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40 CHAPTER 2


asset prices overshoot in real (and often in monetary) terms. Frankel (2006) provides econometric evidence in support of the inverse relationship between commodity prices and real interest rates in the United States dating back to the 1950s, and Frankel argues that more recent data points—before and after the commodity price peak in mid-2008—are consistent with historical evidence and the overshooting hypothesis.


How consistent this theory is with the evidence is still questionable, how- ever. Some commentators claim that a major inconsistency is that inventories are not high, but low. How true this observation is for metals and minerals is debatable, because part of the “inventory” of these commodities is in the ground, so that stocks for some of these commodities are not especially low (for example, oil). But agricultural stocks are low by historical standards. Of course, the data on stocks could be wrong or biased, because it is difficult to measure private stocks and because public reserves are influenced by policy decisions that may not be consistent with profit motives. Another caveat is that the diversion of assets from treasury bills and the like to commodities may have influenced agricultural futures prices, but as noted above, the jury is still out on the issue of whether futures prices affect spot prices. It is also difficult to distinguish between this channel of impact resulting from low interest rates and the effects of interest rates on exchange rates.


Speculation in Financial Markets


Various commentaries have suggested that commodity futures markets may have triggered the oil and food crises, and speculators have been denounced in the popular media and in high-level political circles. In fact, many of these discussions are themselves speculative, based on little theoretical reasoning or robust empirical evidence. The background to the speculation debate is that futures markets are relatively new to agriculture. For nearly a century, food markets have been organized around forward contracts between producers and buyers that reduce producers’ risks by providing a guaranteed future price. Over time, the forward contract market developed into a futures contract market consisting of forward contracts that can be traded as separate financial prod- ucts on exchanges, the most important of which is the Chicago Board of Trade (CBOT) Futures Exchange. The reputed benefit of food securitization is that it facilitates hedging against risk and price discovery, because it allows buyers and sellers of agricultural commodities to indicate their expectations of price move- ments. Futures prices therefore provide a benchmark for spot prices. Despite these benefits, there may be risks (CBC 2008). One area of concern is that, unlike forward contracts, futures contracts allow a variety of non- commercial participants to partake in trade (that is, those who are not directly engaged in agricultural production, distribution, and delivery to markets).


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