Commodities, Financialization, and Heterogeneous Agents

Abstract

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How do speculators in agricultural commodity markets impact production decisions and commodity prices? A theoretical analysis

“…The producer/farmer must plan her production volume with regard to the expected selling price of the commodity and the current futures price. This important mechanism goes beyond the papers of Branger, Grüning, and Schlag (), Ekeland, Lautier, and Villeneuve (), Hirshleifer (, ), or Liu, Qiu, and Tang (), who treat the production volume as an exogenous random variable. Given an exogenous production decision of the farmer, speculative trading would affect only the futures price of the commodity, but the supply would remain unchanged.…”

“…The second strand of the literature primarily examines how the financialization of commodity futures markets affects commodity prices and the welfare of the market participants. Examples are Branger et al (), Ekeland et al (), Hirshleifer (, ), and Liu et al (). Those papers analyze price effects of forwards such as risk premia, value drivers, and its variance, and examine how the access to forward markets benefits agents by a lower variance of consumption.…”