A Bitter Brew? Futures Speculation and Commodity Prices

Abstract

We introduce a new approach to measuring the possible impact of futures speculation on spot commodity prices. We advocate the use of a non-parametric, highly flexible empirical model for measuring this impact, in order to account for possible non-linearity in the transmission from futures to spot market. Empirical results for the coffee market show that most of the changes in spot prices can be attributed to shifts in demand and - in particular - supply. Nevertheless, speculation is an impor- tant part of the coffee price generation process. The effect of speculation on the price of coffee is indeed spiky, which explains why traditional, mean-variance based methods have failed to identify this. However, it is also significant, both statistically and economically. An extensive robustness analysis confirms the validity of our results, and - within the limitations posed by the data - we have been able to establish causality.

Keywords: Commodities; index funds; speculation; efficiency

JEL Classification: C14, D20, G13