Agricultural speculation and commodity prices – is there a link?

Do index funds and agricultural speculation drive food prices? Most scientists say no. Yet futures contracts with soft commodities are still under fire. Governments are considering strict regulations for futures markets that trade soft commodities. What are the facts, and where does Deutsche Bank stand?

For the last ten years or so, practically anyone has been able to invest in agriculture. This has led to a significant rise in the number of transactions. Over the same period, food staples became more expensive and price spikes more frequent. So critics suspect a basic link between the rise of index funds and the price rises for soft commodities. In this regard proponents contradict by referring to index funds’ business model as well as empirical studies.


Pros and cons in the current discussion

What critics say

Speculation by index funds causes hunger in the world.

What supporters say

The primary causes of recent famines lie within the real economy. Index funds did not trigger these crises and did not make them worse, as studies show.

In recent years, the activities of agricultural index funds have caused massive price hikes for food staples such as grain.

Not so – grain prices also rose in phases during which index fund activities decreased. US researchers who proved this also showed that oat prices rose although no index fund invested in oats futures.

Index funds reinforce the trend towards higher prices and increase price volatility.

Index funds never set or follow trends. Their business model is to passively reflect market developments. So they behave anticyclically and tend to stabilise the market, as shown by empirical studies.

Speculators buy up large amounts of soft commodities like wheat, corn or soy. That creates artificial shortages, so food staples become more and more expensive.

Speculators trade bonds, not food. They never buy grain, corn or soy, only future contracts that cover their purchase or sale. So their activities do not affect the quantities available, or pricings in local markets.

Even if speculators do not directly influence how much food is available, they still have an indirect effect because of feedback effects. When wheat prices rise on the futures market, for example, many farmers store their grain so they can sell it later. So less wheat is available on the market, and the price goes up.

In theory, feedback effects are possible; in practice, no empirical proof has been found. Studies show that in recent years, storage levels for soft commodities did not increase as prices rose. The levels stayed steady, or even dropped.

Governments should severely restrict or ban futures trading by index funds.

Index funds increase liquidity in the futures market. If lawmakers restrict index funds, the market could be severely impaired. The market is important for the agricultural sector because it enables actors to insure against their price risks. We appreciate regulatory measures promoting market transparency. However, far-reaching limits and bans would be counterproductive.

“Inflation pressure in commodities is due not to speculation, but to robust growth in emerging countries. This increases demand for commodities. Supply and demand are the most important underlying data. We analyse oil prices more precisely – and in this market, future prices can indeed decouple from the spot price short term, which means for one or two months. One example is the oil price peak in 2008; the price hike from 110 to 130 USD might indeed have been due to speculation. But it was brief, and it only had very minor effects on the real economy. I’m not a fan of financial innovations, and I’m not defending them. But in this case, I think people are laying the blame at the wrong door.”

Paul Krugman Nobel Memorial Prize Winner Economics, November 2011 in the Financial Times

Controversial Viewpoints

In recent years, many researchers have examined price spikes for food staples and the role of agricultural index funds. Yet doubts remain about the influence of agricultural speculation. But one thing is clear: the large majority of financial scientists and agricultural economists say there is no underlying link between agricultural speculation and increases in price.

Index funds have important positive effects

Business ethics expert Professor Ingo Pies and his colleagues at Halle-Wittenberg University evaluated 35 studies on index funds and agricultural speculation. They found no proof whatsoever of a link between index fund activities and price rises in agriculture. In fact, they confirmed that index funds actually had important positive effects: “Index funds pursue a passive trading strategy. They reflect market trends and hence have a stabilising effect on prices.“ Therefore, regulatory limits on index fund business activities would make futures markets less effective.Despite these clear findings, the study also states that methodologies should be optimised. Since price developments are so dynamic, the authors state that research procedures need to be refined so that even very short term pricing processes in international commodity markets can be analysed in detail. The study also recommended looking even more closely at the way index funds adapt when market conditions change.

Speculation is necessary

In an open letter, 40 German agricultural economists responded to German President Joachim Gauck, who in November 2012 addressed public criticism of financial speculation with soft commodities. The letter emphasised that the president’s criticism of financial speculation did not correspond with scientific findings. “The impression among the general public is that research supports the thesis of damaging effects of financial speculation on soft commodities,” the letter states. “That impression is wrong. The great majority of scientific publications cannot confirm such fears; in fact, they sound the all-clear instead. Speculation is necessary so that agricultural producers and brokers can pass on price risks, instead of having to bear them themselves [...] Drastically restricting these financial transactions would take the required liquidity out of futures markets and make them less effective.“
The entire letter can be found in the Background and further reading section (in German only)

Recent contribution to the debate:

Brokers and Traders on the Influence of Financial Speculation on Commodity Prices – Survey Result by SIS International Market Research

