HANOVER, Germany — International financial companies have made themselves comfortable in the houses of commodity trading, leaving little room for those who have to live there.
The activity of big international investment firms in commodity markets has hurt the transparency of those markets, said Carl Albrecht Bartmer, head of the farm organization that organizes Agritechnica in Hanover.
“Price discovery systems are not serving producers and processors as well as they should be,” he told a meeting held during Agritechnica last week.
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Lars Kechenbuck of KS Agrat in Mannheim, Germany, said futures markets were established to serve producers and users of raw materials, but they now provide profits for financial houses and speculative investors.
“It can be good to have them there; they provide a lot of liquidity. However, they also make (price discovery) in the shorter (term) quite difficult,” he said.
“Ten years ago, 80 percent of futures (trades) were done for the agriculture and food market. Twenty was for the finance industry.… Now it is the other way around and the majority of grain is sold outside the (exchanges). In 1998, we had 500 wheat contracts trading on the (Chicago Mercantile Exchange), now we have 30,000.”
However, Kechenbuck believes these speculators have little effect on crop prices over the longer term of a year or two.
He cited the Goldman Sachs forecast last May that wheat prices were set to fall. It recommended that its clients sell positions.
“Wheat fell, for a little while. But supply wasn’t there and it went back up,” he said.
“In June, it got very expensive for those who took the advice and were short in that market.”
Perez Dominguez of the Organization for Economic Co-operation and Development in Paris agreed, saying speculators don’t set price trends, but they do create extremes that can hurt the agricultural and food industry.
Kechenbuck said if speculators were truly the cause of large upward price moves, like those in 2008 and 2011, then other crops that don’t trade on exchanges wouldn’t be dragged along.
“Hazelnuts, you laugh, but it is a big crop. There is no hazelnut futures contract. It moves in step with wheat and soybeans.… There are many more examples,” he said.
“We need some market reform, to make them more effective around the globe and provide more competition between (trading facilities).”
Farmers and food processors often sit on the sidelines of their own markets because they can’t rely on them for short or medium term risk management and liquidity, said Kechenbuck.
Bartmer said more futures markets might be needed to create competition for American commodities contracts.
“We need it to manage our risk, but it has become a tool for others to manage risks they have in (equities and bonds), so some balance is needed for agriculture,” he said.
