Financialization of Commodity Markets: Non linear Consequences from - PowerPoint PPT Presentation

Nombre de la presentación en cuerpo 17 Financialization of Commodity Markets: Non linear Consequences from Heterogeneous Agent Behavior Non-linear Consequences from Heterogeneous Agent Behavior Diego Bastourre Diego Bastourre Jorge Carrera Jorge Carrera Javier Ibarlucia Javier Ibarlucia Central Bank of Argentina Session I – Agricultural Profitability in the 21st Century Farming, Finance and the Global Marketplace - Regional Economic Symposium Kansas, June 8, 2010 The views expressed here are those of the authors and do not necessarily reflect the official position of the Central 1 Bank of Argentina.

Outline Nombre de la presentación en cuerpo 17 1. Motivation 2. Commodity Prices: Recent developments and long run trends 2 C dit P i R t d l t d l t d 3. Long-run drivers of commodity prices 4. Financialization of commodity markets 5. A heterogeneous agent model 6. Econometric results 7. Open questions: Structural changes 8. Conclusions 2

1) Motivation Nombre de la presentación en cuerpo 17 A Agricultural exports represent a very significant share in total exports for several Latin i l l i ifi h i l f l L i American countries. Agricultural exports (as % of total exports) (as % of total exports) (2007) 3 Source: FAO 0-5 5-10 10-30 30-50 50-70 70-100 No Data

1) Motivation Nombre de la presentación en cuerpo 17 … and a very significant portion of the GDP. d i ifi i f h GDP Exports of agricultural, fishery and forest products Paraguay P 19.1 19 1 Uruguay 12.1 Chile 11.7 Argentina g 11.0 Ecuador 9.4 Guatemala 8.4 Bolivia 6.0 Latin America 4.4 Peru 3.8 Brazil 3.8 C l Colombia bi 2.9 2 9 Dominican Republic 2.0 Mexico 1.5 % of total GDP Venezuela 0.1 0 5 10 15 20 25 Source: FAO 4

2) Commodity Prices: recent Nombre de la presentación en cuerpo 17 developments and long run trends Key commodity price indexes, 2002M1-2009M12 (2002=100) 600 350 • Up to the intensification of the Up to the intensification of the 300 financial crisis, nominal 500 commodity prices grew at a strong peace during the last 6 250 years 400 200 300 150 200 100 • Strong reversal: Record values of June-July were cut at least 100 50 50 by a 40% at the end of 2008. 0 0 2M1 2M6 M11 3M4 3M9 4M2 4M7 M12 5M5 M10 6M3 6M8 7M1 7M6 M11 8M4 8M9 9M2 9M7 M12 2002M 2004M 2005M 2007M 2009M 2002 2002 2003 2003 2004 2004 2005 2006 2006 2007 2007 2008 2008 2009 2009 5 Crude Oil (LHS) Copper (LHS) Aluminium (RHS) Soybeans (RHS) Corn (RHS)

2) Commodity Prices: recent Nombre de la presentación en cuerpo 17 developments and long run trends Food and metal price IMF indexes (nominal and real, 1960=100) 200 700 Contrary to the belief that prices reached 180 historical high levels, long-run perspective shows 600 160 decaying prices if world inflation is incorporated 140 500 120 400 100 300 80 60 200 40 100 100 20 0 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Food Food Metals Metals Food (real) Food (real) Metals (real) Metals (real) 6

2) Commodity Prices: recent Nombre de la presentación en cuerpo 17 developments and long run trends Oil (nominal and real, 1960=100) The history of oil is different… y 4000 500 450 3500 400 3000 3000 350 2500 300 2000 250 200 1500 150 1000 100 500 500 50 0 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Oil Oil Oil (real) Oil (real) 7

0.00 0 00 0.02 0 04 0.04 0.06 0 08 0.08 0.10 0 12 0.12 1960-01 1961-01 1962-01 1963-01 1964-01 1965-01 1966-01 1967-01 1968-01 1969-01 1970-01 1971-01 1972-01 1973-01 1974-01 Real Price Volatility (1960-2009) 1975-01 1976-01 1977-01 1978-01 1979-01 1980-01 1981-01 1982-01 1983-01 Food 1984-01 1985-01 1986-01 Nombre de la presentación en cuerpo 17 developments and long run trends Metals 1987-01 1988-01 2) Commodity Prices: recent 1989-01 1990-01 1991-01 1992-01 1993-01 1994-01 1995-01 1996-01 1997-01 1998-01 1999-01 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 8 2007-01 2008-01 2009-01

