Speculation identified as gas, food price driver

In Washington, the RFA reports:

“Two new reports independently concluded that speculation in the commodities market is having an unduly large effect in driving prices for goods like gasoline and food higher for all Americans.  These reports come in advance of the October 18 meeting of the Commodities Futures and Trading Commission (CFTC) to discuss commodity index funds, a chief mechanism for speculative trading in the market, and in the midst of increasing angst with Wall Street business as usual as demonstrated by the Occupy movement.

“The first report from the non-profit organization Better Markets concludes, “Research analyzing commodity markets for the last 27 years shows that Wall Street’s speculative trading through commodity index funds is causing market disruptions, interfering with price discovery, increasing the costs for businesses to hedge, and needlessly pushing prices higher for all Americans. It shows how the biggest banks, all bailed out by the taxpayers in 2008, are lining their pockets at the expense of America’s families and farmers.”

“According to the research from Better Markets, speculative commodity index funds are currently influencing the market with between $200 and $300 billion of investment.  These speculative traders are the largest single group of traders in the market, outpacing producers and users of physical commodities and the more traditional speculative traders.

“A second report from economic analysis firm Cardno Entrix buttresses the findings of the Better Market analysis.  According to Cardno Entrix, “[It] is clear that [commodity] prices are likely higher than justified purely by fundamentals and the commodity markets have become more volatile as the volume of trading by index funds and other non-commercial traders has increased sharply.”

A chart from Cardno Entrix tells the real story.  While trading by commercials has increased, non-commercial trading volume has grown far faster in recent years. The creation of paper bushels reflected by speculative non-commercial trading is 3 to 4 times the number of physical bushels of corn being used. Since trading volume represents a measure of intensity or pressure behind a price trend, the significant increase in both the level of futures contracts and the ratio of futures trading to physical corn use – which use has increased significantly over the past decade – further illustrates the impact of the futures market on corn prices.”