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The Institute for Agriculture and Trade Policy promotes resilient family farms, rural communities and ecosystems around the world through research and education, science and technology, and advocacy.

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March 04, 2010

Protecting food from Wall Street speculators

As Congress dithers on regulating Wall Street, the Commodity Futures Trading Commission is quietly acting to limit the role of speculators on energy markets—with a spillover effect that could help stabilize agriculture markets as well.

The CFTC has proposed a rule that would establish position limits on energy derivative contracts, which include specified crude oil, natural gas, heating oil and gasoline contracts. Position limits reduce speculation by limiting the number of derivative contracts that any one entity (say Goldman Sachs) can hold for a contract period. Because other commodities are position-limited, the energy position exemption is colloquially known as the “Enron Loophole.”

Why is this important for farmers and consumers? Commodity index funds bundle together energy derivatives and agricultural contracts, with the energy component being as much as two-thirds of the fund formula. So spikes and drops in energy derivative prices tend to pull the much smaller agricultural contract components of the fund along with it. In 2006–2008, index funds held about a third of all agricultural futures contracts.

The CFTC is accepting public comments on its proposed rule through April 26. The financial services industry is trying to block the new rule. IATP sent in its comment today, supporting the proposed rule with a few suggestions on how to make it stronger.

Trading energy contracts with no position limits has brought on unwarranted price increases and volatility in heating oil, gasoline and other retail and wholesale energy products. As we reported in late 2008, several loopholes, combined with a lack of effective enforcement, allowed excessive speculation to be a major factor in steep food price increases in late 2007 to early 2008. Commodity prices collapsed an aggregate of 60 percent between June and November of 2008 as the insolvency of major investors, including index fund dealers, led to U.S. bailouts of Wall Street firms.

“The lack of energy trade position limits has exacerbated excessive speculation and price volatility in agricultural futures contracts,” said IATP's Steve Suppan in a press release we put out today. “Excessive speculation has hurt U.S. agriculture by undermining the original purpose of commodity exchanges—to help commodity sellers and buyers manage price risk. Agricultural price spikes and volatility in U.S. markets have contributed to increased hunger in many of the two-thirds of developing countries that are food import–dependent and that rely on U.S. markets for predictable purchase prices.”

The CFTC's proposed rule has slipped under the radar of much of the media. That's what the speculators are counting on. We need to change that.

Ben Lilliston


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Christophe Pelletier

Speculation on commodities does not only affect agriculture. It affects food affordability, inflation and social stability.
If not under control, speculators could cause wars!

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