Financialisation of Commodity Markets

In the context of the boom-bust cycles of commodity prices since 2003, causal factors for this price developments as well as policy measure to prevent future price shocks are crucial in international and nation policy debates. Generally, commodity prices are largely determined by supply and demand factors as well as broad macroeconomic developments. However, these fundamental factors are insufficient to explain the recent commodity price fluctuations. Hence, more attention has been given to the role of financial investors such as banks, institutional investors and hedge funds that have increased in importance on commodity derivate markets. The potential impact of this so-called Financialisation of commodity markets on commodity prices and the question of necessary regulations of commodity derivative markets has been controversially debated.

In the context of the research project „Financial Markets and the Commodity Price Boom” financed by the Oesterreichische Nationalbank, ÖFSE conducted research on the question whether and to which extent financial investors and the financialisation of commodity markets have affected commodity prices and have changed the functioning and fundamental roles of commodity derivative markets. The research involved quantitative econometric as well as qualitative interview-based approaches. The analysis has been performed for five commodities: coffee, cotton, wheat, crude oil and aluminum.
Results of both approaches have generally supported the financialisation hypothesis which states that the increasing role of financial investors in commodity derivative markets has, in addition to fundamental and macroeconomic factors, had effects on commodity prices and market structure. This research also questions to which extent commodity derivative markets still fulfill their economic roles of price discovery and hedging price risks for in particular small commercial traders.

Based on this research project, ÖFSE will launch a new project on “Financialising commodity markets and global value chains in cocoa and coffee? The role of commodity trading houses“ in 2016/17. The focus of this project is on the analysis of international commodity trading houses and their multiple roles and strategies in physical and financial commodity markets in the context of the potential end of the commodity super-cycle and regulatory changes. The analysis is concerned with economic and social effects on producers of coffee and cacao in Sub-Saharan Africa. Even though commodity trading houses play a central role in commodity trade, their diverse strategies and the effects on developing countries is rarely assessed. This project aims to develop policy recommendations on international, EU and national levels.