Market
Monitor
No. 104 December 2022
With northern hemisphere grain and oilseed
Contents
crops largely harvested, and the Black Sea
Feature article:
Is Speculation Driving CommodityGrain Initiative extended for another 120
Price Volatility? 2
days, market attention is shifting to grow-
World supply-demand outlook3
ing conditions in the southern hemisphere.
Crop monitor5
The third consecutive year of La Ni~na has
Policy developments8prolonged drought conditions in Argentina,
International prices 11resulting in sharply reduced wheat produc-
Futures markets13tion prospects relative to last year. By con-
Market indicators 14trast, La Ni~na has resulted in abnormally wet
Fertilizer outlook16conditions in Australia, which expects above-
Ocean freight markets 17average wheat yields; however, concerns re-
Explanatory notes 18main over the quality of the crop, which
could impact prices for milling wheat. Plant-
Markets at a glance
ing progress for South American maize and
Easing FROM FROM
NeutralPREVIOUS PREVIOUS
TighteningFORECASTS SEASONsoybeans are on pace, but it is still too early
WHEATto tell whether yields will return to more nor-
MAIZE
mal levels after last year;s drought-reduced
RICE
production.
SOYBEANS
The Market Monitor is a product of the Agricultural Market Information System (AMIS). It covers international markets for wheat, maize, rice
and soybeans, giving a synopsis of major market developments and the policy and other market drivers behind them. The analysis is a collective
assessment of the market situation and outlook by the ten international organizations and entities that form the AMIS Secretariat.2AMIS Market Monitor No. 104 December 2022
Feature article
Is Speculation Driving Commodity Price Volatility?
The debate whether speculation is driving food price can move the entire market. While the hypothesis of the
volatility has come back to the forefront. Especially for existence of such a phenomenon raises legitimate con-
low-income countries, such volatility in prices can in- cerns, the bulk of the evidence in the literature suggests
crease food security risks, thus calling for a thorough in- that in practice these funds have little to no impact on
vestigation of the role of speculation on food markets. To commodity futures prices.
this end, AMIS organized a public webinar with a group
of experts in commodity futures markets, covering a wide The last concern is about a potential manipulation dur-
range of perspectives.ing the delivery of a futures contract, usually coined as a
"corner". In these cases, a "manipulator" tries to gather
Speculation is most frequently associated with invest- a position to be delivered that is large enough to cause
ment operations in commodity futures markets, which a divergence between cash and futures prices. Deliv-
are used by agricultural producers and buyers for hedg- ery manipulation is arguably the most concerning form
ing purposes. By agreeing on a future price of a com- in which speculation can impact markets as it breaks the
modity, the price risk of these market participants ("com- very core function of commodity futures as a risk man-
mercials") can be transferred to investors ("financials"), agement tool. To avoid it, market regulators such as the
who buy and sell futures contracts in anticipation of mak- Commodity Futures Trading Commission in the United
ing a profit, adding liquidity to the market. This buying and States use instruments such as position limits, which set
selling of futures contracts with the objective of making a maximum number of contracts that can be held for
a profit rather than reducing risks related to the physical non-hedging purposes.
exchange of the commodity can be referred to as "spec-
ulation".While opinions on the exact impact of speculation might
differ, it is usually regarded as indispensable to ensure
In order to determine whether speculation is indeed dis- the smooth functioning of futures markets. Allowing an
torting food prices, it is important to consider that com- adequate level of speculation for liquidity purposes with-
modity futures markets can play their function as a price out destabilizing markets is a delicate affair. By providing
risk management tool only if they reflect the underlying information on supply, demand and prices, commodity
value of the cash price, which is periodically guaranteed exchanges, market regulators and even initiatives such
by the fact that futures contracts can be physically deliv- as AMIS all have a role to play to promote fair and or-
ered. Although used for only a very limited share of the derly markets. Yet, even with fully transparent food mar-
total positions held in futures exchanges, this possibility kets, there might be instances when prices will be excep-
for a physical delivery allows market participants to take tionally volatile, and these require the urgent attention of
advantage of any price discrepancy between cash and policy makers in view of the detrimental impact that these
futures price and ensures price convergence when con- situations might have on food security.
tracts expire.
Is Speculation Driving Commodity Price
The literature usually identifies three ways in which spec-
Volatility?
ulation may destabilize markets: For one, speculative ac-
tivities such as "trend following" (a market strategy based Since the outbreak of the Ukraine war, agricultural fu-
on buying when the price of commodity futures goes up tures market prices have been highly volatile, with lev-
and selling when the prices go down) may cause futures els not seen since the food price spikes in 2007/08
prices to regularly overshoot or undershoot the level of and 2010/11. Some believe that market speculators
the underlying cash price. Although the literature is far and managed money funds are to blame, by dis-
from conclusive about the depth or frequency of this type torting market prices and thus hampering means by
of phenomenon, there is broad agreement that any ef-which producers, merchants and other hedgers can
fects would usually be short-lived.effectively manage price risks. This seminar examined
the role of speculation in markets and discussed the
In a second category, speculation is suspected to cause impact of speculation in previous periods of high food
futures prices to periodically diverge from fundamental prices, and the role it plays in current markets.
values in a more substantial way. In this context, activi- AMIS Webinar - Is Speculation Driving Commodity
ties of commodity index funds are viewed as a potential Price Volatility?
driver as they hold large long (i.e. buying) positions thatAMIS Market Monitor No. 104December 2022 3
World supply-demand outlook
FAO-AMISUSDAIGC
WHEAT2022 production still forecast to reach a record level, up 2021/222022/232021/22 2022/232021/222022/23
0.4 percent year-on-year, but lowered slightly this month on reducedest f;cast est f;cast est f;cast
Wheat
production prospects in Argentina due to prolonged dry conditions. 3 Nov 8 Dec 9 Nov 17 Nov
Utilization in 2022/23 headed for a marginal expansion from the778.2783.8 781.1 779.4 782.7781.6 791.9
2021/22 level with growth in food consumption offsetting a foreseen Prod. 641.3 645.4642.7 642.5644.7 644.7653.9
decline in feed use of wheat, mostly in China.1070.21077.51074.2 1070.11059.01059.81071.1
Trade in 2022/23 (July/June) forecast to slightly decline from the 802.9 805.1801.8 789.0779.2 795.6800.9
Supply
2021/22 level and virtually unchanged m/m with higher expected 773.2775.0 774.7 793.8 791.2780.6 785.5
shipments for Australia and the Russian Federation offsetting lower630.4 63