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Speculation on Commodities Futures Markets and Destabilization Of Global Food Prices: Exploring the Connections

Author

Listed:
  • Jayati Ghosh
  • James Heintz
  • Robert Pollin

Abstract

In December 2010, the FAO food price index surpassed its previous peak of June 2008, and prices have been maintained at this high level through September 2011 (i.e. as of this writing). This pattern in food prices is creating justified fears of a renewal or intensification of the global food crisis. This paper reviews arguments and evidence to inform current debates on how to regulate commodity futures markets in the face of such price volatility and sustained high prices, focusing on 1) the relationship between market liquidity and price patterns in asset markets in general and commodities futures markets in particular, and 2) the relationship between spot and futures market prices for food. We find that there is strong and consistent evidence in support of the need to limit the huge increases in trading volume on futures markets through effective regulations. We also find that the opposite position—i.e. the main analytic arguments opposing market regulation—cannot be supported by the evidence. That is, we find no support for the claim that liquidity in futures markets serves to stabilize prices at their “fundamental” values or that spot market prices are formed free of any significant influence from futures markets. Given these results, the most appropriate position for regulators to assume at present is a precautionary principle: they should enact and enforce policies capable of effectively dampening excessive speculative trading on the commodities markets for food.

Suggested Citation

  • Jayati Ghosh & James Heintz & Robert Pollin, 2011. "Speculation on Commodities Futures Markets and Destabilization Of Global Food Prices: Exploring the Connections," Working Papers wp269, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp269
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    References listed on IDEAS

    as
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    Cited by:

    1. ap Gwilym, Rhys & Ebrahim, M. Shahid & El Alaoui, Abdelkader O. & Rahman, Hamid & Taamouti, Abderrahim, 2020. "Financial frictions and the futures pricing puzzle," Economic Modelling, Elsevier, vol. 87(C), pages 358-371.
    2. Manisha Pradhananga, 2016. "Financialization and the rise in co-movement of commodity prices," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 547-566, September.
    3. Shittu, Adebayo M. & Akerele, Dare & Haile, Mekbib, 2017. "Food Price Spikes and Volatility in Local Food Markets in Nigeria," Discussion Papers 263293, University of Bonn, Center for Development Research (ZEF).
    4. Baines, Joseph, 2015. "Price and Income Dynamics in the Agri-Food System: A Disaggregate Perspective," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 157992, February.
    5. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    6. Jennifer Clapp & S. Ryan Isakson & Oane Visser, 2017. "The complex dynamics of agriculture as a financial asset: introduction to symposium," Agriculture and Human Values, Springer;The Agriculture, Food, & Human Values Society (AFHVS), vol. 34(1), pages 179-183, March.
    7. Robert Pollin, 2013. "Austerity Economics and the Struggle for the Soul of U.S. Capitalism," Working Papers wp321, Political Economy Research Institute, University of Massachusetts at Amherst.
    8. Rashid Khan, Haroon Ur & Islam, Talat & Yousaf, Sheikh Usman & Zaman, Khalid & Shoukry, Alaa Mohamd & Sharkawy, Mohamed A. & Gani, Showkat & Aamir, Alamzeb & Hishan, Sanil S., 2019. "The impact of financial development indicators on natural resource markets: Evidence from two-step GMM estimator," Resources Policy, Elsevier, vol. 62(C), pages 240-255.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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