There have been two stories about the increase in commodity prices over the past decade. One is that the increases in prices have represented fundamentals, and strong world demand for commodities in particular. The other is that they represent the effects of financial innovations. The story is that the rise of mutual funds and ETFs that track commodities prices (or futures) has allowed investors easy access to these assets which has lead investors to speculator or diversify by buying commodities (or futures). It looks like the “fundamentals” view is losing steam as the prices of oil, copper and some other commodities seem to be independent of the recent bad economic news. Most commodity prices are above where they were a year ago. To see deeper analyses, there was a recent conference at the CFTC on the topic of the financialization of commodities that you can watch here (on Youtube!) that includes papers by Wei Xiong, Ken Singleton and others.
Two questions remain in my mind. First, I can understand how financialization can affect prices for storable commodities. (It requires that price movements affect expectations “enough.”) But I have a harder time seeing how this works for agricultural prices/futures like corn where markets largely clear each year. Second, and again mostly for storable commodities, are the policies and deep pockets of the Chinese government playing a significant role here? That is, to what extent is financialization only a facilitator and is the driving force the Chinese government purchases of commodities and their futures? Not sure about the answers.