A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Focus on issues

Testing for bubbles in agriculture commodity markets

Francisco J. Areal, Kelvin Balcombe, George Rapsomanikis,
University of Reading (United Kingdom),
United Nations Food and Agriculture Organization (FAO)

There is only one step between speculative bubbles and wide-ranging international crises. Speculative practices in futures markets, the growing disconnect of economic fundamentals and structural price hyper-volatility have been reported in agricultural markets since 2008. Such situation enables the development of agricultural bubbles, and jeopardizes not only agriculture but also food security.

In a recently published paper, three economists from the University of Reading and the FAO reexamine the existence of these agricultural bubbles and try to explain their scope and origin. We are publishing below excerpts1 from this particularly enlightening analysis, as it covers not only the intrinsic failures of agricultural markets, but also the inability to act as demiurges, and to predict a new—and fatal––future price reversal with the devastating consequences it can generate.

The growing financialization and its destructive distorting practices are also highlighting the frailty of governance indicators and tools in our societies. Consequently, it is crucial to have credible means to assess the impact of speculation on market stability, and develop effective regulation measures to prevent the formation of any “agricultural bubble”, whose results would be as devastating as those created by the financial crisis.

momagri Editorial Board

Since 2007 the world experiences dramatic swings in internationally traded food commodity prices. Within the period of five years, food markets, and especially grains, have experienced a number of price surges. In June 2008, December 2010 and, more recently in the autumn of 2012, food prices increased sharply and subsequently declined for their peak, only to remain at relatively high levels, as compared with the 2005-2006 average.

Food prices are inherently volatile and addressing the consequences of such volatility is one of the most challenging issues facing policy makers, especially in developing countries.

In spite of what we have learned about commodity price behavior during the last 50 years, the 2008 commodities price episode revealed a gap in our knowledge on the drivers that determine commodity, and especially food prices. Since 2005 real food prices exhibit an upward trend, and in mid-2008 they increased in a violent surge by more than 60 percent, as compared to the 2007 levels.

Persistent food price volatility can have significant effects, especially on developing countries. In the short run, for net food importing developing countries price shocks can negatively affect the balance of payments, foreign currency reserves and worsen the ability to implement social safety programs. In the longer run, the diversification of activities to minimize exposure to price risk, inhibits efficiency gains from specialization in production and hinders the development of the agricultural sector (Kurosaki and Fafchamps, 2002). Income risks may also blunt the adoption of technologies necessary for agricultural production efficiency, as producers may decide to apply less productive technologies in exchange for greater stability (Larson and Plessman, 2002).

The violent spells of food price volatility in world food prices strengthened the attention of policy makers to agriculture and fuelled the debate about the future reliability of world markets as a source for food. They have also generated a wide array of opinions concerning their nature and drivers, and have led to an equally wide array of policy proposals among policy makers. At the heart of the debate lies the question of whether such price surges are generated by the market fundamentals – the forces of food demand and supply, or by other drivers such as trend-following behavior in both physical and financial markets.

The debate on whether the drivers of food price volatility go beyond market fundamentals is reflected on the wide range of the policies proposed. Investing to accelerate agricultural productivity growth to meet increasingly stronger demand for food and ease the pressure on prices (FAO, 2011) is a proposal founded on the understanding that supply, demand and stocks are the relevant drivers of volatility. Proposals such as the establishment of ‘virtual funds’ to intervene in the food futures markets by executing a number of progressive short sales are based on the surmise that changes in supply and demand fundamentals cannot fully explain volatility and speculation, especially in the futures markets, plays an important role in determining price movements (von Braun and Torero, 2009). There is no consensus between economists on the nature and drivers of food price volatility and, unsurprisingly, between policy makers on the policies to mitigate it.

In sum, the debate centers on whether agricultural and food prices experienced a ‘rational bubble’, which as in the finance literature reconciles trend-following behavior with rational expectations on future earnings. Stiglitz (1990) presents a straightforward definition of a bubble: if the reason that the price is high today is only because investors believe that the selling price will be high tomorrow – when fundamental factors do not seem to justify such a price – then a bubble exists (Stiglitz, 1990, p. 13).

