Index Fundsʼ Financial Speculation with Agricultural Commodities: Functioning Effects

Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Issue 12, January 2014

4 Pages Posted: 30 Jan 2014

See all articles by Thomas Glauben

Thomas Glauben

University of Kiel

Sören Prehn

Leibniz Institute of Agricultural Development in Transition Economies (IAMO)

Ingo Pies

Martin-Luther-University Halle-Wittenberg

Matthias Georg Will

Martin Luther University of Halle-Wittenberg - Faculty of Economics and Business Administration

Jens-Peter Loy

University of Kiel - Institute of Agricultural Economics

Alfons Balmann

Leibniz Institute of Agricultural Development in Transition Economies (IAMO)

Bernhard Brümmer

Christian-Albrechts-Universitat zu Kiel

Thomas Heckelei

University of Bonn

Heinrich Hockmann

Leibniz Institute of Agricultural Development in Transition Economies (IAMO)

Dieter Kirschke

Humboldt University of Berlin

Ulrich Koester

Independent

Rolf J. Langhammer

University of Kiel

Klaus Salhofer

Technische Universität München (TUM)

Peter Michael Schmitz

University of Giessen

Stefan Tangermann

Organization for Economic Co-Operation and Development (OECD) - Directorate for Food, Agriculture and Fisheries (AGR)

Harald von Witzke

Independent

Justus Wesseler

Agricultural Economics and Rural Policy Group, Wageningen University

Date Written: January 23, 2014

Abstract

For quite some time long-only index funds have been suspected of being responsible for price increases in agricultural futures markets. This suspicion has prompted demands to drastically limit long-only index fundsʼ scope of activity. Such demands and their underlying diagnoses, however, contradict the current state of scientific knowledge. To date, the empirically oriented literature has not provided conclusive evidence that long-only index funds with their futures transactions significantly have increased the level or volatility of agricultural commodity prices. Indeed, recent theoretical works suggest that long-only index funds, pursuant to their investment strategy, rather stabilize agricultural commodity prices and fulfill an important collateralization and competition function in agricultural futures markets. The commitment to these funds reduces risk premiums and thus enables food producers to hedge against price fluctuations at lower costs. Mitigated risk premiums motivate farmers to put larger parts of their harvests into storage, which counteracts seasonal price fluctuations. To safeguard sustainable global food supply, long-only index funds should not be subjected to stricter market entry regulations.

Keywords: Financial speculation, futures market, agricultural commodities, regulation, position limits, transaction tax, volatility, price level

JEL Classification: D84, G12, G13, G14, Q13, Q18

Suggested Citation

Glauben, Thomas and Prehn, Sören and Pies, Ingo and Will, Matthias Georg and Loy, Jens-Peter and Balmann, Alfons and Brümmer, Bernhard and Heckelei, Thomas and Hockmann, Heinrich and Kirschke, Dieter and Koester, Ulrich and Langhammer, Rolf J. and Salhofer, Klaus and Schmitz, Peter Michael and Tangermann, Stefan and von Witzke, Harald and Wesseler, Justus, Index Fundsʼ Financial Speculation with Agricultural Commodities: Functioning Effects (January 23, 2014). Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Issue 12, January 2014. Available at SSRN: https://ssrn.com/abstract=2384917

Thomas Glauben

University of Kiel ( email )

Department of Food Economics & Consumption Studies
D-24098 Kiel
Germany
+49 431 880-7372 (Phone)
+49 431 880-7308 (Fax)

Sören Prehn

Leibniz Institute of Agricultural Development in Transition Economies (IAMO) ( email )

Theodor-Lieser-Str.2
Halle, 06120
Germany

Ingo Pies

Martin-Luther-University Halle-Wittenberg ( email )

Grosse Steinstrasse 73
Halle/Saale, DE Saxony-Anhalt 06108
Germany
+49 0 345 55 23420 (Phone)

HOME PAGE: http://ethik.wiwi.uni-halle.de/2166_199920/2166_199912/

Matthias Georg Will (Contact Author)

Martin Luther University of Halle-Wittenberg - Faculty of Economics and Business Administration ( email )

Germany

Jens-Peter Loy

University of Kiel - Institute of Agricultural Economics ( email )

Kiel
Germany

Alfons Balmann

Leibniz Institute of Agricultural Development in Transition Economies (IAMO) ( email )

Theodor-Lieser-Str.2
Halle, 06120
Germany

Bernhard Brümmer

Christian-Albrechts-Universitat zu Kiel ( email )

Wirtschafts und Sozialwissenschaftlichen Fakultat
Westring 425
D-24118 Kiel, 24161
Germany
49-431-8804436 (Phone)
49-431-8804592 (Fax)

HOME PAGE: http://www.uni-kiel.de/Agraroekonomie/

Thomas Heckelei

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Heinrich Hockmann

Leibniz Institute of Agricultural Development in Transition Economies (IAMO) ( email )

Theodor-Lieser-Str.2
Halle, 06120
Germany

Dieter Kirschke

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Ulrich Koester

Independent ( email )

Rolf J. Langhammer

University of Kiel ( email )

Duesternbrooker Weg 120
D-24100 Kiel
Germany
++49.431.8814-203 (Phone)
++49.431.85853 (Fax)

Klaus Salhofer

Technische Universität München (TUM)

Arcisstrasse 21
Munich, 80333
Germany

Peter Michael Schmitz

University of Giessen ( email )

Betriebswirtschaftslehre VII
Giessen, WY 35394
Germany

Stefan Tangermann

Organization for Economic Co-Operation and Development (OECD) - Directorate for Food, Agriculture and Fisheries (AGR) ( email )

2, rue Andre Pascal
Paris, Cedex 16, 75775
France

Harald Von Witzke

Independent

Justus Wesseler

Agricultural Economics and Rural Policy Group, Wageningen University ( email )

Hollandseweg 1
Wageningen, 6706 KN
Netherlands

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