculators, who are an easy scapegoat.”

Pirrong, Craig. “Still No Theory. Still No Evidence.” Streetwise Professor, April 10, 2011.

  • “As yet there is no serious theory, and certainly no serious evidence that speculators have distorted commodity prices.”

Sanders, Dwight R. and Scott H. Irwin. “Futures Imperfect.” New York Times, July 20, 2008.

  • “Over all, there is limited evidence that anything other than economic fundamentals is driving the recent run-up in commodity prices. The main driving factors in the energy markets include strong demand from China, India and other developing nations, a lack of growth in crude oil production and United States monetary policy. In the grain markets, driving factors are, in addition to monetary policy and demand from developing nations, the diversion of row crops to biofuel production and unfavorable weather that has hurt harvests.”
  • “The complex interplay of these factors and how they affect commodity prices is often difficult to grasp immediately, and speculators are a convenient scapegoat for the public’s frustration with rising prices. That’s unfortunate because curbing speculation — and hobbling the ability of businesses that rely on futures markets to reduce their risk — is counterproductive.”
  • “Based on such data, it seems unlikely that speculators are dominating commodity futures markets. If speculation is driving prices above fundamental economic values, it is not obvious in the level of speculation relative to hedging. And there are additional reasons to doubt that speculation has led to bubbles in commodity futures prices.”
  • “Current legislative proposals might similarly curtail speculation by reducing the volume of trade, but it is unlikely that they would cure the “problem” of high prices. The measures, however, are likely to hurt the ability of futures markets to accommodate businesses that need to manage price risks.”
  • “First, recent price increases do not neatly fit a bubble explanation. For example, livestock and meat futures markets did not experience price increases until recently, yet the concentration of speculative buying has been among the highest in these markets for some time. It is difficult to see why speculative buying would have an impact on some markets and not on others.”

Skypala, Pauline. “Enthusiasm wanes as regulators sharpen focus.” Financial Times, December 1, 2012.

  • “Trade associations representing commodity traders and other financial groups deny there is any link between the weight of money going into commodity markets and higher price levels or volatility. They say fundamentals drive markets in the medium and long term, and while investors may intensify short term trends, they do not create them.”
  • “Kevin Norrish, commodities strategist at Barclays, says the idea that investor flows affect prices is ‘an attractive argument for interest groups and regulators to promote’, but that there is ‘a mountain of evidence’ to show it is not the case.”

Technical Committee of the International Organization of Securities Commissions (IOSCO). “Principles for the Regulation and Supervision of Commodity Derivatives Markets: Final Report.” (September 2011): 9.

  • “..The Task Force’s 2009 review of available literature led it to conclude that existing economic research “[did]” not support the proposition that the activity of speculators has systematically driven commodity market cash (physical) or futures prices up or down on a sustained basis.”

Technical Committee of the International Organization of Securities Commissions (IOSCO). “Task Force on Commodity Futures Markets: Final Report.” (March 2009): 7, 10.

  • “These reports suggest that economic fundamentals, rather than speculative activity, are a plausible explanation for recent price changes.”
  • “The empirical regularity disclosed by these studies is that financial participants do not trade in advance of price changes, but rather trade in response to past price changes.”

Williams, Orice M. “Issues Involving the Use of the Futures Markets to Invest in Commodity Indexes.” Letter Prepared by the United States Government Accountability Office (GAO) (January 30, 2009): 5-6.

  • “…the eight empirical studies we reviewed generally found limited statistical evidence of a causal relationship between speculation in the futures markets and changes in commodity prices”
  • “…similar to the studies that used the public COT data, the studies using the nonpublic data also found limited evidence that speculation was affecting commodity prices. In addition, all of the empirical studies we reviewed generally employed statistical techniques that were designed to detect a very weak or even spurious causal relationship between futures speculators and commodity prices. As result, the fact that the studies generally did not find statistical evidence of such a relationship appears to suggest that such trading is not significantly affecting commodity prices at the weekly or daily frequency.”

