Index funds' financial speculation with agricultural commodities: Functioning. Effects

Thomas Glauben, Sören Prehn, Ingo Pies, Matthias Georg Will, Jens-Peter Loy, Alfons Balmann (), Bernhard Brümmer, Thomas Heckelei, Heinrich Hockmann, Dieter Kirschke, Ulrich Koester, Rolf Langhammer, Klaus Salhofer, Peter Michael Schmitz, Stefan Tangermann, Harald von Witzke and Justus Wesseler

No 163699, IAMO Policy Briefs from Institute of Agricultural Development in Transition Economies (IAMO)

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 funds' 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: Agricultural Finance; Financial Economics (search for similar items in EconPapers)
Pages: 4
Date: 2014
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Working Paper: Index funds' financial speculation with agricultural commodities: Functioning. Effects (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iamopb:163699

DOI: 10.22004/ag.econ.163699

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