Last updated on June 5, 2013
Yet more evidence that speculation has not caused the food crisis:
The “Masters Hypothesis” is the claim that unprecedented buying pressure from new financial index investors created a massive bubble in agricultural futures prices at various times in recent years. This paper analyzes the market impact of financial index investment in agricultural futures markets using non-public data from the Large Trader Reporting System (LTRS) maintained by the U.S. Commodity Futures Trading Commission (CFTC). The LTRS data are superior to publicly-available data because commodity index trader (CIT) positions are available on a daily basis, positions are disaggregated by contract maturity, and positions before 2006 can be reliably estimated. Bivariate Granger causality tests use CIT positions in terms of both the change in aggregate new net flows into index investments and the rolling of existing index positions from one contract to another. The null hypothesis of no impact of aggregate CIT positions on daily returns is rejected in only 3 of the 12 markets. Point estimates of the cumulative impact of a one standard deviation increase in CIT positions on daily returns are negative and very small, averaging only about two basis points. The null hypothesis that CIT positions do not impact daily returns in a data-defined roll period is rejected in 5 of the 12 markets and estimated cumulative impacts are negative in all 12 markets; the opposite of the expected outcome if CIT rolling activity simultaneously pressures nearby prices downward and first deferred prices upward. Overall, the results add to the growing body of literature showing that buying pressure from financial index investment in recent years did not cause massive bubbles in agricultural futures prices.
From a new NBER working paper (ungated version here) by Nicole Aulerich, Scott Irwin, and Philip Garcia. Here is a discussion of the paper by Aaron Smith, who writes:
I commend [Aulerich et al.] for emphatically refuting the Masters Hypothesis. It is important for economists to bring facts and rigorous data analysis to bear on issues that have received such publicity, especially if they appear to be influencing policy
In short, the Aulerich et al. findings fly in the face of what many food policy “experts” love to believe about food prices.
Excellent. I would just add:
(1) Granger-causality is not causality as is typically understood, and is best interpreted as “predictability.” Thus, if knowledge of speculative positions does not improve our price forecasts, it is reasonable to conclude that speculation does not affect prices.
(2) Speculators can profit either by taking long (buy) or short (sell) positions, so there is no reason to believe they would have an interest in strictly rising prices.
(3) Prices have gone up for some commodities for which there are no financial instruments (i.e. speculation); and prices have not gone up for some commodities for which there are financial instruments
Sorry, but the evidence is far from conclusive regarding excessive commodity speculation affecting prices. For every study I see coming out saying that is not an issue, another one or two come out saying it is a problem.
A good compilation of more than 100 studies from respected institution showing that excessive speculation can interfere with price formation can be found here:
http://www2.weed-online.org/uploads/evidence_on_impact_of_commodity_speculation.pdf
What most food policy “experts” are saying is that we should return to the common sense speculative limits that were in place for many decades (1936-2000) that helped avoid price bubbles like we experienced in 2008. If those laws were in place at that time, millions of people would not have been driven to hunger as they were by the price bubbles.
Thanks for this list, Dave. From a (very) cursory glance, it seems very interesting and, more importantly, instructive. I like that it is being continuously (or almost) updated. I look forward to going through it in more detail.
Thanks Dave for the list. Of course, all studies are not equally persuasive. I would add two points to the discussion:
(1) The media usually does not distinguish between speculators (short-run positions) and index investors (longer-run positions). While I have not seen any persuasive evidence (theoretical or empirical) about the role of speculators , I will admit there is a case to be made about index investors. The latter use futures positions for their diversification benefit, and by going mainly long (buy) and seeking diversification rather than profit, the arguments I mentioned previously need not apply here. The jury’s still out on this one.
(2) Most of the empirical research in the list relies on correlation or Granger-causality to argue their case. Neither is entirely satisfactory, as Marc F. Bellemare can explain better than I can. That’s why I start with first principles: How could speculation lead to strictly higher food prices? It doesn’t seem plausible. Speculators can profit just as much from falling prices as from rising prices. Etc. But for a deep analysis, read Craig Pirrong’s recent book. He shows how to think about speculation, storage, and prices in a single framework.