Prof. Dr. Ingo Pies

Prof. Dr. Ingo Pies, Chair of Business Ethics, University of Halle-Wittenberg

A literature review chronicling current empirical studies

Matthias Georg Will, Sören Prehn, Ingo Pies, Thomas Glauben: Financial speculation on agricultural commodities - is it harmful or beneficial? PDF, 270 KB, (in German only)

Financial market speculation can have a negative impact on the world market prices

On the other hand, in its study “Financial Speculation and Food Prices: Remarks on the Current State of Research” for foodwatch e.V., the Institute for World Economics and International Management of the University of Bremen concludes: “There is no scientific consensus. Empirical studies employing sophisticated methods do have a tendency to come to the conclusion that financial market speculation has a negative impact on the world market prices.” Professor Dr. Hans-Heinrich Bass, the author of the study, states: “There is no doubt that there is still a substantial need for research to clarify the price mechanisms in the commodity futures market. However, the need for action in the meantime has become much more urgent. [...] There are primarily three conceivable measures to take to mitigate the most severe impact of that speculation. In the order of their market conformity, these are: deceleration of financial market transactions through taxation; introduction of maximum limits for the positions that financial investors including index-oriented investors are permitted to hold; and a prohibition on certain financial market products (such as ETFs and ETCs).”
You can read the complete study here (in German).

The way in which the “Hunger Makers” campaign is being kept in full swing is the real scandal

Based on this research, foodwatch issued a discussion paper (in German) in November 2013, the University of Halle-Wittenberg issued an academic opinion from the perspective of economics and business ethics. The authors, Prof. Dr. Ingo Pies and Prof. Dr. Thomas Glauben, analyze the associated changes of position and corrections of the “Hunger Makers” campaign against financial speculation on agricultural commodities in this position paper. The article also points out that this campaign is still operating with numerous assertions that are incorrect. It comes to the conclusion: “From the perspective of economics and business ethics, it is not financial speculation with agricultural commodities that is a scandal, but rather the way in which the “Hunger Makers” campaign criticizing financial speculation was initiated and is being kept in full swing.”

Read the complete position paper here (in German).

Foodwatch issued a rebuttal based on this paper.


Prof. Dr. Hans-Heinrich Bass, Institute for Transport and Development at Hochschule Bremen

Prof. Dr. Hans-Heinrich Bass, Institute for Transport and Development at Hochschule Bremen

Further Positions

The Background and further reading section holds a comprehensive selection of academic materials, unfolding the debate in its full complexity.

Where governments stand

All over the world, governments are examining how food price spikes occur. In general, they consider that the main cause is strong and steadily growing demand for food. The role of agricultural futures markets is defined as secondary. However, there is widespread agreement that excessive trading must be avoided and that activities in futures markets should be made more transparent. So particularly in the USA and Europe, drastic regulatory changes are being discussed.

The German government...

...emphasises the importance of effective agricultural futures markets for farmers and food manufacturers. It points to real economic factors (such as currency rates and growth rates) as the primary drivers of long term food price developments. However, it wishes to prevent extreme price volatility as a result of excessive speculation in future markets. So at the European level, the government is working towards strict regulations and high transparency requirements to prevent destabilising impacts on food prices.

The European Union...

...has already discussed or agreed on several regulatory plans. These include the EU act on non-stock market traded OTC derivates, transaction registers and central counterparties (EMIR), which was passed in July 2012. EMIR requires details of all derivatives transactions to be reported to transaction registers – a move designed to increase transparency. It also calls for more safety features as a way of reducing speculation.

In spring 2014, the European Parliament adopted the draft to update the Markets in Financial Instruments Directive (MiFID), which has been published as MiFID 2 in summer 2014. The contents at a glance: financial transactions being carried out in unregulated markets will not only be subject to special admission requirements but also to extensive requirements covering market transparency as well as market integrity. All kinds of commodity derivatives will be limited, aiming to restrict influencing prices by large speculative positions. Transformation into national law is expected being effective from 2017, while the specific regulatory scope should be tangible during the implementation process.

The G20 nations...

...agreed at their summit in November 2011 to create far-reaching powers for financial service authorities. The aims are to prevent market misuse and to promote orderly conditions for pricing and accounting. Reforms include stricter rules for trading, additional reporting requirements, ceilings for positions, and new trading and accounting rules for OTC derivates.

The G20 nations already passed resolutions in September 2009 to regulate OTC derivates markets. The resolutions aimed to make non-exchange traded derivate trading more transparent. The key point: in the future, standardised OTC derivates should be traded on exchanges or electronic trading platforms.

This is what the World Bank says

A 2013 World Bank study shows that increases in agricultural commodity prices can be mainly attributed to changes in crude oil prices. Food storage levels and consumption as well as the influence of exchange rates are seen as far less influential. more

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