Impact of Commodity Index Investments on Agricultural Commodity Price Increases Over 2006-2011 Period

Abstract

Although prices in the agricultural commodity futures markets have risen significantly in recent years, the results of this study support those of many previous studies that concluded that investments of commodity index traders and speculators in the futures markets are not the major causes of the price increases. While the analyses in this study do not directly test for price impacts, the results of the ratio analyses, “T” indexes, and Granger Causality tests show that there is no “excess speculation” in the commodities futures markets. However, the ratio and speculative index results revealed a small level of abnormality only in CBOT wheat and CME feeder cattle markets. The Granger Causality tests revealed that index investments do not Granger cause futures prices in 9 out of the 12 commodities. Index investments Granger caused futures prices only in CBOT corn and CME feeder cattle markets. These results debunk the assertion that speculators are to be blamed for the recent increases in commodity prices and that their activities in the futures markets must be curbed. Indeed, the results of this study indicate the possibility that speculators and commodity index traders potentially play appropriate roles in the futures markets by providing liquidity needed for the smooth functioning of the markets. The results of the study imply that commodity index traders in agricultural commodities do not change futures markets primarily from hedging to “excessive” speculative markets. As a result, the potential causes of the recent price spikes in agricultural commodities may potentially be the results of market fundamentals. Consequently, recent proposed government policies and programs aimed at curbing speculation in the commodities and futures market may potentially be counterproductive in terms of needed liquidity in the markets to ensure stable price levels and market stability.