WASHINGTON, D.C. – Most hedge fund managers have little time and even less love for government regulations and oversight.
But Michael Masters isn’t your typical hedge fund manager.
Masters, founder and managing member of Masters Capital Management in the Virgin Islands, is adamant that the U.S. Commodity Futures Trading Commission (CFTC) needs to crack down on speculators who are inflating prices of agricultural commodities.
In fact, Masters said during a presentation at the North American Agricultural Journalists annual meeting in Washington that speculators now control the marketplace for agricultural commodities.
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“As a percentage, we’ve actually seen a very significant change in the open interest,” he said.
“In the ’90s, hedgers used to be about 70 percent of the market … and speculators were about 30 percent. This sort of ratio existed for many, many years.”
The ratio has reversed since the U.S. government deregulated commodity markets in 2000. Masters said speculators now hold 70 percent of open interest and hedgers have 30 percent.
“The speculators are now the controlling interest in these markets.”
A deadline is looming to implement new rules for derivative trading in the United States, and farm groups, professional lobbyists and hedge fund managers have arrived in Washington to make a case for more or less regulation of agricultural futures markets.
The Commodity Futures Trading Commission (CFTC) is required to write new regulations for derivatives trading in America by July as part of its mandate to implement the Dodd- Frank financial reform law, which was a legislative response to the financial crisis of 2008.
The House of Representatives ag sub-committee held its hearing on the issue April 13 and heard comments from Michael Greenberger, a University of Maryland law school professor.
Like Masters, Greenberger believes the CFTC should restrict the influence of speculative money on corn, soybean and other ag commodity prices.
“(Position limits are) designed to ban excessive speculation from the derivatives market, i.e., ban that speculation which exceeds the need for liquidity by commercial hedgers in the commodity markets,” said Greenberger, who previously worked as director of trading and markets at the CFTC.
Masters believes the CFTC should limit speculators to 30 percent of the open interest in ag futures markets.
He said volatility has increased since speculators became the dominant players in ag commodity markets, and there is a disconnect from market fundamentals.
Speculators aren’t buying corn, wheat and cattle futures based on supply and demand figures but as a way to round out a portfolio, he said.
“They are buying them based on the idea that it is an asset class in their portfolio… which means people are paying prices that have little to do with supply and demand and a lot to do with institutional investment.”
Terrence Duffy, executive chair of the Chicago Mercantile Exchange, told a U.S. Senate hearing in March that “there’s been absolutely no evidence that (speculators) have anything to do with the effect of price.”
Masters scoffed at the comment, noting there are 30 economic studies that demonstrate the direct connection between more speculative money in commodity markets and increasing prices.
“If you go to www.bettermarkets.com … you can access all of them,” he said, referring to an organization he founded that is attempting to curb the financial damage caused by unregulated commodity speculation.
“There is no question that the significant entrance of hundreds of billions of dollars of capital … it’s going to have a significant (impact) on pricing, the volatility and the structure of those markets.”
Masters said speculation in wheat futures was 12 percent of the market in 1996 but now represents 67 percent.
He said the ratio of 70 percent hedgers and 30 percent speculators in ag markets is appropriate because it provides sufficient liquidity for hedging activity but doesn’t distort the market.
David Lehman, managing director of commodity research with the CME, isn’t buying the argument.
He said corn, soybean and canola prices may have been volatile in the last few years, but that doesn’t prove speculation is to blame.
“Supply and demand, at the end of the day, is what determines prices,” he said.
Masters acknowledged that his opinions on derivative regulation aren’t in line with the majority of hedge fund mangers, who generally oppose financial regulation. However, he said almost every manager he talks to admits speculative money is influencing the price of corn, soybeans and canola.
“Nobody buys a bad fundamental story… (but) money comes in and it amplifies prices.”
