IDEAS home Printed from https://ideas.repec.org/a/bla/agecon/v49y2018i2p171-181.html
   My bibliography  Save this article

How financial investment distorts food prices: evidence from U.S. grain markets

Author

Listed:
  • Sophie van Huellen

Abstract

Convergence between commodity futures prices and the underlying physical assets at each contract's expiration date is a pivotal condition for the market's functioning. Between 2005 and 2010, convergence failed for several U.S. grain markets. This article presents a price pressure†augmented commodity storage model that links the scale of nonconvergence to financial investment channeled through indices, which are traded in commodity futures markets. The model is empirically tested, using Markov regime†switching regression analysis. Regression results strongly support the model's predicted link between index investment and the extent of nonconvergence for three grains traded at the Chicago Board of Trade: wheat, corn, and soybeans.

Suggested Citation

  • Sophie van Huellen, 2018. "How financial investment distorts food prices: evidence from U.S. grain markets," Agricultural Economics, International Association of Agricultural Economists, vol. 49(2), pages 171-181, March.
    • Handle: RePEc:bla:agecon:v:49:y:2018:i:2:p:171-181
    DOI: 10.1111/agec.12406
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/agec.12406
    Download Restriction: no
    File URL: https://libkey.io/10.1111/agec.12406?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    2. Hirshleifer, David, 1990. "Hedging Pressure and Futures Price Movements in a General Equilibrium Model," Econometrica, Econometric Society, vol. 58(2), pages 411-428, March.
    3. Nicole M. Aulerich & Raymond P. H. Fishe & Jeffrey H. Harris, 2011. "Why do expiring futures and cash prices diverge for grain markets?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(6), pages 503-533, June.
    4. Jane Harrigan, 2014. "The Political Economy of Arab Food Sovereignty," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-33938-6.
    5. Philip Garcia & Scott H. Irwin & Aaron Smith, 2015. "Futures Market Failure?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 40-64.
    6. Bernardina Algieri, 2014. "A roller coaster ride: an empirical investigation of the main drivers of the international wheat price," Agricultural Economics, International Association of Agricultural Economists, vol. 45(4), pages 459-475, July.
    7. Headey, Derek, 2011. "Rethinking the global food crisis: The role of trade shocks," Food Policy, Elsevier, vol. 36(2), pages 136-146, April.
    8. Bernardina Algieri, 2016. "Conditional price volatility, speculation, and excessive speculation in commodity markets: sheep or shepherd behaviour?," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 210-237, March.
    9. Hervé Ott, 2014. "Extent and possible causes of intrayear agricultural commodity price volatility," Agricultural Economics, International Association of Agricultural Economists, vol. 45(2), pages 225-252, March.
    10. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    11. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    13. Scott H. Irwin & Philip Garcia & Darrel L. Good & Eugene L. Kunda, 2011. "Spreads and Non-Convergence in Chicago Board of Trade Corn, Soybean, and Wheat Futures: Are Index Funds to Blame?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 116-142.
    14. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    15. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    16. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
    17. Machiko Nissanke, 2012. "Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 732-750, June.
    18. Scott H. Irwin, 2013. "Commodity index investment and food prices: does the “Masters Hypothesis” explain recent price spikes?," Agricultural Economics, International Association of Agricultural Economists, vol. 44(s1), pages 29-41, November.
    19. Dwight R. Sanders & Scott H. Irwin, 2017. "Bubbles, Froth and Facts: Another Look at the Masters Hypothesis in Commodity Futures Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(2), pages 345-365, June.
    20. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
    21. Jörg Mayer, 2012. "The Growing Financialisation of Commodity Markets: Divergences between Index Investors and Money Managers," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 751-767, June.
    22. Benoît Guilleminot & Jean-Jacques Ohana & Steve Ohana, 2014. "The interaction of speculators and index investors in agricultural derivatives markets," Agricultural Economics, International Association of Agricultural Economists, vol. 45(6), pages 767-792, November.
    23. repec:dau:papers:123456789/5465 is not listed on IDEAS
    24. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    25. Brunetti, Celso & Reiffen, David, 2014. "Commodity index trading and hedging costs," Journal of Financial Markets, Elsevier, vol. 21(C), pages 153-180.
    26. Andrew Dorward, 2011. "Getting Real About Food Prices," Development Policy Review, Overseas Development Institute, vol. 29(6), pages 647-664, November.
