Commodity Index Investing and Commodity Futures Prices

Abstract

Recently, commodity index investing has come under attack. A Staff Report by the U.S. Senate Permanent Subcommittee on Investigation (hereafter, the "subcommittee report") "…finds that there is significant and persuasive evidence to conclude that these commodity index traders, in the aggregate, were one of the major causes of 'unwarranted changes' - here increases - in the price of wheat futures contracts relative to the price of wheat in the cash market". The purpose of this study is to provide a comprehensive evaluation of whether commodity index investing is a disruptive force not only in the wheat futures market in particular but in the commodity futures market in general. We conclude that: (a) commodity index investing is not speculation; (b) commodity index rolls have little futures price impact, and inflows and outflows from commodity index investment do not cause futures prices to change; and, (c) the failure of the wheat futures price to converge to the cash price at the contract’s expiration has not undermined the futures contract’s effectiveness as a risk management tool.

Keywords: commodity index investing, excessive speculation, investment flows, index rolls

JEL Classification: G10, G11, G12, G13, G14, G23