Speculation by Commodity Index Funds (eBook)

Scott H. Irwin (Author) Scott H. Irwin holds the Laurence J. Norton Chair of Agricultural Marketing in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. He is a national and international leader in the field of agricultural economics. His research on commodity markets is widely cited by other academic researchers and is in high demand among market participants, policymakers, and the media.Dwight R. Sanders (Author) Dwight R. Sanders is a professor in Agribusiness Economics at Southern Illinois University Carbondale (SIUC). He received his Ph.D. in Agricultural Economics and M.S. in Finance from University of Illinois in 1995. After positions with The Pillsbury Company and Darden Resaurants, he joined the faculty at SIUC where his research interests are in futures markets, forecasting, and risk management.

Professors Irwin and Sanders analyze and discuss in a rigorous and clear way the role of speculation in commodity and energy markets and the impact on food and energy prices. They show a balanced review of various - sometimes conflicting - opinions about the role of speculators in commodity futures markets. They are not afraid to ask difficult questions: challenging the work done in this domain by others and themselves and subsequently synthesizing and improving on that work. A book that will help better understand the structure of markets, their characteristics (volatilities) and their participants. A timely, must-read book for readers interested in commodity markets and the role of financial institutions.

This collection of papers by Irwin and Sanders, spanning their decade plus of collaboration on commodity futures markets and the impacts of index fund investing on those markets, is greater than the sim of its parts.

The authors have included additional insights and backstories in new forewords to each of the eleven papers collected here. These alone are worth the price of admission. If you study, invest in, or regulate commodity futures markets, this book is essential reading.

When food prices began spiking around the world in late 2007 - and multiple times since then - observers offered a range of competing explanations. One popular explanation was the 'financialization' of agricultural commodity markets.

One popular explanation was the 'financialization' of agricultural commodity markets. The idea that financial speculators were diversifying from more traditional financial securities into commodity futures, including through new commodity index fund structures, and that this innovation was enriching a few while immiserating millions captured popular and policymakers' imaginations. The correlational evidence indeed seemed consistent with that hypothesis. Two experts in agricultural finance, Scott Irwin and Dwight Sanders, took those concerns seriously. Using the best available theory, methods and data they rigorously tested a range of hypotheses around the central claim: financial speculation increasingly drives food prices globally. Their findings are the most convincing evidence available on the topic, largely showing the correlation is largely spurious, not causal.

This book pulls together various papers they wrote on the topic into a coherent, compelling narrative. It is a must read for anyone interested in this topic at a serious level.

Many observers and policy makers are convinced that participation in commodity markets by speculators and financial investors contributed to the volatility in commodity prices over the last two decades. Irwin and Sanders have been at the forefront of careful academic investigation of the evidence that could support this conclusion. The studies in this book use data on the positions of index fund traders in commodity futures markets, roll yields and rollover effects, and order-flow costs together with the economic theory and practical understanding of how futures markets function. This evidence is must reading for anyone who has concluded that we need to tighten limits on participation in these markets.