A model of financialization of commodities

We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity-commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices

The Need for Transparency in Commodity and Commodity Derivatives Markets. ECMI Research Report No. 3, 15 December 2008

This paper argues that transparency-boosting measures specifically tailored to commodity and commodity derivatives markets are much needed. In particular, encouraging the creation of a clearing infrastructure for OTC commodity and commodity derivatives markets would be desirable. Moreover, EU regulators should consider setting up a new, more effective market abuse regime aimed at preventing manipulation in both the physical and financial commodities markets. Finally, in cooperation with the G20, EU authorities should consider the creation of an International Commodity Agency to increase transparency and restore confidence in international physical markets for commodities. The paper is structured as follows: Section 2 briefly discusses the fundamentals of commodity spot and futures markets. Section 3 presents both physical commodity markets and commodity derivative markets in their usual breakdown categories: agriculture, metals and energy. Section 4 discusses the regulations in the EU and the US concerning commodity derivatives. Section 5 advances certain policy proposals and the last section draws the conclusions

Commodity Speculation and Commodity Investment

I distinguish between speculation and index-based investment in commodity futures stressing the differing motivations of the two groups and the differing instruments that they use. I discuss the amounts of money deployed in these activities. I document evidence of extrapolative behaviour in metals prices, consistent with speculation affecting prices, and show that in at least one market (soybeans) index-based investment has a significant and persistent price impact.Commodities, Speculation, Asset Allocation

Kinetic market models with single commodity having price fluctuations

We study here numerically the behavior of an ideal gas like model of markets having only one non-consumable commodity. We investigate the behavior of the steady-state distributions of money, commodity and total wealth, as the dynamics of trading or exchange of money and commodity proceeds, with local (in time) fluctuations in the price of the commodity. These distributions are studied in markets with agents having uniform and random saving factors. The self-organizing features in money distribution are similar to the cases without any commodity (or with consumable commodities), while the commodity distribution shows an exponential decay. The wealth distribution shows interesting behavior: Gamma like distribution for uniform saving propensity and has the same power-law tail, as that of the money distribution, for a market with agents having random saving propensity.Comment: RevTeX4, 6 pages, 5 eps figures, accepted in Eur. Phys. J.

Commodity futures price behaviour following large one-day price changes

This study examines individual commodity futures price reactions to large one-day price changes, or “shocks”. The mean-adjusted abnormal return model suggests that investors in 6 of the 18 commodity futures examined in this study either underreact or overreact to positive surprises. It also detects underreaction patterns in 8 commodity future prices following negative surprises. However, after making appropriate systematic risk and conditional heteroskedasticity adjustments, we show that almost all commodity futures react efficiently to shocks

Commodity Currencies and the Real Exchange Rate

This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using IMF data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 commodity-exporting countries over 1980-2002. Evidence of a longrun relationship between national real exchange rate and real commodity prices is found for about onethird of the commodity-exporting countries. The long-run real exchange rate of these ‘commodity currencies’ is not constant (as would be implied by purchasing power parity-based models) but is time-varying, being dependent on movements in the real price of commodity exports.

Evaluating Food Commodity Procurement Strategies

We use a case study approach to determine the primary factors affecting food manufacturers' commodity procurement decisions, as well as to examine the strategic nature of commodity procurement departments. The research fills a gap in both the commodity and procurement literature. A large literature exists on commodity marketing; however, very little exists on the topic of commodity procurement. Existing procurement literature tends to focus on non-commodity products rather than commodity products. The results suggest a model for the strategic role of commodity procurement departments within food manufacturers. The initial procurement strategy must be supply maintenance, which once accomplished, allows the commodity procurement department to progress to a profit-focused strategy, which is generally cost-based. Finally, the role of the commodity procurement department can expand by offering additional services to customers, such as designing promotional programs.Marketing,

Characteristics of Japan’s Commodities Index and its Correlation with Stock Index

The commodity indexes associated with Japan’s commodity-futures markets were formed in 2008 and publicized by the Tokyo Commodity Exchange and the Tokyo Grain Exchange. In this paper, I used these indexes to analyze the properties of Japan’s commodity futures as portfolio investments, and could confirm that they possess investment characteristics that differ from stocks, and that commodity investors can enjoy favorable “diversified investment” effects if leveraged skillfully.commodity future; commodity index; Japan

A Second Look at the 2007-08 Food Price Crisis: Considering the Impact of Endogenous Dynamics on Food Prices

This paper offers an alternative to the conventional explanation of the 2007-08 food price crisis in terms of escalating demand or dwindling supply. Instead, its focus is on the legal-institutional structure of commodity futures markets, which has witnessed a drastic alteration in the role of speculators. These have transformed from “market makers” (that keep commodity futures markets liquid by arbitraging on price fluctuations) to "market breakers". Index speculation, in particular, has had the effect of muddling information about market "fundamentals" because of the need – brought about by commodity index swaps – for swap dealers to hedge the fluctuations of an index of commodity prices by opening and periodically rolling over long-only positions. This periodical rollover to comply with contractual obligations, rather than in response to anticipated fluctuations in the availability of a commodity in the future, can induce a "contango bias" in the commodity futures market that, in turn, might have given the wrong signals to market operators, leading to a condition of induced (rather than pre-existing) scarcity and to an increase in spot prices in the 2007-08 crisis

Commodity markets and the international transmission of fiscal shocks

The "engine of growth" argument holds that an economic expansion in a large country increases the growth of its trading partners. Growth in developing countries is routinely linked to growth patterns in the Industrial economies. This paper examines the role of commodity markets in transmitting disturbances internationally and finds that contrary to the implications of the "engine of growth" argument, a fiscal-induced expansion in a large commodity-importing country could either increase or decrease growth in the developing commodity-exporting country, and unambiguously reduces output in the second commodity-importing country