With grain prices down more than 50 percent from highs set earlier this year, it is interesting to look back at what people said were the drivers of higher prices last winter.
The experience of the past two months makes one wonder how officials of the U.S. Commodity Futures Trading Commission were able to say with a straight face that speculators had little effect on surging grain prices.
In late April, CFTC commissioner Bart Chilton said: “Our economists have looked at all the data available … and there doesn’t appear that any inordinate speculation has caused prices to move.”
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Instead it was weather damaged harvests in Australia and Europe, smaller grain inventories and the declining value of the U.S. dollar, Chilton said.
Indeed those were the fundamental factors that gave strong support to grain prices. But we would not have seen such a spectacular rise if not for the billions of dollars from various investment funds poured into commodities.
The amount of money flowing into commodities increased as equity markets stagnated and fell last year. To protect returns, funds shifted from equities to commodities, the only market that was still rising, at least until July.
That speculative money has now drained out of commodities, causing prices to plummet even though the fundamentals of supply and demand in grain have changed little, with only a slight rebuilding of stocks expected.
There were moves this summer and fall in the U.S. Congress to limit speculation, particularly in the oil market, and overhaul CFTC’s policies, but they did not get enough support to pass.
After the credit crisis and market meltdown of recent weeks, the voices against increased regulation have less persuasion.
Also, the Democrats, the party more friendly to regulation, have increased their lead in both houses of Congress.
Even Canadian Conservative prime minister Stephen Harper has said there is a need to create a better infrastructure for the establishment of markets internationally.
It is easy to paint speculators as greedy capitalists intent on profits without regard to real people. However, speculators can play a valuable role in markets, acting as the grease on the wheels.
It will be the delicate task of politicians and regulators to shave the excesses from the market and improve the flow of information without constraining market function.
