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
Date Written: January 23, 2014
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: Suggested Citation