Price Bubbles in Chinese Agricultural Commodity Market

This cumulative dissertation presents four contributions that attempt to shed light on the issues regarding price bubbles in Chinese agricultural commodity market. Given that the public and policymakers show their concern on the price bubbles in Chinese agricultural commodity market, chapter 2 and 3 investigate the origin of price bubbles in futures and spot markets, respectively. In particular, after accurately identifying the bubble dates in agricultural futures market and fixing the estimation bias of rare events models, our empirical results in chapter 2 indicate that bubble episodes only account for a very limited proportion of the sample period, meanwhile, China’s corn and soybeans markets respond differently to the speculative activity and external shocks from international markets. Price bubbles are more likely to be associated with strong economic activity, high interest rates and low inflation levels. Furthermore, by gauging the synchronization level of bubble occurrences between futures and spot markets in chapter 3, we find that even cointegrated futures and spot prices for agricultural commodities seldom bubble together. Further analysis through a regime-switching approach of price transmission reveals that the adjustment effect of futures prices on spot prices is the lowest during the regime where bubbles occur the most frequently for spot prices, while the spot price returns are more likely to be affected by its own lagged terms. All these results challenge the idea that bubbles are originated from over-financialization in futures markets and are then transmitted to spot markets. Therefore, we conclude that futures price bubbles are more sensitive to fundamental factors, while spot price bubbles are more likely to be affected by their own market features. Apart from empirical analyses on the origin of price bubbles, it is widely believed that bubbles could distort resource allocation and a recession usually follows the collapse of bubbles. Inspired by the findings from chapter 2 and 3, chapter 4 attempts to build a systematic theoretical framework that explains the observed economic process with bubbles. From a new perspective of firm growth, we construct a theoretical model to describe the evolvement of bubbles, including their origin, development, collapse, and their effect on the output of economy. Following our research topic, chapter 5 tends to investigate the effects of the newly established futures contract for apples in China. The results of various tests suggest that the apple futures market does not serve well for the price discovery and may reduce the spot price volatility to some extent. In order to improve the efficiency of the apple futures market, the regulators should consider effective measures to attract more commercial traders from different regions in China into the futures market

How to Understand High Food Prices

Commodity price booms are best explained by macroeconomic rather than market-specific factors. I argue that the rise in food prices over 2007 and the first half of 2008 should be seen as part of the wider commodity boom which is largely the result of rapid economic growth in China and throughout Asia in a context of loose money and in which, because of previous low investment, supply was inelastic. The demand for grains and oilseeds as biofuel feedstocks was the main cause of the price rise but macroeconomic and financial factors explain its extent. The futures market may be an important monetary transmission mechanism, but it is commodity investors, not speculators, who, by investing in commodities as an asset class, may have generalized prices rises across markets.Food prices, commodity prices, money, futures markets

The global food crisis : supply and demand revisited

This study aims to show that the volatility in food prices between 2008 and 2011 cannot be explained merely by the market fundamentals of demand and supply. While global changes in demand and supply are bringing about radical changes to the food equation, evidence shows that market failure in the world grain market aggravated the problem. Excess liquidity, brought about by monetary growth policies after the subprime crises and financial meltdown in 2008, has stimulated speculation and hoarding. Strong incentives for financial operators to find better returns in places like the commodities market is attested by the six-fold increase in the number of ‘derivatives’ contracts made between 2002 and 2008. Furthermore, agriculture is one of the most heavily subsidized, protected, and distorted markets in the world. This is a key reason behind a decade long lack of progress in the Doha Round of the World Trade Organization (WTO). This study investigates the hypothesis that speculative activities are a major source of volatility in the agricultural commodities market and that this has significantly contributed to price inflation. It also explores Malta’s possible involvement in food commodity speculation, albeit on a small scale.peer-reviewe

Soft commodity funds, food price volatility, speculation and public Perception. Why soft commodities are a special asset class.

This paper reviews evidence on food price volatility, soft commodity speculation and the public perception of these practices, at least from a Belgian perspective. Soft commodity speculation expanded greatly during the 2007-2008 food crisis and since then has become an asset class of its own in which many banks and investment institutions engage in. This is fueled by food price volatility, especially for the soft primary commodities wich teh food industry uses as ingredients: cereals, oilseeds, vegetable oil, sugar, coffee, cocao, etc ... Of course, speculation is not new and extends to all primary commodities, to stocks and bonds, currencies, and in fact all asset classes. What is special about soft commodity(comprising all agricultural products and raw materials for the food, fiber and bio-fuel industry)speculation is that it impacts our dialy food, and that there are nearly one billion people in the world that are chronically food insecure, i.e. don't have enough to eat every day for a normal and healthy life. The recent food crisis added more than 100 million people, according to FAO, to that group. The 50 poorest countries in the world ) basically all agriculturally based economies-are nearly all net importers of food, particularly cereals, and thus depend on the world market for their food supply. Many poor families spend over half their income on food. And this is why food price speculation raises many ethical questions and why soft commodities - the basis of food - are a special asset class.

Placing the 2006/08 commodity price boom into perspective

The 2006-08 commodity price boom was one of the longest and broadest of the post-World War II period. Apart from strong and sustained economic growth, the recent boom was fueled by numerous factors, including low past investment in extractive commodities, weak dollar, fiscal expansion, and lax monetary policy in many countries, and investment fund activity. At the same time, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s. This in turn accelerated the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn, induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels, begging once more the question about the real factors affecting them. This paper concludes that a stronger link between energy and non-energy commodity prices is likely to be the dominant influence on developments in commodity, and especially food, markets. Demand by emerging economies is unlikely to put additional pressure on the prices of food commodities. The paper also argues that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors (the so-called"financialization of commodities") may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long-term evolution of commodity prices supports the thesis that price variability overwhelms price trends.Markets and Market Access,Emerging Markets,Commodities,Energy Production and Transportation,E-Business

Commodity Price Volatility: The Impact of Commodity Index Traders

Over the years, critics have argued that futures market prices have been either too low or too high. Speculators have often been the target for the wrath of those feeling the futures price does not properly reflect market fundamentals. Recently, the criticism has been vented toward a new type of speculator that has been blamed for the dramatic changes in agricultural commodity prices experienced over the last several years. Commodity index traders (CITs) and other large institutional traders are commonly accused of exerting a destabilizing influence on commodity prices. The intensity of the debate over the role of CITs appeared to wane with the reduction in commodity prices since 2008 but the recent release of a well-publicized OECD report on the issue by Irwin and Sanders (2010) along with the doubling of wheat prices and the claim by von Braun (2010) and others that the rise was due to speculative activity has renewed the debate.commodity, index futures, trading, volatility, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Marketing,

What are the implications for global value chains when the market shifts from the north to the south?

Rapid growth in many low-income economies was fuelled by the insertion of producers into global value chains feeding into high-income northern markets. This paper charts the evolution of financial and economic crisis in the global economy and argues that the likely outcome will be sustained growth in the two very large Asian Driver economies of China and India and stagnation in the historically dominant northern economies. Given the nature of demand in low-income southern economies, it is likely to be reflected in sustained demand for commodities, with other southern economy producers in global value chains being forced into lower levels of value added. Standards are likely to be of considerably reduced significance in value chains feeding into China and India