Rising and Volatile Food Prices: Are Index Fund Investors to Blame?

Abstract

The recent sharp increase in the prices of primary food commodities has raised serious concerns of policy makers on the role of index funds in these food markets. In this paper, we employ a dataset on trading positions of index fund investors from the US Commodity Futures Trading Commission (CFTC), and analyze the relationship between index fund activity and food prices and their volatility. We focus on three major and liquid agricultural markets: corn, soybeans and wheat. We find little evidence that the positions of index fund investors can help explain changes in food prices. Instead, causality from food price changes to position changes appears to be much stronger. Furthermore, our findings suggest that index trader positions bear some predictive ability for volatility. This relationship is mainly concentrated on the 2006-2009 period that includes the recent financial crisis. Finally, we find that volatility decreases with the positions of index fund traders.

Keywords: Food prices, index funds, volatility, agricultural futures

JEL Classification: G10, G13, G28, Q14, Q18