Speculators have convinced the NY Times that they shouldn’t be blamed for soaring oil prices

Columnists for both The New York Times and The Wall Street Journal believe speculators have nothing to do with soaring energy and commodities prices, but pension funds, endowments and other buy only institutional speculators are playing major roles in inflating futures prices and consumer prices.

What these columnists don’t understand and their friends in the speculators’ community won’t tell them is that the recently arrived institutional speculators distort the markets by taking long-term positions on the buy side only. Because they only buy huge positions, they put artificial floors under energy and other futures markets prices, as explained by farmers and others at a forum sponsored by the Commodity Futures Trading Commission on April 22. Transcripts of many of the remarks made at that forum by representatives of growers of corn, soybeans, wheat, cotton and rice are here.

A scholarly explanation of the problems created for corn and bean farmers and grain elevators was made by Prof. Eugene Kundra of the University Illinois. His statement is here.

Kundra said there are several reasons that futures and cash prices aren’t converging when futures contracts near expiration, causing major problems for farmers and commercial buyers of their corn and beans. While he didn’t specifically point to the long-term positions held by index funds and other institutional speculators, he clearly implicated them in one of his major proposed solutions. He proposed that the CFTC and the Chicago Board of Trade consider:

“Managing” the influence of passive longs and perhaps other groups by
limiting hedge exemptions, thereby forcing those groups to trade with spec
margins and spec limits. This solution follows from the assumption that these
traders have artificially and permanently forced futures prices above
fundamental value of the commodities in the cash market.

Garry Niemeyer, a corn grower, explained how institutional speculators are distorting the corn markets and making it impossible for grain elevators to buy corn or finance their hedges on the Chicago Board of Trade’s corn futures markets. His statement for the National Corn Growers Assn. is here.

After a detailed explanation of the problems institutional speculators are creating for farmers and the grain elevators that buy their crops, the corn growers recommended that speculating by institutions should be limited.

It is NCGA’s opinion that the large funds are having an overwhelming influence on the
futures markets and are “non-commercial” traders. Frequently, we see dramatic shifts in
the futures market that have no substantiated fundamental drivers. While we do not want
to drive the index and hedge funds from the market, they should be treated for what they
are, “speculators”. I realize this flies in the face of some CFTC decisions, but I believe to
truly be classified as a hedger, an entity must have a cash commodity position. NCGA
realizes that the large Index Funds are selling a commodity index and then going long in
each of their market basket commodities which could be construed as a hedge. But, they
are selling a market basket of futures prices, not a market basket of physical
commodities.
NCGA proposes that the Index Funds no longer be afforded the same margin
requirements as traditional commercial hedgers. Specifically, to be classified as a hedger
the entity must have a cash position. We are not suggesting that they have an equal or
proportional cash position, but somewhere within that company they must be buying or
selling cash grain to retain the “hedger” classification.

Soybean, cotton and wheat growers agreed with this recommendation. They are in the markets every day. They have been in the markets during most of their careers and while they value the traditional roles of speculators in the futures markets, they also believe that index funds and other institutional speculators are distorting the markets, inflating prices and hurting both growers and consumers.

Having covered and studied the futures markets for years, I think the growers’ case that speculators are inflating prices and consumer prices is much stronger than the speculators’ argument that they are not. Institutional speculators say they are diversifying their portfolios and hedging against inflation for their beneficiaries.

But it is clear that institutional speculating in the energy and other commodities futures markets is causing much more inflation and is hurting their index fund and pension fund beneficiaries much more than it is helping them.

It’s time for institutional speculators to reassess their strategies and the impact of their speculating on their beneficiaries as well as on the American consumer.

The CFTC obviously was persuaded by the arguments that institutional speculators’ trading in the futures markets must be curbed.

On June 3, the CFTC announced that it was reversing previously announced intentions to expand position limits for institutional speculators, and it announced that it would work to make it easier for traders and the public to track trading activities by institutional speculators. The press release is here.

Joe Nocera’s Times column is here. As I previously reported here, Congress is investigating whether the sovereign wealth funds of net oil exporting countries are playing the futures markets and inflating prices. I advocated tighter position limits on commodity index funds and other institutional investors here. I explained one way institutional speculators influence individual speculators and trading by hedgers here.

 

 

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