What We’ve Learned About Speculation


Speculation has been a point of contention throughout the history of commodity futures markets.  In that sense, the current controversy is nothing new.  The long battle over speculation that played out over the first century of futures trading in the U.S., stretching roughly 1870 to 1970, was very strident and threatened the industry with extinction.  Futures markets were viewed by many as mere gambling dens filled with manipulative speculators.  There is an important and largely untold story about the role of three relatively obscure agricultural economists in changing this perception.

These three agricultural economists—Holbrook Working, Roger Gray, and Tom Hieronymus—stepped into the long-running public fray over speculation and futures markets and brick-by-brick built the foundation for understanding the economic functions of these markets. Over the course of nearly six decades they showed the world how futures markets worked, guided policy debates, and led the public to a more informed position about the value of these markets.  In doing so, they played a key role in “saving” futures markets and helped pave the way for the incredible growth and success of these markets over that last 30 years.  Try imagining how easy it would have been to get financial futures markets off the ground if futures trading in corn, soybeans, and wheat had been banned, as trading in onion futures was in 1958.

There are some key lessons from past speculation controversies and how leaders like Working, Gray, and Hieronymus responded that can applied to the present one, which is largely traced to the price spikes of 2007-08.  Those lessons are:


There is a definite historical pattern to speculation controversies. When prices are exceptionally low, producers often express concern that speculators pushed prices down, and when prices are exceptionally high consumers express just the opposite concern.  So, no one should be surprised when these controversies erupt during the extremes of price cycles.

Facts do ultimately matter in the debate.  The economic theories and empirical evidence generated by Working, Gray, and Hieronymus and others did eventually turn the tide.

Public education on the performance of futures markets is crucial in order to combat the natural tendency of speculation controversies to erupt at market peaks and troughs.  Past programs emphasized the performance of futures markets in terms of their basic functions of price discovery and risk shifting.

The futures industry is best served by adopting a proactive stance and investing in programs and initiatives that can be called upon when the inevitable controversies about speculation erupt.

Editor’s Note:  Watch Scott Irwin’s full video presentation about the role of speculation in futures markets. Leave your thoughts on speculation in the comments section below.


Scott H. Irwin is the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois.

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