The impact of financialization on commodity prices

Professor Dr. Heiner Flassbeck

Director, Flassbeck-Economics (flassbeck-economics.de)

and Professor of Economics at Hamburg University

Brussels, March 7 2013

2

Commodity prices have recovered amidst high volatility and a global slowdown

Commodity prices, selected categories, January 2002 – July 2012 (Index numbers, 2000 = 100)

By comparing the evolution of stocks and commodity prices, the financialization of commodity markets reveals

a dramatic change

Daily movements in oil prices and Brazilian Real/Japanese Yen exchange rate are highly

correlated November 2011 – November 2012

Daily movements in S&P GSCI and Brazilian Real/Japanese Yen exchange rate show only one

major deviation November 2011- November 2012

The number of annual trades by commodity has increased in tandem with

increased correlation among markets 1996 -2011

10.000

100.000

1.000.000

10.000.000

100.000.000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Oil (WTI)

Corn

Soybean

Sugar

Wheat

Live Cattle

Note: The y-axis is a logarithmic scale of base 10.

Monthly median of short-term rolling correlations bewteen the returns on the WTI and the S&P 500 Futures, by frequency shows higher correlation

despite one deviation

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

20

07

m1

20

07

m3

20

07

m5

20

07

m7

20

07

m9

20

07

m1

1

20

08

m1

20

08

m3

20

08

m5

20

08

m7

20

08

m9

20

08

m1

1

20

09

m1

20

09

m3

20

09

m5

20

09

m7

20

09

m9

20

09

m1

1

20

10

m1

20

10

m3

20

10

m5

20

10

m7

20

10

m9

20

10

m1

1

20

11

m1

20

11

m3

20

11

m5

20

11

m7

20

11

m9

20

11

m1

1

1-second

10-second

5-minute

1-hour

Other agricultural products show the

same break as oil in HFT

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

200

7m1

200

7m4

200

7m7

200

7m10

200

8m1

200

8m4

200

8m7

200

8m10

200

9m1

200

9m4

200

9m7

200

9m10

201

0m1

201

0m4

201

0m7

201

0m10

201

1m1

201

1m4

201

1m7

201

1m10

Corn LiveCattle Sugar Soybean Wheat

Daily movements of the Brazilian Real spot and 12 month future prices: no future in the futures

and no price discovery

Daily movements in the WTI spot and 12 month future prices: the future is more uncertain than

ever before

Information generation and use is inefficient in financial markets: Herding and price distortion but no additional liquidity from financial markets