A number of tests and dating algorithms have been developed and used to identify rapid increases in prices followed by a collapse, also known as explosive bubbles (Phillips, Wu and Yu, 2011; Phillips, Shi and Yu, 2012; Gilbert, 2009; Gutierrez, forthcoming). Previous analysis on agriculture commodities by Gilbert (2009) and Gutierrez (forthcoming) applied the tests developed by Phillips, Wu and Yu (2011) and focused on four agricultural commodities. In contrast, We apply the more recent generalized sup augmented Dickey-Fuller (GSADF) test for explosive bubbles (Phillips, Shi and Yu, 2012) to monthly time-series for food, beverages, agricultural raw material, cereals, dairy, meat, oils and sugar indices and a total of 28 agricultural commodities between 1980-2012. We found price bubbles occurred for some commodities within food markets.

Beyond market fundamentals, dramatic increases in commodity futures investments by financial institutions coincided with the 2008 food price surge, giving rise to questions on whether the forces of demand and supply alone are sufficient to explain such price developments. While most of the speculative capital is invested in non-agricultural, especially energy futures, investments in agricultural futures, reflected by market open interest, marked a significant increase from 2007 to 2008, a period with rapid increases in food prices, especially for maize, soybeans and wheat. Once again in 2010, although increases in the global market price of wheat were triggered by market fundamentals – reduced supply from Russia and the black Sea region due to drought and export restrictions, open market interest in commodity exchanges increased significantly.

Robles et al. (2009) stress that, along with market fundamentals, rising expectations, speculation, hoarding, and hysteria played a significant role in the increasing level and volatility of food prices, attributing the 2008 food price episode partly to ‘speculative bubbles’. UNCTAD (2011), in the similar line, lay emphasis on the ‘financialization’ of commodities, a term which implies that the activities of ‘non-commercial’ financial participants tend to drive commodity prices away from levels justified by market fundamentals. Non-commercial investors do not engage in physical markets, as commercial investors do.

The concern is whether these non-commercial investors and their trend following behavior feed price bubbles, thus detaching both prices from their market fundamental values, and inevitably, the test for speculative bubbles becomes an investigation of the impact of non-commercial traders on futures prices. Such an impact would be also reflected in the physical markets, as the information flow runs from futures to spot markets (Hernadez and Torero, 2010), thus distorting price signals.


Recently there has been a rise in agriculture products price volatility which has had a wide range of implications. A number of tests and dating algorithms have been developed and used to identify rapid increases in prices followed by a collapse, also known as explosive bubbles (Phillips, Wu and Yu, 2011; Phillips, Shi and Yu, 2012; Gilbert, 2009). We apply the GSADF test for explosive bubbles to monthly time-series for food, beverages, agricultural raw material, cereals, dairy, meat, oils and sugar indices and a total of 28 agricultural commodities between 1980-2012.

These tests identified that price bubbles occurred for some commodities within food markets.

Such rapid changes in agricultural commodity prices may have important immediate effects on the income and welfare of producers, agents along the food change and consumers as well as the trading positions of countries (Balcombe, 2009). Two important questions arise, a) are the price bubbles found in food commodities of speculative origin?; b) are some commodities more prone to suffer price bubbles than others.

Looking forward, on question a) there is need for further analysis of trading positions of commercial and non-commercial participants in the futures markets. A price bubble was identified in the wheat market, where the share of open interest was held by non-commercial traders. However, maize, as well as other commodities are traded in futures markets and further research based on disaggregated data on the composition of both commercial and non-commercial positions and their behaviour during price surges is necessary to unravel their potential role in determining price movements. Regarding b) specifically we conclude that a number of agriculture commodities are prone to suffer price bubbles and therefore efforts in both identifying and tackling price bubbles should focus on those commodities that have shown bubble behaviour in the past. For example, the global rice market is quite thin, with major producers and exporters managing domestic markets through export controls combined with buffer stocks. Our results show that export restrictions can exacerbate or even cause severe disruption and a collapse in confidence on international markets. Increased international trade policy coordination in times of crisis can also reduce volatility and ensure that global markets can be still a reliable source of food. Enhanced trade policy harmonization through more predictable and less discretionary policies would convey clearer information and render panic and hoarding less likely, resulting in less uncertainty.

Therefore, high frequency data of agricultural prices, particularly data of commodities that have shown bubble behaviour in the past, should be used to detect emerging trends of price spikes. Cereals, such as wheat and rice, staple crops, and vegetable oils such as soybean and rapeseed oil have shown bubble behaviour in the recent years and close attention should be paid to their price evolution. On the other hand, fruits meat, seafood and to a large extent beverages have not shown evidence of bubble behaviour and therefore the relative risk of bubble behaviour may be low.

1 The complete paper is available from http://mpra.ub.uni-muenchen.de/48015/
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Paris, 16 June 2019