My Aunt Kathryn is the only person that I know who successfully and consistently invested in the commodities futures markets. During a visit to her and Uncle Claude's farm, as a 15-year-old, I tried to understand why she needed all those newspapers, a calculator and notebooks spread out on the kitchen table. She tried to explain to me, with increasing frustration, what she was doing; using the analogy of investing in the stock market, which we were studying in high school. She explained how traders made verbal deals on the trading floors (the "pits") of Chicago, New York, Minneapolis and Kansas City, and how commodity futures markets helped to set the cash prices for what Uncle Claude produced. Then she looked an uncomprehending me straight in the eye and said, "Stevie, the next stop after commodity futures is Las Vegas." Even a callow youth could understand that explanation.
Aunt Kathryn turned 90 a few days ago and soon my parents and I will go down to Iowa for a big birthday bash paid for by a trust fund filled with her killings in pork belly and corn futures. She wouldn’t recognize the markets now. The traders and "pits" are gone, replaced by Bloomberg "Market Masters" and other marvels of 24/7 round-the-clock and round-the-world electronic trading. In February, the last open outcry called out in the pits of the Minneapolis Grain Exchange, which I had first visited as an employee of IATP fourteen years earlier. I ran across my earnest notes from that visit: e.g., “speculators add enough liquidity to the market so that other speculators (farmers included) can get in and out of trades.”
Today liquidity is far in excess of what is required to clear trades. Huge financial institutions, such as Goldman Sachs and Morgan Stanley, dominate the market, after having successfully lobbied for a decade to deregulate and de-supervise their industry. Among their achievements was the removal of the speculative position limits to which financial investors had been subject. IATP joined other members of the Commodity Markets Oversight Coalition (CMOC) in an August 5 letter to the Congressional leadership, calling for the same aggregate position limits for all financial institutions and other measures.
IATP has written to the Commodities Futures Trading Commission (CFTC) in support of aggregate position limits. IATP noted that since the CFTC would be in charge of regulating the carbon emissions permit trading envisioned in the House of Representatives “American Clean Energy and Security Act,” (ACES) that the CFTC should hold hearings on how to write rules to prevent excessive speculation in carbon markets. If the CFTC fails to prevent excessive speculation in the carbon markets, the result could be more than the extreme price volatility affecting the market since 2007 (with a concomitant rise in food and energy insecurity). Speculators could jump in as short sellers to drive down the price of carbon emission futures, thus discouraging investment to reduce greenhouse gas emissions to mitigate climate change. Excessive carbon speculation could fuel an increase in GHG emissions and the economic damage forecast to result, after a two-degree centigrade increase in the global average temperature.
There are at least some signs that the CFTC recognizes the need to address position limits. On August 19, the CFTC withdrew letters permitting Deutsche Bank’s commodity service and Gresham Investment Management to exceed position limits in wheat, soybean and corn futures. These limits apply to traders who use the futures markets to protect themselves against price volatility in commodities they trade or use for manufacture (commercial traders). For a decade these limits had not applied to “non-commercial” traders, such as investment banks. During a CMOC conference call discussing this CFTC action and others, one CMOC member said, “two down and 700 to go.”
Even if Congress acts to prevent excessive speculation in the commodity and financial markets and the CFTC continues to withdraw the hundreds of “No Action” letters that enabled excessive speculation, the process of restoring fairness to the market will likely be slow. Deutsche Bank and Gresham had already reduced their positions in advance of the CFTC ruling. According to The Wall Street Journal, the two financial institutions will have until October 31 to comply with the rulings, but both were confident that they could already meet their clients’ trading needs within the new limits.
The late Al Krebs, in his indispensable The Corporate Reapers:The Book of Agribusiness (Essential Books, 1992) wrote, “No one enduring myth in American agriculture has taken deeper root than that which says that the law of supply and demand is the determining factor in establishing fair prices for agricultural commodities.” He documented how speculators in the1970s and 1980s determined prices by providing far more liquidity than what was needed to clear futures contract trades, 41 times as much liquidity in the case of soybean speculators. Al would not be the least bit surprised by the dominance of energy futures over agricultural futures in today’s commodity index funds—nor by the current spike in oil prices at a time when oil reserves are full to overflowing.
I like to think that if Al had met my Aunt Kathryn (in the 1980s they lived fewer than 200 miles apart in Iowa), he would have advised her to get out the market until the CFTC started to provide a level trading field for commercial traders, such as Aunt Kathryn, with the financial speculators. And I like to think that she, despite the thrill of trading, which Al documents so eloquently, would have taken his advice.
