Authors: Kiriakos Kousoulis, Antonios Rezitis

Title: Financialization of agricultural commodities in the global market

Abstract

Abstract: Commodity futures contracts are agreements to buy and sell a certain quantity of a commodity, at a predetermined price, on the scheduled date. The agreements enable producers and processors to minimize the risk of falling prices for their products. However, these agreements are linked to the activity of speculators who trade these contracts, raising world product prices. Rising prices for agricultural products may be catastrophic for consumers, especially in developing countries, which mostly rely on agricultural imports. Moreover, according to research, increasing food price fluctuations lead to the overthrow of democratic institutions and political unrest. (Etienne et al., 2014 & Gutierrez, 2012).

Many institutional investors have chosen commodities to diversify their portfolios (Gorton & Rouswnhost 2006). Until 2000, commodity markets were based on leverage (Hirshleifer 1988). Since 2000, the agricultural commodity markets have experienced unprecedented price shocks, culminating in mid-2008, when wheat and corn prices fell by 112% and 47.3%, respectively.

The present work examines the daily returns between the prices of selected futures contracts for cereals (wheat and corn), stock indices, and crude oil. We choose the S&P500 as a representative indicator for the American economy, one of the strongest economies that affect global markets. The data are obtained from investing.com and are daily futures prices for wheat, corn, and crude oil from July 28, 2000, to March 7, 2022, and the S&P500 index for the same period.

The paper's main aim is to examine the 'financialization’ of agricultural commodes in the international market. ‘Financialization’ is created due to speculation in the commodity futures markets, driving them away from rational or expected levels. ‘Financialized’ commodities have been accountable for high world prices. This is an important topic, especially nowadays during the Russian invasion of Ukraine, which has caused a significant increase in crude oil and cereal prices. In order to analyze the price relation between cereal, crude oil, and stock markets, we use a time-varying copula to investigate the dependence structure between these markets.

Several results are obtained from our analysis. First, positive correlations between agricultural commodities, crude oil, and stock markets support the ‘financialization’ of agricultural commodities. Second, the estimated correlations are time-varying and idiosyncratic with respect to products. Third, the agricultural commodity market is more closely correlated with the crude oil market than the stock market. Fourth, a growing dependence between agricultural commodities, crude oil, and the stock market is found and the specific periods where these dependencies become stronger are provided.