Investigating the role of speculation in commodity futures markets: a multi-method approach

Abstract

With finance entering the real economy, new kinds of markets have emerged, such as futures markets, in which special contracts – called futures – are exchanged. From the early 2000s, futures on commodities have become popular among financial instruments, and we talk about "financialization of commodity markets". The uniqueness of commodity futures markets is that they see the participation of two structurally different market actors: physical commodity participants and speculators. Several, opposing claims have been made about speculation within commodity futures markets. One important claim is that the increase in speculative activity has, in certain periods of time, driven up commodity prices over and above the levels warranted by fundamentals of demand and supply.
This thesis investigates the role of speculation on the prices of two food commodities, corn (maize) and soybeans, and answers the following research question: To what extent did financial speculation have a role in rising food commodity prices over the years 2004-2023? To do so, a "multi-method" approach is employed. Specifically, the four methods are: a literature review; a replication of an econometric model; statistical inspections and linear Granger causality tests; and interviews with experts.
First, the "indirect" effect of speculation on food commodity prices through the oil market is examined with the extension of an econometric model proposed by Knittel and Pindyck. The analysis shows that, in recent periods, speculation can account for around 11% of the oil price changes. Then, through Granger-causality tests, a Granger-causation chain between oil prices, fertilizer prices and food commodity prices is found. The two findings together prove that speculation has some role in affecting oil prices, and that dynamics in oil markets are transmitted to food markets. Second, the thesis proceeds by assessing – though empirical analyses and Granger causality tests – the more direct effects of speculative activities in food commodity markets themselves on food commodity prices, as well as the relation existing between spot and futures prices. Even though the statistical evidence of speculation driving prices is found only in a few specific cases, the chapter concludes that speculation cannot be completely excluded from the factors affecting prices’ dynamics. Eventually, this thesis comes up with a theoretical-cum-empirical framework – justified and sustained by a literature review, a model replication, some statistical inspections and tests, and interviews of experts – that concludes that excessive speculation has – to some extent – been driving up and affecting commodities prices: specifically, speculation has increased volatility in futures markets.