The New Price Makers: An investigation into the impact of financial investment on coffee price behaviour

Newman, Susan

Abstract

The collapse of the international commodity agreements in the 1980s, together with the liberalisation of marketing systems in commodity exporting developing countries under structural adjustment programs have removed the role of the state in the pricing of commodities. The logic of liberalisation was to remove impediments to the efficient market discovery of commodities prices where state intervention was seen as the main culprit. Mainstream economics has also promoted the role of derivatives exchanges in efficient price discovery on physical markets in international commodity markets with globally fragmented production. By rapidly exploiting opportunities to profit from price deviations between futures and spot markets, rational and informed speculators are seen to drive any price deviations in the market quickly to the equilibrium price that reflect international supply and demand realities. Such a view, however, fails to consider the role of differentiated market participants on international exchanges in driving commodity prices, by assuming that all trading activities are efficiency enhancing irrespective of the motives behind them. There has been much media interest in the role of speculation on commodity prices, in particular food commodities, over the recent months. There has, however, been very little systematic evidence gathered on the extent to which speculative activities affect prices of exchange traded commodities.
Using the example of international prices for coffee, this paper shows that increases in trading activities by non-physical market actors for the purposes of financial investment have led to a dislocation between prices on international exchanges and supply and demand realities. With increasing participation by various
institutional investors such as hedge and pension funds, prices have become increasingly driven by trading that arises owing to changes in the financial investment environment more generally, such as the dot-com crash of the late 1990s and the recent credit crunch.

Citation

Newman, S. (2009). The New Price Makers: An investigation into the impact of financial investment on coffee price behaviour

• Publication Date: Mar 1, 2009
• Publicly Available Date: Jun 8, 2019
• Peer Reviewed: Not Peer Reviewed
• Keywords: new price makers, investigation, financial investment, coffee price
• Public URL: https://uwe-repository.worktribe.com/output/998366
• Related Public URLs: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.471.1144&rep=rep1&type=pdf
• Additional Information: Additional Information : This is an NCCR Trade Working Paper