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.