0.00 0.05 0.10 0 15 0.15 0.20 0.25 0.30 0.35 0 40 0.40 1961-01 1962-01 1963-01 1964-01 1965-01 1966-01 1967-01 1968-01 1969-01 1970-01 1971-01 1972-01 1973-01 1974-01 1975-01 Real Price Volatility (1960-2009) 1976-01 1977-01 1978-01 1979-01 1980-01 1981-01 1982-01 1983-01 1984-01 1985-01 1986-01 Oil Nombre de la presentación en cuerpo 17 1987-01 developments and long run trends 1988-01 2) Commodity Prices: recent 1989-01 1990-01 1991-01 1992-01 1993-01 1994-01 1995-01 1996-01 1997-01 1998-01 1999-01 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 9 2006-01 2007-01 2008-01 2009-01

3) Long-run drivers of Nombre de la presentación en cuerpo 17 commodity prices • Prebisch (1950) and Singer (1950) claimed that, contrary to the classical view, commodity prices would fall relatively to those of the industry goods. The influence of this hypothesis on empirical research has been significant: univariate models to study long-run trends. • A different approach for studying commodity prices starts asking which macroeconomic factors could act as determinants of them. • US Multilateral Real Exchange Rate: - Pioneering single-good model of Ridler and Yandle (1972) demonstrates that a real exchange rate appreciation induces a fall in dollar commodity prices. - Commodity Price elasticity to Dollar Multilateral RER should lie between 0 and -1 (Dornbusch, 1985). 10

3) Long-run drivers of Nombre de la presentación en cuerpo 17 commodity prices • World demand: i) Food: - Engel’s law is an accurate framework to predict the impact of income on food - Engel s law is an accurate framework to predict the impact of income on food commodities (Houthakker, 1987; Hamilton, 2001). - Income-elasticity decreases as long as the transit to development is completed. ii) Metals: - Inverse U-shape relationship between its use and income level. Consumption increases up to 15,000 or 20,000 per capita GDP in PPP dollars (IMF, 2006). • Interest rate: Interest rate increases reduce commodity prices through 3 channels (Frankel, 2006): i) by increasing the incentive for extraction (or production) today rather than tomorrow; ii) by decreasing the desire of firms to carry inventories; and iii) by encouraging speculators to shift out of commodity contracts into treasury bills encouraging speculators to shift out of commodity contracts into treasury bills. The 3 transmission channels work to reduce spot prices . 11

4) Financialization of Nombre de la presentación en cuerpo 17 commodities • Intense debate regarding financialization in commodity markets. Some authors have blamed financial markets as the only source of violent price ups y p p and downs. Others have neglected any influence on prices. • By “ financialization of commodities ” we usually refer to two linked facts: i) B “ fi i li ti f diti ” ll f t t li k d f t i) recent impressive growth of derivative market activity ; ii) increasing participation of financial investors in commodity future markets participation of financial investors in commodity future markets . • Why to believe there is a connection between prices and speculative activity? Casual empirical evidence: Commodity prices soared jointly with a rapid increase in turnover on commodity-linked instruments since 2002. 12

4) Financialization of Nombre de la presentación en cuerpo 17 commodities Derivative commodity contracts and commodity prices, 2002Q1 to 2008Q2 30 500 I th li ht f thi In the light of this evidence it id it 450 results quite natural to associate 25 400 this significant increase in financial commodity-market y 350 deepening with soaring prices 20 300 250 15 15 200 200 150 10 100 50 5 0 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 Number of Contracts in millions (lhs) IMF Non Fuel Commodities Index (rhs) 13 IMF Energy Index (rhs)

4) Financialization of Nombre de la presentación en cuerpo 17 commodities • Caveat: if financialization has played a fundamental role in boosting prices, we would expect C t if fi i li ti h l d f d t l l i b ti i ld t lower growth rates for those commodities that lack derivative markets. But… Price changes in selected commodity markets from 2001 to 2008 1200 Non-exchange traded commodities Exchange traded commodities 1000 800 600 600 400 200 0 Cadmium Rhodium Ferrochrome Rice Iron ore Steel Tin WTI Nickel Silver Zinc Molybdenum Cobalt Tungsten Manganese Ruthenium Copper Lead Natural Gas Gold 14 Aluminium Source: Deustche Bank (2008)