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Oil & Energy

European Commission. “First Interim Report on Oil Price Developments and Measures to Mitigate the Impact of Increased Oil Prices.” (September 2008)

  • “Both the oil price increases seen in recent years and the price fall over the past weeks have been mainly driven by demand and supply factors.”
  • “Linked to the expected evolution in market fundamentals, which it characterized as an essentially positive feature of the market, facilitating price discovery and risk management for the investor, while providing a timely signal of the need for adjustments in structural supply and/or demand in the market” [while]…The second type of speculation can result in the emergence of a speculative bubble, reinforcing the fundamentals-based (and usually upward) price trend”

Interagency Task Force on Commodity Markets. “Interim Report on Crude Oil.” (Washington, DC: July 2008): 3.

  • “The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures markets – as measured by the number of contracts outstanding, trading activity, and the number of trades – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”

Kilian, Lutz and Daniel P. Murphy. “The Role of Inventories and Speculative Trading in the Global Market for Crude Oil.” Department of Economics, University of Michigan (May 12, 2011): 0, 29-30.

  • “We develop a structural model of the global market for crude oil that explicitly allows for shocks to the speculative demand for oil as well as shocks to the flow demand and flow supply. We show how one can identify the forward-looking element of the real price of oil with the help of data on oil inventories. The model estimates allow us to reject explanations of the 2003-08 oil price surge based on unexpectedly diminishing oil supplies (as in the peak-oil hypothesis) and explanations based on speculative trading. Instead, we find that this surge was caused by fluctuations in the flow demand for oil driven by the global business cycle.”
  • “…the largest and most persistent fluctuations in the real price of oil since the 1970s such as the oil price increase in 1979/80 were driven primarily business cycle fluctuations affecting the demand for crude oil. Of particular interest in this paper has been the oil price increase from 2003 until mid-2008. We were able to provide direct evidence against the popular view that the sharp increase in the real price of oil during this period (and in 2007/08 in particular) was driven by speculation among oil traders.”
  • “Hamilton (2009) recently has cast doubt on explanations of major oil price increases based on shifts in speculative demand during previous oil price shocks episodes. He observed in particular that following the outbreak of the Persian Gulf War in August 1990, oil inventories did not increase as one would have expected in response to a positive speculative demand shock. At the same time, the absence of a sharp decline in oil inventories in August of 1990 is inconsistent with the view that the price increase reflected a negative oil supply shock.”

McNally, Robert and Michael Levi. “A Crude Predicament: The Era of Volatile Oil Prices.” US Foreign Affairs Vol. 90, No. 4 (July/August 2011): 6.

  • “In order to help consumers and companies deal with unpredictable oil prices, the United States should encourage more hedging through the financial markets. This idea may trouble those who blame speculators for price swings, but careful studies by the U.S. Energy Information Administration and the U.S. Commodity Futures Trading Commission have found that medium-term and long-term price shifts are primarily a function of changes in global supply and demand. Policymakers should help facilitate more hedging by encouraging the development of well-regulated financial markets: the point is to relieve those who are exposed to price risks today—from motorists to airlines and other oil-intensive industries—and transfer those risks to speculators, who are more willing and better able to bear them.”
  • “U.S. officials, both in Congress and in the executive branch, should take care not go too far, however, and prescribe overly harsh limits on speculative bets on energy futures or set other costly barriers for firms that need to hedge. A blanket crackdown on speculation would only increase the exposure of firms and consumers to volatility by shrinking financial markets and chasing hedging to less transparent and less regulated venues.”

Pirrong, Craig. “Have You Heard the One About the Baker Institute and the Oil Speculators?” Streetwise Professor, August 28, 2009.

