December 17, 2010

 

US agriculture markets distorted by speculators

 

 

US commodity markets have been distorted by speculators, forcing farmers to contend with extreme market volatility and absorb higher costs for fertiliser and fuel, according to the head of the largest US livestock feed association.

 

"Agriculture, from farm to retail, had to deal with extreme price volatility on a number of fronts without the effective support of our primary risk mitigation tool - the futures markets," said Joel Newman, Chief Executive Officer of the American Feed Industry Association.

 

"Those markets were severely compromised by Wall Street banks' ability to avoid speculative position limits and invest substantial levels of monies in the physical commodity markets," Newman said. He urged government regulators to impose position limits as part of a financial reform bill passed earlier this year.

 

Newman was one of seven who testified earlier today during a hearing held by the House Agriculture Subcommittee on General Farm Commodities and Risk Management. The subcommittee is reviewing the position limits provision of the Dodd-Frank financial reform act, which President Obama signed into law in July.

 

The law sets a January 17 deadline for the Commodities Futures Trading Commission, which regulates US futures markets, to set position limits in commodity markets such as oil and metals. Recently, concerns have grown whether the CFTC will meet the deadline.

 

"Position limits are essential to the function of effective and efficient markets, and necessary to protect market end-users who rely on the marketplace to hedge their risks in operating their businesses," subcommittee chairman, Leonard Boswell, said.

 

Hedge funds, swap dealers and other speculators drew increased scrutiny after oil soared to a record near US$150 a barrel in mid-2008. Corn futures hit a record US$7.65 a bushel around the same time. More recently, speculators have stepped up buying in grain, cattle and hog futures, generating record trading at Chicago-based CME Group.

 

Many are concerned that big traders hold too much influence in commodities linked to key consumer products, such as gasoline, heating oil and meat.

 

"The American Feed Industry Association would very much like to have speculation position limits set in place today, as well as the additional regulatory and transparency provisions," Newman said. The group represents most of the country's animal feed suppliers.

 

"It is critical for all bona fide end-users to know we are on a level playing field with speculators and each other," he said.

 

CME Group Executive Chairman, Terry Duffy, who also testified, cautioned that position limits are not a costless palliative. As the operator of the largest US futures exchange, the CME already has position limits for most contracts, he said.

 

"Improperly calibrated position limits can easily distort markets, increase the costs to hedgers and effectively increase costs to consumers," Duffy said.

 

"Unfortunately, many demands for speculative limitations assume that severe limits on speculation will bring prices to some favoured level," Duffy said. "On the contrary, position limits on futures contracts will not and do not control cash market prices."