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42 CHAPTER 2


tory demand, because long positions would suggest to cash-market partici- pants that prices will rise. This last linkage is perhaps the most important, but it is also contentious, because stocks have been declining during 2005–08. Gilbert (2010) suggests that in the short term stocks are largely a postharvest residual rather than a conscious decision. If stocks are therefore fixed in the short term, suppliers may raise prices rather than hoard. Although this assumption may be somewhat extreme (stocks may be neither fixed nor fully adjustable), it makes the question largely an empirical one. However, in the next subsection we show that U.S. wheat stocks were depleted by foreign demand, which would seem to constitute a real shock rather than one related to futures market activities.


Fifth, if index fund buying drove commodity prices higher, then markets without index funds should not have seen prices advance. Headey and Fan (2008) caution against directly comparing commodity markets selected for futures contracts—because they may have characteristics that exacerbate volatility, such as relatively inelastic supply and demand—to those commodi- ties without futures markets. But with that caveat in mind, Headey and Fan (2008) cite the rapid increases in the prices for nonsecuritized commodities (such as rubber, onions, and iron ore) as evidence that rapid inflation occurred in commodities without futures markets. Similarly, Sanders and Irwin (2010) show that the size of index fund investments in different markets does not predict market returns. For example, futures markets with the highest con- centration of index fund positions (livestock markets) showed little or no increase, whereas those markets with the smallest index fund participation (grains and oilseeds) saw the largest price increases.


More generic tests, however, do find an econometric linkage between futures market activities and spot market prices. Robles and Cooke (2009) use monthly CBOT data to test whether lagged proxies for speculative activity in the CBOT (for example, various ratios of noncommercial activities relative to total activities) predict changes in spot prices. They conduct 23 tests based on four commodities and six proxies for speculative activity. They find evidence of Granger causality in 6 of the 23 tests. Gilbert (2010) also tests the impacts of futures market activity on spot prices, although he uses different depen- dent and independent variables. His dependent variable is the IMF’s index of agricultural food prices, whereas the independent variables measured with monthly data from March 2006 to June 2009 are oil prices, an exchange rate index, and an index of futures positions on 12 major U.S. agricultural futures markets constructed from the data in the U.S. Commodity Futures Trading Commission’s Supplementary Commitments of Traders Reports. Gilbert (2010) tests both contemporaneous and lagged variables and treats oil prices and futures positions as endogenous, chiefly being determined by deeper factors,


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