    27. C. Peter Timmer, 2009. "Did Speculation Affect World Rice Prices?," Working Papers 09-07, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    28. Adjemian, Michael K. & Garcia, Philip & Irwin, Scott & Smith, Aaron, 2013. "Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies," Economic Information Bulletin 155381, United States Department of Agriculture, Economic Research Service.
    29. Chang, Eric C, 1985. "Returns to Speculators and the Theory of Normal Backwardation," Journal of Finance, American Finance Association, vol. 40(1), pages 193-208, March.
    30. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-667.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goswami, Alankrita & Adjemian, Michael K. & Karali, Berna, 2022. "The impact of futures contract storage rate policy on convergence expectations in domestic commodity markets," Food Policy, Elsevier, vol. 111(C).
    2. van Huellen, Sophie, 2019. "Price discovery in commodity futures and cash markets with heterogeneous agents," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 1-13.
    3. Brooks, Robert & Brooks, Joshua A., 2022. "Samuelson hypothesis and carry arbitrage: U.S. and China," Journal of International Money and Finance, Elsevier, vol. 128(C).
    4. Qianqian Mao & Jens-Peter Loy & Thomas Glauben & Yanjun Ren, 2023. "Are futures markets functioning well for agricultural perishables? Evidence from China's apple futures market," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 69(12), pages 471-484.
    5. Qianqian Mao & Jens-Peter Loy & Thomas Glauben & Yanjun Ren, . "Are futures markets functioning well for agricultural perishables? Evidence from China's apple futures market," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 0.
    6. van Huellen, Sophie, 2020. "Too much of a good thing? Speculative effects on commodity futures curves," Journal of Financial Markets, Elsevier, vol. 47(C).
    7. Hayhurst, Emma & Brorsen, B. Wade, 2023. "Resilience of Grain Storage Markets to Upheaval in Futures Markets," Research on World Agricultural Economy, Nan Yang Academy of Sciences Pte Ltd (NASS), vol. 4(2), April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van Huellen, Sophie, 2020. "Too much of a good thing? Speculative effects on commodity futures curves," Journal of Financial Markets, Elsevier, vol. 47(C).
    2. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    3. Goswami, Alankrita & Adjemian, Michael K. & Karali, Berna, 2022. "The impact of futures contract storage rate policy on convergence expectations in domestic commodity markets," Food Policy, Elsevier, vol. 111(C).
    4. Irwin, Scott H., 2020. "Trilogy for troubleshooting convergence: Manipulation, structural imbalance, and storage rates," Journal of Commodity Markets, Elsevier, vol. 17(C).
    5. van Huellen, Sophie, 2019. "Price discovery in commodity futures and cash markets with heterogeneous agents," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 1-13.
    6. Sophie van Huellen, 2013. "Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum," Working Papers 185, Department of Economics, SOAS University of London, UK.
    7. Sophie van Huellen, 2020. "Approaches To Price Formation In Financialized Commodity Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 34(1), pages 219-237, February.
    8. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    9. Loïc Maréchal, 2023. "A tale of two premiums revisited," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 580-614, May.
    10. Gurdip Bakshi & Xiaohui Gao & Alberto G. Rossi, 2019. "Understanding the Sources of Risk Underlying the Cross Section of Commodity Returns," Management Science, INFORMS, vol. 65(2), pages 619-641, February.
    11. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    12. Raphaël H. Boroumand & Stéphane Goutte & Ehud I. Ronn, 2020. "Characterizing the hedging policies of commodity price‐sensitive corporations," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(8), pages 1264-1281, August.
    13. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    14. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.
    15. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    16. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 187-205, February.
    17. Jun Yuan & Qi Xu & Ying Wang, 2023. "Probability weighting in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(4), pages 516-548, April.
    18. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2018. "Mapping algorithms, agricultural futures, and the relationship between commodity investment flows and crude oil futures prices," Energy Economics, Elsevier, vol. 72(C), pages 486-504.
    19. Fernandez-Perez, Adrian & Fuertes, Ana-Maria & Miffre, Joelle, 2021. "The risk premia of energy futures," Energy Economics, Elsevier, vol. 102(C).
    20. Mohammad Isleimeyyeh, 2020. "The role of financial investors in determining the commodity futures risk premium," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(9), pages 1375-1397, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:agecon:v:49:y:2018:i:2:p:171-181. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iaaeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.