Futures for food Commodities world
Economists Jayati Ghosh, Robert Pollin and James Heintz review the links between futures markets and food prices.
The paper explores whether greater liquidity contributes to more stable prices, and whether futures markets can affect food prices.
It finds that the recent increase in liquidity, particularly marked since 2007, is correlated with higher and more volatile prices.
The authors also argue that futures markets affect food prices by influencing expectations of price movements, in turn encouraging producers to withhold supply and buyers to purchase as soon as possible in order to avoid future price rises.
They further argue that trading and prices are not based simply on supply and demand. They are also strongly influenced by factors such as investor psychology, herding behaviour, unequal access to market information, and the acitivities of large-scale traders.
The researchers find that:
- There is no evidence that the recent increase in liquidity has stabilised commodity prices
- Increased liquidity is in fact associated with price inflation and greater volatility
- The arguments and evidence reviewed do not support the claim that spot prices are set independently of futures prices
They argue for the introduction of position limits to cap speculators' share of the market.
Commodity Trader's Almanac 2013: For Active Traders of Futures, Forex, Stocks, Options, and ETFs