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. Yet this is contradicted by index funds’ business model as well as by 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. So 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.“
Read the entire letter here (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

Further academic materials, which demonstrate the debate in its full complexity, can be found at the bottom of the page "Downloads" and "Further Information“.

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.

The European Council is currently discussing the draft update for the EU Markets in Financial Instruments Directive (MiFID). Financial transactions that currently take place outside of regulated markets will then be subject to specific approval requirements, and to extensive requirements in terms of market transparency and integrity. To reduce the chance of large speculative positions affecting prices, limits are also foreseen for all types of commodity derivatives.

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.

Where Deutsche Bank stands

Deutsche Bank began monitoring its role in agriculture long before the current debate on agricultural speculation. But in the wake of accusations, we took an even closer look at our activities in the food sector. We analysed the causes of rising food prices and conducted a critical examination to see if index products like the ones we offer do, or could, affect prices in the agricultural market. Here are our findings:

Factors in the real economy make food prices rise.

Numerous studies show that the main reason prices rise is because supply cannot keep pace with the growing demand for food staples. The main drivers for increased demand are strong global population growth, and higher incomes in developing and emerging countries. At the same time, factors such as water shortages, climate change, substandard infrastructures and rotting harvests are preventing the urgently needed increase in agricultural production. 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.

Deutsche Bank Research study from March 2011 supports these findings: “Long term, growing global demand and supply-side bottlenecks lead to considerable upward pressure on prices.“

Short term price volatility is caused by real economic factors, too.

The Deutsche Bank Research study cites weather-related production loss, political events, oil price developments and currency exchange rates as the main factors that affect food prices short term. The study does not entirely rule out agricultural speculation as another potential factor, however, saying it is unclear whether this might increase price volatility or not. In the meantime, this critical assessment from our in-house study has been mitigated by more recent studies, including the one from Halle-Wittenberg University. The scientists in Halle do, however, share our own research team’s view that the mechanisms of short term price volatility should be examined even more carefully, using improved procedures.

Index funds and agricultural future contracts are important for the agriculture sector

In the agricultural market, soft commodity futures contracts and index funds help actors to secure their price risk. They send price signals that help supplies to adapt and create security for longer term investments in infrastructure and cultivation technology. Due to their anticyclical behavior, they can also balance out price volatility and stabilise the market. So they play an important role in making the agricultural market work effectively.

More transparency and appropriate regulation are needed

In this regard, Deutsche Bank agrees with the G20 nations that the market for soft commodity derivatives should be made more transparent and that control mechanisms should be strengthened to prevent misuse. All markets, including those for derivatives, need a stable regulatory framework to operate smoothly. Improved transparency helps ensure market integrity.

We support the G20 action plan on food price volatility and agriculture. This addresses structural weaknesses in the sector, and calls for appropriate rule reforms to limit marketmisuse and increase transparency.

  • We welcome political efforts to introduce appropriate regulatory specifications for all important futures exchanges and markets. They will play a key role in ensuring that futures markets for soft commodities function well and can contribute to social wellbeing.
  • We are in favor of stricter trading rules to prevent manipulation. We believe additional reporting requirements for actors make sense as a way of increasing transparency.
  • We take a critical view of position ceilings, which the European Union has adopted as part of the “Markets in Financial Instruments Directive” (MiFID). Measures of that nature restrict the ability of banks to offer business transactions tailored to the requirements of their clients. It goes without saying that we will comply with existing legislation.

“You could make it really simple and just say we won’t touch it. That would earn the approval of some NGOs. But my question is this: in this emotionally charged discussion, who would represent the African farmers who often make up more than half the population? I know the situation in many countries. I myself manage a development cooperation fund for African agriculture in which Deutsche Bank is involved. So I know for a fact that for farmers in Zambia, it’s definitely not a bad thing if wheat is expensive on the commodities future market in Chicago. Quite the reverse, because then it’s worth their while to plant more wheat than they need themselves, because it would be really expensive to import grain at high global market prices.”

Michael Schneider in charge of responsible investment in Deutsche Bank’s Asset Management

Deutsche Bank has been conducting scientific research on the causes of rising agricultural prices for a long time. After an extensive analysis in March 2011, Deutsche Bank Research presented its interim findings and highlighted important linkages in August 2012. Find the results of the respective studies here: "Soft Commodities – What Drives Agricultural Prices?"

Why Deutsche Bank continues to offer agricultural finance products

Based on current scientific evidence, there is no empirical proof that agricultural finance products cause price hikes or increase price volatility.
Soft commodity futures markets offer important benefits for farmers and food manufacturers:

  • They enable growers and processors to insure against price volatility.
  • They send robust price signals that help farmers to assess supply more accurately (taking production times into account) and hence to plan better.
  • They give farmers the necessary security in planning for investments in infrastructure and agricultural technology.
  • They increase market liquidity.

After intensive scrutiny and discussion, we therefore repealed our temporary ban on the introduction of new exchange-traded products in early 2013. We will continue to assess new products and make sure their underlying investment strategies are not conducive to price spikes.

To eliminate any remaining doubts that financial speculation might influence agricultural prices at least short term, more empirical analyses are needed. Deutsche Bank and our in-house research team will play our part.

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