The role of speculators in recent price volatility in wheat futures markets

Investors in the agricultural futures markets have been blamed for the recent price spikes. Consequently, policies have been proposed to curb speculation in these markets. This study evaluates "excessive" speculation or the lack thereof in the US wheat markets using hedging ratios, speculative ratios, Working's speculative 'T' index and Granger causality tests to examine the investment activities of commodity index traders. The study results show that there is no "excess" speculation in the US wheat markets over the 2006-2011 periods. Indeed, the speculation levels found in this study are not significantly different from historical results reported in other studies and accepted as normal and necessary for the efficient functioning of the markets. Thus the current speculative activities in the US wheat markets may reflect necessary liquidity needs for smooth functioning and stability of the markets. Therefore, the recent proposed policies to curb speculation in the commodities markets may be counterproductive.