  • “But it is odd indeed to argue that a massive increase in speculation caused higher oil prices when the bulk of this increase in speculation occurred in spread positions. Such positions, which involve the purchase and sale of oil for different delivery dates, are speculations on the shape of the oil forward curve, not on the absolute price level. Indeed, it is very difficult to imagine how such spread positions would cause prices to rise since they involve purchases and sales in equal magnitude.”
  • “Rice University’s Baker Institute has released a report on oil speculation that concludes that increasing volumes of speculation have caused oil prices to be higher than they would otherwise be, and in a novel twist, have caused a higher correlation between the dollar and the price of oil. It also lays blame on everybody’s favorite whipping boy, the Commodity Futures Modernization Act of 2000. In a nutshell, this report is bilge. It relies on no rigorous economic analysis to support its contentions. Moreover, it is unscientific, eschewing any serious statistical analysis.”

Pirrong, Craig. “Restricting Speculation Will not Reduce Oil Prices.” The Wall Street Journal, June 11, 2008.

  • “The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices — most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.”
  • “First, consider the charge that commodity prices are being “manipulated.” There are of course certain well-known forms of market manipulation — notably the “corner” or “squeeze.” Here a trader buys more futures contracts than there is commodity to deliver, and forces those that have sold to him — but who cannot deliver — to buy back their contacts at an exorbitant price. None of this has been observed in the oil markets in recent months. Even more to the point, manipulations of this sort typically have short-lived effects on prices. They cannot account for the extended run of high oil prices.”
  • “Restricting these speculators won’t reduce the price of oil — but they are likely to make consumers and investors worse off. Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price. He can do so by selling a futures contract at the prevailing market price. Similarly, an airline can protect itself against price increases next summer by buying today a futures contract that locks in a purchase price for next July.”
  • “Restricting speculation would increase the costs that producers, consumers (such as airlines), and marketers (such as heating-oil dealers) pay to manage their price risks by reducing the number of traders able to absorb the risks they want to shed.”
  • “More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.”

Turner, Adair, Jon Farrimond, and Jonathan Hill. “The Oil Trading Markets 2003 – 2010: Analysis of market behaviour and possible policy responses.” The Oxford Institute for Energy Studies, University of Oxford (April 2011): 2-3, 5, 27, 50.

  • “The available evidence illustrates that oil price movements between 2003 and 2010 are largely explicable in fundamental terms…”
  • “…the vulnerability to potential instability derives from the structural character of the market, not simply from the presence of speculative financial investors.”
  • “even if there is a adverse effect arising from the entry into the market of a class of pure financial investors, limiting the percentage of any one contract that can be held by any one investor would not be an effective response, since multiple investors each holding positions below the percentage limit could, conceivably, still have a large aggregate effect.”
  • “Nor would it make sense to calibrate a regulatory regime which seeks to limit the participation of one class of investor given that, as we noted earlier, medium-term market expectations affect prices through the position taking of both commercial and financial participants.”
  • “The key focus for public policy makers should be medium-term price trends because of the potentially harmful economic impact these can have. However, we consider the objective of controlling medium-term price movements through financial market regulation alone to be both misaligned and unachievable. This is because the financial regulatory tools currently being considered, such as position management techniques (including position limits), would not have a meaningful impact on this key issue. The overall conclusion is that, if there are policies which can make a difference to the key economic issue they would have to address the fundamental drivers of instability, rather than issues solely related to the operation of the financial markets.”
  • “…there are also ways in which the presence of financial investors could stabilise markets, off-setting to a degree the previously discussed inherent features of oil price volatility that are present even if financial speculators are absent.”
  •  “If there are thoughtful active investors who truly do analyse the fundamentals of supply and demand carefully, and do so more effectively than the commercial participants (producers and consumers), then their activity can help make the market more efficient by reflecting changes in fundamental factors in the oil futures price. For example, it could be envisaged that collectively such participants drive the price higher in anticipation of a future tightness of supply and demand, potentially reducing the extreme volatility that could result from the more sudden realisation of emerging supply and demand imbalances.”
  • “The existence of active traders – taking both long and short positions – can also help increase the day-by-day liquidity of markets, increasing the ability of producers and consumers to match future commercial needs in large quantity and at finer bid-offer spreads. However, this day-by-day liquidity may well be neutral in its effect on the medium-term (e.g. quarter-by-quarter) price trends which are most concerning, i.e. providing greater liquidity day-by-day may neither help to moderate medium-term price swings nor accentuate them.”

