How do speculators in agricultural commodity markets impact production decisions and commodity prices? A theoretical analysis

We analyze the impact of speculative trading in agricultural commodity markets on major economic quantities. We consider a theoretical model with production shocks, in which a farmer interacts with a retailer in both the spot and the forward market. The contribution of the paper is twofold. First, we show that the current forward price drives agricultural production decisions. Since the forward trading of speculators influences the forward price, they indirectly affect production decisions. Second, we identify crucial variables determining whether speculative trading is beneficial or dangerous, such as the correlation between the speculators' portfolio and the commodity prices, the risk premium of the forward, and the producer's gains.