ROLE OF SPECULATORS IN AGRICULTURAL COMMODITY PRICE SPIKES DURING 2006-2011

The press, governments, institutions and some researchers have blamed investors in the agricultural futures markets as the major cause for the recent price spikes in agricultural commodities mainly because of the significant inflow of investment funds into the futures markets by commodity index traders. Consequently, there have been many proposed government and institutional policies and programs such as increased financial regulation, strict supervision, and transparency aimed at curbing speculation in the commodities and futures markets. This study evaluates "excessive" speculation or the lack thereof in these markets using hedging ratios, speculative ratios, Working's speculative 'T' index, and Granger causality tests to examine the investment activities of commodity index traders and speculators on CFTC COT supplemental data for 12 agricultural commodities. The results of the study show that there is no "excess" speculation in the agricultural markets over the 2006-2011 periods. Indeed, the speculation levels found in this study are not significantly different from historical results reported in other studies and accepted as normal and necessary for the efficient functioning of the markets. The implications are that current speculative activities in the commodities and futures markets may possibly reflect necessary liquidity needs for the smooth functioning and stability of the markets. Therefore, the recent proposed policies aimed at curbing speculation in the commodities and futures markets may be potentially counterproductive. [PUBLICATION ABSTRACT]