Vansteenkiste, Isabel. “What Is Driving Oil Futures Prices? Fundamentals Versus Speculation.” European Central Bank Working Paper Series No 1371 (August 2011): 7.

  • “First, some authors note that fundamentals and more specifically increased demand from fast growing developing countries – which are accounting for larger and larger shares of annual oil consumption growth – are playing an important role. While some large developing countries have been growing rapidly for years, and in some cases decades, a combination of rapid industrialization and higher commodity intensity of growth, coupled with rapid income per capita growth, has increased significantly their oil demand.”
  • “One of the counter arguments that recently prices reflect fundamentals rather than speculation is the question ‘Where are the stocks?’ Along this line of argumentation, if speculators were the main force pushing oil prices far above the level justified by fundamentals, excess supply should be observed.”

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Food & Agriculture

European Commission Agriculture and Rural Development. “High commodity prices and volatility…what lies behind the roller coaster ride?” Agriculture Markets Brief, Brief No. 1 (June 2011): 11

  • “There is a general consensus that both higher output and input prices in agriculture are here to stay. Price volatility has increased markedly and is also expected to remain high, at the same time as productivity growth has slowed down. Based on our analysis it is clear that changes to the fundamentals of agricultural markets have contributed to upward pressure on prices and go some way towards explaining the rise in price volatility but they do not give the full picture. The link to developments in other commodity sectors should be explored further.”
  • “Since the causes of price volatility are multiple and varied, this does not lend itself to simple solutions. Despite some common factors that appear to be at play across and beyond commodity markets, there are specific factors related to agricultural production (linkage to food security and the environment, dependency on life cycles, weather and seasons, sanitary conditions) which further complicate the potential impact of policy. The scope for agricultural policy measures to address the causes of agricultural price volatility is further constrained by the presence of price co-movement across commodities. In the short term, efforts should be concentrated on improvement in market transparency particularly on public stocks and dissemination of relevant information throughout the food chain, which could play a significant role in reducing price fluctuations. In the longer term, the sustainability and competitiveness of agriculture depend upon innovation and agricultural productivity growth.”

FAO, IFAD, IMF, OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI and the UN HLTF. “Price Volatility in Food and Agricultural Markets: Policy Responses.” Policy Report (June 2, 2011): 22.

  • “Speculators are necessary for the performance of both these functions [transferring price risk and facilitating price discovery]. They buy and sell futures contracts and take on the risk of price fluctuations…By doing so, they provide the market liquidity which enables commercial hedgers to find counterparties in a relatively costless manner. Too little non-commercial participation results in low liquidity and potentially in large seasonal price swings.”

Jacks, David S. “Populists versus theorists: Futures markets and the volatility of prices.” Explorations in Economic History, Simon Fraser University (June 6, 2006): 342-343, 357.

  • “…futures markets were associated with—and most likely caused—lower commodity price volatility.”
  • “The fundamental result of this paper is that futures markets are systematically associated with lower levels of commodity price volatility.”

Johnson, Steve. “Food for thought on real food issues.” Financial Times, August 19, 2012.

