Price Formation in Commodities Markets: Financialisation and Beyond

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Author(s): 
Diego Valiante, Christian Egenhofer

The Final Report of the CEPS-ECMI Task Force on 'Price Formation in Commodities Spot and Derivatives Markets' reviews the interaction between physical and futures commodities markets and the price formation mechanisms in eleven different commodities markets - crude oil, natural gas, iron ore, aluminium, copper, wheat, corn, soybean oil, sugar, cocoa and coffee. After more than one year of data gathering and qualitative research, over and beyond the information collected through Task Force meetings, the Report sheds light on a broad set of policy concerns by looking at the long-term drivers of price formation in futures and physical commodities markets. 

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Commodities markets are at the core of the global economy and influence people’s daily decisions about essential needs. Acquiring greater access to and control over commodities motivate the actions of many governments in economies that are increasingly dependent on resources produced in emerging markets. In the aftermath to the financial crisis, the rise of commodities price volatility alarmed policy-makers (e.g. G-20) and raised questions about the functioning of commodities markets and their interaction with the financial system. In response to those concerns, in September 2011, the Centre for European Policy Studies and the European Capital Markets Institute formed a Task Force comprising experts representing 30 members and many more observers, including commodities firms, financial institutions, price-reporting agencies, independent experts, academics and policy-makers. The group, chaired by the independent commodities expert and former Director at Chicago Board of Trade, Ann Berg, met six times over an 18-month period with the support of two Rapporteurs, ECMI Head of Research and CEPS Research Fellow Diego Valiante and CEPS Senior Research Fellow Christian Egenhofer.