The interaction of speculators and index investors in agricultural derivatives markets

Abstract

Through the analysis of the weekly Commodity Futures Trading Commission reports on 12 US traded agricultural commodities, we revisit the heated debate on the impact of index flows on commodities prices. After introducing a novel stock‐to‐use proxy that may be used to represent inventory variations at the intra‐month level, we show that speculators, contrary to index investors, are sensitive to commodity‐specific fundamental information. Their endogeneity to commodities markets hinders the estimation of their market impact. Regarding the market impact of index flows, the endogeneity problem is alleviated in two ways: first, we restrict the scope to agricultural commodities, for which index flows are more exogenous to market prices; second, we introduce two novel instrumental variables that are computed from index flows outside the market under analysis. We find that index investment flows are offset by commercial players, not speculators. The serial correlation of index flows may explain the tendency of speculators to synchronize with index investors. There is strong evidence of an index flows' impact in those commodities markets where speculative and index positions are the most correlated. The market impact of index flows is located in periods of liquidity stress, as is the correlation between speculative and index positions. Overall, our results demonstrate an impact of index investors on some agricultural prices and suggest that the synchronicity between speculative and index positions is an important determinant of this impact.

Price-Setting Power in Global Value Chains: The Cases of Price Stabilisation in the Cocoa Sectors in Côte d’Ivoire and Ghana

“…Cocoa often is included among other agricultural commodities in studies that look for commodity index investors’ impacts on commodity prices (Wimmer et al 2021 ). Even though most of these studies find no general impact of index investor activities, several findings indicate a stronger effect on cocoa prices and other studies find impacts on cocoa futures returns (Sanders and Irwin 2017 ; Aulerich et al 2013 ; Capelle-Blancard and Coulibaly 2011 ; Guilleminot et al 2014 ), but Sanders and Irwin ( 2011 ) see a dampening effect from index investors on realised volatility. Van Huellen ( 2015 ) show that index investors impact the cocoa futures curve; thus, it can be a misleading indicator of fundamental demand and supply conditions.…”

Revisiting the determinants of futures contracts success: the role of market participants

“…Guilleminot et al. () also show that trade activity depends on the interaction of speculators and commercial traders. However, there is limited empirical evidence to support these hypotheses and an absence of broader insights about the role of futures market participants.…”

How financial investment distorts food prices: evidence from U.S. grain markets

“…These traders are “long only” and passive in the market, as they invest in a large basket of commodities by taking buy positions. Therefore, index positions are relatively inelastic, with respect to market fundamentals (Guilleminot et al., ; Mayer, ; Nissanke, ; Tang and Xiong, ).…”