  • “However the existence of speculators has allowed politicians and campaigners to paint them as bogeymen and blame them for rising food prices. Removing speculation from the equation would simplify matters and, come the inevitable next spike in food prices, leave policy makers and special interest groups no option but to address the real issues that are causing demand to outstrip supply – namely an ever-spiralling (and increasingly wealthy) global population, climate change and, in too many cases, degradation of soil quality due to over-intensive production.”
  • “Given the huge importance of food security, the benefits of this scenario would massively outstrip the potential loss of a small source of return to the investment community.”
  • “The argument of the antis is that speculative investment pushes up food prices beyond the level that intrinsic supply and demand would dictate. For all the huffing and puffing there is precious little evidence to support this.”
  • “If nasty speculators were buying up several Iowas worth of corn and squirreling it away in vast warehouses that would certainly move the spot price. But they are not, they are buying futures contracts.”
  • “To the extent that this steepens the forward price curve, it could be argued that it should stimulate greater production, eventually lowering prices.”

Pies, Ingo. “The Ethics of Financialization – A Moral Perspective on Futures Markets for Agricultural Commodities.” Faculty of Law, Economics and Business; Martin Luther University Halle-Wittenberg. ISDA’s 29th Annual General Meeting, Munich (April 9, 2014).

  • “There is little academic support for the allegations that long-only index funds are hungermakers: that their financial activity in futures markets for agricultural commodities has indeed caused food prices to skyrocket.”

Pies, Ingo, Matthias Georg Will, Thomas Glauben and Soren Prehn. “The Ethics of Financial Speculation in Futures Markets.” Martin Luther University Halle-Wittenberg, Discussion Paper Nr. 2013-21 (2013).

  • “…economists came to the conclusion that many market problems have their origin in political problems, especially where politics is responsible for deficits in the institutional framework of competitive markets. The core insight here is that market failure might result from political failure, e.g. in establishing property rights.”

Pies, Ingo, Soren Prehn, Thomas Glauben and Matthias Georg Will. “Hungermakers? – Why Futures Market Activities by Index Funds Are Promoting the Common Good.” Martin Luther University Halle-Wittenberg, Discussion Paper Nr. 2013-19 (2013).

  • “If one wants to improve global food security in a sustainable manner, one needs an appropriate diagnosis of the food crises of 2008 and 2011. The popular diagnosis that futures market operations by index funds were responsible for catastrophic price increases is – to the best of our knowledge – wrong. Instead, the dramatic price increases experienced in recent years were caused by shocks and structural developments in the real economy and intensified by political coordination failures.”
  • “Global food security will not be improved by introducing entry barriers for futures markets. Those who desire to effectively combat hunger in the world have to take real-economy precautions to ensure that food supplies will match the projected increase in demand.”

Prehn, Soren, Thomas Glauben, Jens-Peter Loy, Ingo Pies and Matthias Georg Will. “The impact of long-only index funds on price discovery and market performance in agriculture futures markets.” Leibniz Institute of Agriculture Development in Transition Economies, Discussion Paper No. 147 (2014).

Sanders, Dwight R., Scott H. Irwin, and Robert P. Merrin. “The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?” Marketing and Outlook Research Report 2008-02, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign (June 2008): 17-18.

  • “First, if there is a market impact from index fund activity, it seems likely that it would have occurred during the period of most rapid growth: 2004-2005. Second, the stabilization of the index funds’ percent of total open interest may suggest that other traders have adjusted their strategies to better cope with this relatively new market participant. Third, Working’s speculative index suggests that long-only index funds may in fact be beneficial in markets dominated by short hedging pressure. That is, they improve the adequacy of speculation by helping the market to “carry” unbalanced short hedging. However, the traditional notion that hedging begets speculating may need to be re-visited. The relatively normal level of speculation over the sample period raises some doubt as to whether index funds are behind recent commodity price increases.”
  • “Proposals are once again surfacing to increase margins in an effort to curb “harmful” speculation in futures markets. Such policy decisions aimed at curbing speculation may well be counter-productive in terms of price levels or market volatility. In particular, these policy initiatives could severely compromise the ability of futures markets to accommodate hedgers and facilitate the transfer of risk.”

