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Document Type

Open Access Dissertation

Degree Name

Doctor of Philosophy (PhD)

Degree Program

Economics

Year Degree Awarded

Summer 2014

First Advisor

Robert Pollin

Second Advisor

James Heintz

Third Advisor

Deepankar Basu

Subject Categories

Agricultural and Resource Economics | Econometrics | Finance | Macroeconomics

Abstract

After declining for almost three decades, the food price index of the Food and Agricultural Organization (FAO) rose by 90 percent between January 2002 and June 2008. Besides the magnitude, the rise in prices was remarkable for its breadth, affecting a broad range of commodities including agricultural (wheat, corn, soybeans, cocoa, coffee), energy (crude oil, gasoline), and metals (copper, aluminum). According to the US Department of Agriculture, this price spike was responsible for increasing the number of malnourished people by 80 million. These dramatic developments in prices coincided with a rapid inflow of investment into the commodities futures market -- the number of open contracts between 2001 and June 2008 increased by more than six-fold, from around 6 million to 37 million. The new investment was primarily driven by portfolio diversification motives of a new class of traders who were neither producers nor direct consumers of the underlying commodities.

This dissertation examines the potential causal links between this financialization of the commodities futures market and the 2008 global spike in food prices and other commodities. The dissertation consists of three major chapters. The second chapter analyses the relationship between spot and futures markets for a range of commodities. The third and fourth chapters seek to understand the role of financialization in causing the 2008 price developments. Chapter 3 explores commodity markets individually, studying the correlation between the inflow of liquidity and price changes. Chapter 4 studies the issue at a more macro level by investigating if the inflow of investment can explain the increase in comovement of prices between unrelated commodities.

My results show that i) for many commodities, prices are determined in the futures markets, and ii) financialization of the futures market was an important factor in causing the 2008 price rises for a range of commodities. These results underscore the increasingly important role of financial motive, financial markets, and financial instruments in the operation of the commodities market. The findings are especially relevant with respect to debates as to the relative efficiency of financial markets and the need to regulate them.

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