"This article from FarmDocDaily, a publication of the University of Illinois, shows statistical evidence which argues that index tracking commodity funds are not a significant price driver for commodities. The study was done by Scott Irwin of the University of Illinois and Dwight Sanders of Southern Illinois University.

"The study results are admittedly counter intuitive, but certainly bring into question the current conventional wisdom regarding the role of commodity funds in price discovery."

Eoin Treacy's view Thank you for this article which is similar in vein to another sent in by a subscriber last week. As the CFTC's investigation into the role of speculators in commodity prices draws to a close an increasing number of people are coming out in support of speculators. I agree with the above article that a differentiation has to be made between different kinds of speculators.

Traditionally speculators which have always been part of the market and add value through providing liquidity when prices fall and withdrawing it when prices are high. However, passive long only funds are not speculators in this sense. There role is more akin to an attempted corner because they are effectively withholding supply from the market. High frequency traders are not speculating that prices will rise or fall but are scalping points. This increases the chances of price slippage rather than supplying liquidity when it is most needed.

The overlay of wheat prices overlaid with Index Trader open interest, used in the above article only displays data until September 2009. I thought it might be instructive to update it. There appears to be a lag between when long positions held by Index Traders surge and when prices respond. More importantly, when index trader long positions begin to be liquidated they have a deleterious effect on prices. The total open interest this morning on CBOT wheat was 456,455 contracts. At 241,115 contracts index traders own 52.8% of the available contracts on wheat.

Similar charts for corn and soybeans display a much more marked influence of index traders on price action, both up and down. Index traders hold 66.2% and 51% of corn and soybean open interest respectively according to the CBOT data. It is nonsensical to assume that the actions of such funds have no effect on prices, particularly at price extremes.