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Does the Masters Hypothesis Explain Recent Food Price Spikes?

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  • Irwin, Scott H.

Abstract

The Masters Hypothesis is the claim that unprecedented buying pressure in recent years from commodity index investors created massive bubbles in food and energy prices. A number of recent studies investigate the empirical relationship between index investment and price movements in agricultural futures markets. One line of research uses time-series regression tests, such as Granger causality tests, to investigate the relationship between price movements and index positions. This research provides very little evidence supporting the Masters Hypothesis in agricultural futures markets. A second line of research uses cross-sectional regression tests and studies in this area also provide very limited evidence in favor of the Masters Hypothesis for agricultural futures markets. A third line of research investigates whether there is a significant relationship between commodity index trading and the difference, or spread, between futures prices of different contract maturities. These studies provide a range of results depending on the type of test. However, the bulk of the evidence indicates either no relationship or a negative relationship, which is once again inconsistent with the Masters Hypothesis. Overall, this growing body of literature fails to find compelling evidence that buying pressure from commodity index investment in recent years caused a massive bubble in agricultural futures prices. The Masters Hypothesis is simply not a valid characterization of reality.

Suggested Citation

  • Irwin, Scott H., 2012. "Does the Masters Hypothesis Explain Recent Food Price Spikes?," Working Papers 126944, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    • Handle: RePEc:ags:spaawp:126944
    DOI: 10.22004/ag.econ.126944
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    1. Gunther Capelle-Blancard & Dramane Coulibaly, 2011. "Index trading and agricultural commodity prices: A panel Granger causality analysis," International Economics, CEPII research center, issue 126-127, pages 51-71.
    2. Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
    3. 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.
    4. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425, June.
    5. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    6. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
    7. Erkko Etula, 2013. "Broker-Dealer Risk Appetite and Commodity Returns," Journal of Financial Econometrics, Oxford University Press, vol. 11(3), pages 486-521, June.
    8. Ing-Haw Cheng & Andrei Kirilenko & Wei Xiong, 2015. "Convective Risk Flows in Commodity Futures Markets," Review of Finance, European Finance Association, vol. 19(5), pages 1733-1781.
    9. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(2), August.
    10. Brunetti, Celso & Reiffen, David, 2014. "Commodity index trading and hedging costs," Journal of Financial Markets, Elsevier, vol. 21(C), pages 153-180.
    11. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
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    Cited by:

    1. Johan F. M. Swinnen & Louise Knops & Kristine van Herck, 2013. "Food Price Volatility and EU Policies," WIDER Working Paper Series wp-2013-032, World Institute for Development Economic Research (UNU-WIDER).
    2. Bohl, Martin T. & Stephan, Patrick M., 2013. "Does Futures Speculation Destabilize Spot Prices? New Evidence for Commodity Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 45(4), pages 1-21, November.
    3. Knops, Louise & van Herck, Kristine & Swinnen, Johan F. M., 2013. "Food Price Volatility and EU Policies," WIDER Working Paper Series 032, World Institute for Development Economic Research (UNU-WIDER).
    4. Will, Matthias Georg & Prehn, Sören & Pies, Ingo & Glauben, Thomas, 2012. "Schadet oder nützt die Finanzspekulation mit Agrarrohstoffen? Ein Literaturüberblick zum aktuellen Stand der empirischen Forschung," Discussion Papers 2012-26, Martin Luther University of Halle-Wittenberg, Chair of Economic Ethics.
    5. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.

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    More about this item

    Keywords

    Agricultural and Food Policy; Demand and Price Analysis; Risk and Uncertainty;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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