This seminar paper reviews the literature on futures markets as well as the recent food crisis and presents an empirical investigation of the influence of (index) speculation on the corn price. My findings are in line with most of the other empirical conclusions that, rather than speculation, factors from the real and monetary economy played a role in the spike of commodity prices.
For centuries, corn has been one of the most produced crops in the world, used to feed people, livestock and machines. During the last quarter of the twentieth-century, world food prices declined by more than 50 percent, thereby improving the nourishment of people all over the world. However, this extensive decline also raised calls for protectionist policies, aimed at defending the welfare of commodity producers. Starting in the early 2000s, all classes of commodities have experienced hefty price increases. The price for corn increased by more than 250 percent in roughly three years (2005-2008). The resulting food crisis devastated low-income communities around the globe, with the already large part of their income they spent on food becoming even more substantial, causing hunger and malnutrition. While a variety of explanations for this crisis have been offered, some were quick to blame excessive (index) speculation.
Table of Contents
1 Introduction
2 Background
2.1 How Corn is Traded
2.2 Influences from the Real Economy
2.3 Monetary and Fiscal Policy
2.4 Structural Change
2.5 The Perfect Storm
3 Data
4 Methodology
5 Results
6 Conclusion
Objectives and Research Themes
This seminar paper investigates whether excessive speculation in the futures market is a primary driver of the commodity boom, specifically focusing on the corn market. By analyzing empirical evidence from 2000 to 2020, the paper evaluates the impact of speculation against other factors such as macroeconomic influences, monetary policy, and supply-side shocks to determine the root cause of commodity price spikes.
- Analysis of commodity futures trading mechanisms and the role of speculators.
- Examination of macro-economic drivers including global demand, energy costs, and monetary policy.
- Statistical evaluation of speculation measures and their correlation with corn price returns.
- Econometric modeling using ADL regressions and structural break tests.
Excerpt from the Book
2.1 How Corn is Traded
The spot market is the traditional, decentralized (commodity) market, where buyers and sellers exchange physical corn for some payment – the spot price. Note, that the spot market is characterized by an immediate payment for an immediate delivery. However, this proved disadvantageous to the sellers, in our case the corn farmers: by the time they choose to plant their corn (in the late spring), they cannot be certain about the price they are going to earn on the market, when harvesting their crop approximately three months later. That is, they are exposed to price risk. Most problematic for them, is the possibility of an extensive decline in prices, which would reduce revenue and hence profits. Besides the price risk for the output, farmers are also faced with price risk regarding the inputs they use, for example seeds and fertilizers (Geman 2015). The price risk for the output as well as some of the inputs can be mitigated using commodity contracts.
There are three basic kinds of commodity contracts (Black 1976), which fulfill a complementary role to the spot markets. First of all, there is the forward contract, which is a private agreement between individual buyers and sellers. It specifies a delivery price for which both sides are willing to trade the commodity at a future date. Contrasting to the spot market, the sellers may not yet be in the physical possession of the commodity (i.e. the corn might still be growing on the field).
The second kind of commodity contract is the futures contract. Like the forward contract, it is an agreement to trade an asset at some date in the future. However, futures can be traded on public exchanges. To facilitate this public trading, futures contracts require a more rigid form, that is they are homogenous in terms of maturity, as well as quantity and quality of the commodity. These specifications allow for the combination of the produce of different farmers into one contract, thereby aggregating information and simplifying price evaluations (Cheng and Xiong 2014a).
Summary of Chapters
1 Introduction: Provides an overview of the agricultural significance of corn and introduces the research question regarding the influence of speculation on food price crises.
2 Background: Discusses the theoretical framework of futures markets, the mechanics of commodity trading, and various economic factors influencing the commodity boom.
3 Data: Details the dataset used for the empirical analysis, including futures price series, positions of market participants from CoT reports, and relevant control variables.
4 Methodology: Outlines the econometric approach, specifically the use of OLS and ADL regression models, and the testing procedures for structural breaks.
5 Results: Presents the statistical findings of the regression analysis, evaluating the impact of speculation ratios on corn returns and testing for potential structural changes.
6 Conclusion: Summarizes the findings, refutes the dominance of speculation as a cause for price spikes, and discusses implications for policy and public perception.
Keywords
Speculation, Commodity Prices, Corn Market, Futures Contracts, Financialization, Market Volatility, ADL Model, Structural Breaks, Monetary Policy, Real Economy, Hedging, Price Discovery, Agricultural Economics, Commodity Boom, Food Crisis
Frequently Asked Questions
What is the primary objective of this research?
The primary objective is to investigate whether excessive speculation in the futures market is the main driver behind the commodity price boom, with a specific case study on corn.
What are the central themes discussed in the paper?
Central themes include the mechanics of futures trading, the role of different market participants (hedgers and speculators), the influence of macro-economic factors, and the impact of the financialization of commodity markets.
What is the research question addressed by the author?
The research question asks whether speculation drives commodity prices or if other factors from the real and monetary economy provide a more accurate explanation for the price spikes.
Which scientific methodology is employed?
The author uses Ordinary Least Squares (OLS) regression with Autoregressive Distributed Lag (ADL) models, supplemented by the Quandt-Likelihood Ratio (QLR) test to identify potential structural breaks.
What topics are covered in the main body of the work?
The main body covers the theoretical background of trading, the classification of market participants, data descriptions, empirical econometric modeling, and a rigorous analysis of regression results.
Which keywords best characterize this work?
Key terms include commodity markets, financialization, speculation, corn price, ADL regression, and market volatility.
Does the author conclude that speculation is the main cause of the food crisis?
No, the empirical evidence presented suggests that speculation is not the dominant cause, and the author concludes that factors from the real and monetary economy are more significant.
How does the paper treat the concept of "structural breaks"?
Structural breaks are tested using the QLR test to determine if the relationship between variables changed significantly over time, particularly following the financialization of commodity markets in the early 2000s.
- Arbeit zitieren
- Niklas Humann (Autor:in), 2020, Does Speculation Drive Commodity Prices? Evidence from the Market for Corn, München, GRIN Verlag, https://www.grin.com/document/1129104
