No. 849 - The role of financial investments in agricultural commodity derivatives markets

This paper investigates the relationship between futures prices and financial investments in derivatives of the main agricultural commodities. We first provide a broad picture of how these markets function and how they have evolved, showing that traders who deal mostly in commodity index investments (swap dealers) have gained importance since the mid-2000s. However, traditional financial market participants (money managers) still show the stronger (simultaneous) correlation with price movements. Our main empirical analysis aims to gauge the influence of financial investors' positions on both the level and the volatility of futures prices. The Granger-causality tests suggest that speculative investments usually follow - rather than precede - variations in futures returns. Employing a GARCH model, we find that the activity of money managers tends to be associated with lower volatility of futures returns, while that of swap dealers is sometimes followed by higher price variations.