Financialization of food - The determinants of the time-varying relation between agricultural prices and stock market dynamics

This paper studies the correlation of agricultural prices with stock market dynamics. We discuss the possible role of financial, macroeconomic and monetary factors in driving this time-varying relation, with the aim of understanding what has caused positive correlation between agricultural commodities and stocks in recent years. While previous works on commodity-equity correlation have focused on broad commodity indices, we study 16 main agricultural prices, in order to be able to assess patterns that are specific to agricultural commodities (but also differences across agricultural markets). We show that an explanation based on a combination of financialization and financial crisis is consistent with the empirical evidence, while global demand factors and monetary forces don't appear to play a significant role. In particular, we find that the correlation between agricultural price changes and stock market returns tends to get higher as the so-called TED spread (our proxy for financial turmoil) increases. Moreover, the impact of financial turmoil on the correlation gets stronger as the share of financial investors in agricultural derivatives markets (our proxy for financialization) rises. Our findings suggest that the influence of financial shocks on agricultural prices is likely to decrease as global financial tensions settle down but also that, as long as agricultural derivatives markets are populated mainly by financial investors, it can be expected to rise again when it is less needed, i.e. in the presence of new financial turmoil.