The new era of commodity funds dominating agriculture markets may be short-lived.
A growing number of critics are demanding that regulators take action to curb the funds’ immense influence on futures prices.
“My concern is that it’s almost a self-perpetuating bull market,” said Dan Basse, president of a Chicago research and analysis firm that specializes in agricultural markets.
“It’s causing considerable harm and financial stress on the natural hedgers – the elevators, the farmers and the merchandisers …. We have something more akin to Vegas here, without the pretty girls at our shoulders.”
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The U.S. Commodity Futures Trading Commission is obviously listening to market analysts like Basse because the regulator will hold a public forum April 22 in Washington, D.C., to study the effect that commodity funds are having on agriculture markets.
“These historic market conditions, particularly in wheat and cotton, require the CFTC to hear firsthand from participants, to ensure that the exchanges are functioning properly to discover prices and manage risk,” acting CFTC chair Walt Lukken said in a news release.
Basse will attend the April 22 meeting, which he describes as an unusual step by the CFTC.
“We usually don’t have these kind of meetings; they’re very rare,” he said.
“This is the first attempt by the government to get their arms around this.”
Many market participants argue speculators have always influenced the markets, but Basse said the difference now is the scale of influence.
“Collectively these index funds are now putting about $1 to $2 billion per week into our space (Chicago and Kansas City markets).”
David Boyes, a market analyst with the Canadian Wheat Board, said the increase in open interest is an another example of how funds are dominating the market.
Adding up open interest in Chicago Board of Trade soft winter wheat contracts from May 2008 to March 2009 produces 52 million tonnes of wheat production, but the actual crop is only 10 million tonnes.
Boyes said this shows the markets are much more than a risk management tool.
“They’re more like a casino now.”
Basse is concerned that there are no limits on the amount of money funds can dump into commodity futures.
“If an individual or a corporation has to work within speculative limits – 30,000 contracts in corn and beans – then why shouldn’t these index funds do the same?” Basse said.
“Why are they given an exclusion to have as many contracts as they need?”
The Washington meeting may signal that the political winds are blowing against out-of-control derivative trading.
And if Bart Stupak gets his way, the crackdown may begin with energy markets.
The Democratic congressman from Michigan has introduced a bill to curb market distortion by energy speculators that is garnering substantial attention in Washington.
“Speculation and market manipulation in the energy futures can create a snowball effect and consumers ultimately pay the price,” Stupak said.
It’s difficult to nail down how much of a premium speculators add to the price of oil, but in a Los Angeles Times opinion piece, Paul Roberts, who wrote The End of Oil, estimated it could be as large as $45 US per barrel.
He said if that estimate was correct, it would mean speculation adds $1 per gallon to the price at the pump.
Basse said it’s mostly guesswork to determine how much commodity funds are adding to the price of wheat, soybeans and canola, but the influence cannot be ignored.
He gave the example of the California teacher’s pension fund, the largest pension fund in the U.S.
Last year it put $450 million into a commodity fund and did so well that it decided to invest $7 billion into the same fund in 2008.
“Our little commodity markets are not set up like Wall Street,” Basse said.
“We just can’t handle that kind of investment flow.”