Till, Hillary. “Who Sank the Boat?: Response to the Finance Watch paper ‘Investing Not Betting’.” EDHEC-Risk Institute (June 2012): 2, 8, 27.

  • “We conclude by noting that modern commodity futures markets are the result of 160 years of trial-and-error efforts. Before performing surgery on these institutions, we suggest that Finance Watch’s supporters tread carefully and not adopt “speculative” regulatory proposals whose ultimate effects are unknown. We further recommend that European Union policymakers instead consider studying market practices globally and then adopt what is demonstrably best practice, rather than invent new untested regulations.”
  • “What then is the economic role of commodity speculation and its value to society? Ultimately, successful commodity speculation results from becoming an expert in risk bearing. This profession enables commercial entities to privately finance and hold more commodity inventories than otherwise would be the case because commercials can lay off the dangerously volatile commodity price risk to price-risk specialists. Those commercial entities can then focus on their areas of specialty: the physical creation, handling, transformation, and transportation of the physical commodity.”
  •  “The more speculators there are, the more opportunity there is for commercial hedgers to find a natural other side for hedging prohibitively expensive inventories. This in turn means that more inventories can be economically held. Then with more inventories, if there is unexpected demand, one can draw from inventories to meet demand, rather than have prices spike higher to ration demand.”
  • “…proposals in restricting speculation fall somewhere in the continuum of being a placebo to actually being harmful to the goals to which they aspire.”

Will, Matthias Georg and Ingo Pies. “Discourse and Regulation Failures: The Ambivalent Influence of NGOs on Political Organizations.” Martin Luther University Halle-Wittenberg, Discussion Paper Nr. 2014-2 (2014).

Will, Matthias Georg, Soren Prehn, Ingo Pies and Thomas Glauben. “Is financial speculation with agricultural commodities harmful or helpful? – A literature review of current empirical research.” Martin Luther University Halle-Wittenberg, Discussion Paper Nr. 2012-27 (2012).

  • “Political regulatory demands for the introduction of a transaction tax, stipulation of stringent position limits and an all-out ban on financial speculation are contradicted by the dominant mainstream of academic literature.”
  • “…due to their hedging function, commodity futures markets operate in a mode of institutionalized solidarity. This alternative view is supported by the findings arrived at in the vast majority of empirical studies, that financial speculation has contributed to making the agricultural markets function not worse, but better.”

Wright, Brian. “International Grain Reserves And Other Instruments to Address Volatility in Grain Markets.The World Bank Research Observer; doi: 10.1093/wbro/lkr016.

  • “In the long view, recent volatility of prices of the major grains is not anomalous. Wheat, rice, and maize are highly substitutable in the global market for calories, and when aggregate stocks decline to minimal feasible levels, prices become highly sensitive to small shocks, consistent with the economics of storage behavior. In this decade, stocks declined due to high global income growth and biofuels mandates, making markets unusually sensitive to subsequent unanticipated shocks, including biofuels demand boosts in reaction to high petroleum prices, the Australian drought, and other regional grain production problems.”

Wright, Brian D. “Speculators, Storage and the Price of Rice.” ARE Update 12 No.2, November/December, Giannini Foundation, University of California, 2008.

  • “In 2007, one story goes, prices got out of line in the rice market and supplies were withheld in anticipation of greater profits later. A new enthusiasm for investment in commodity futures by hedge funds was purported to be fanning the speculative flames. The very recent sharp reversal of the rice price trend is viewed as confirmation of this
    interpretation: the “bubble” proved munsustainable, as bubbles always are. One problem with application of this notion to rice is that futures markets are less prevalent, and less important, for rice than for other major crops. Rice is a highly differentiated crop and most types are not traded on futures markets. Another problem is that any effect via futures trading must be manifest in increased stocks; how, otherwise, can consumption and prices be influenced? No serious claim of increased speculative rice stocks has been advanced recently.”

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