Financialization of Commodity Markets

Task

We would like you to begin by reading the following research papers:

 

  1. Bhardwaj, Geetesh, Gary Gorton and Geert Rouwenhorst (2015), “Facts and Fantasies about Commodity Futures Ten Years Later”, NBER Working Papers 21243, National Bureau of Economic Research, Inc. Available at: http://www.nber.org/papers/w21243.pdf
  2. Cheng, In-Haw and Wei Xiong (2014), “Financialization of Commodity Markets”, Annual Review of Financial Economics 1(6), 419-44, Available at:https://www.annualreviews.org/doi/10.1146/annurev-financial-110613-034432(earlier version, acceptable for this activity as well is here: http://www.nber.org/papers/w19642 )

In addition, we would also like you to read the following Financial Times articles:

 

  1. “Bunge says China lenders dostorting soybean trade”, by Gregory Meyer, February 12, 2015
  2. “Commodities explained: China’s new normal”, by Henry Sanderson, February 23, 2015
  3. “Investment: Revaluing commodities”, by Gregory Meyer and John Authers, June 3, 2015
  4. “Financialisation compounds commodity rout” by Satyajit Das, December 29, 2015
  5. “Speculators march into China commodities” by Henry Sanderson, April 27, 2016
  6. “A once timeless skill in commodities investing is under threat” by Gregory Meyer, July 6, 2018

 

There has been a debate in academia and the financial industry about the topic of commodity financialisation. Commentators focus on asking if commodity financialisation has significantly influenced commodity markets and the process of commodity price determination.

 

Now complete the following two tasks:

  1. Summarise the views presented in the two above research articles and link them to the views that financial industry holds about the effects of commodity financialisation for investment opportunities.
  2. In the light of what you have learned in this course so far (especially of the Theory of Normal Backwardation and Theory of Storage), discuss how, in your opinion, commodity financialisation has affected the relation between spot and futures prices for commodities?

 

In preparing your answers to the above questions (write around 300 words for each question), you may find it useful to reflect on the queries below in order to help help direct your thoughts. Please note – you are not required to answer these queries specifically in the written answers to the above two questions.

  • What does the term commodity financialisation represent?
  • What were the reasons for commodity financialisation?
  • Who were the main market participants in commodity futures markets before commodity financialisation and after that?