This Weekend's Contemplation - Let's End Speculation in the Commodities Markets

It is the Friday before Memorial Day weekend and everyone is beginning to slow down in anticipation of the weekend. Below is an article that is worth a read and worth thinking over. I understand the problems of fiddling with markets, but I also understand the problems when speculators get involved in day-to-day life. From Market Watch:

It's one thing to make risky bets in the capital markets. It's another when speculation is too closely linked with the basic, everyday things that make society tick.

There has long been debate over whether Wall Street is the economy or the economy is Wall Street. Many say the markets are related to the economy but day to day operate outside of the price-setting that immediately affects us: energy, food, housing, etc.

Well, the advent of futures trading and increased investing by the general public as well as more sophisticated techniques by institutions should quash the notion that market indexes cannot make -- or break -- an economy.

When the costs of food, energy and water as well as other commodities are soaring because of prices in the futures markets we have a problem on our hands. This is exactly what is playing out before us now.

Futures are derivatives, remember, the total notional value of which exceed an estimated $300 trillion. That's exponentially more than the actual value of the global stock markets.

The problem does not lie with just that exponential hedge, it lies with the ramifications of futures, or derivatives, pricing at the gas pump and the checkout counter.

Futures contracts were originally designed so actual asset owners and producers, such as farmers, could better manage production -- for the betterment of us all -- and avoid large swings in harvests. For example, a lower crop this year could be hedged by selling futures on next year's crop, allowing that farmer to stay in business and keep putting food on our plates.
Now enter nonasset owners, otherwise known as speculators.

Earlier this week, the Senate's Homeland Security and Governmental Affairs Committee held a hearing on commodities speculation. This is what it found out: The commodities futures markets have seen an enormous amount of new business from funds and institutions shying away from the stock markets. And this, many claim, has sent prices soaring above historic levels.

Meanwhile, the Commodity Futures Trading Commission blames a series of events -- in one report likened to a "perfect storm" -- for price hikes, not just futures trading itself. Limited supply due to weather-related events, increased demand and -- yes, they admit -- Wall Street interest has pushed commodities futures contract prices way up.

Supply-demand issues are nothing new in the commodities markets. Neither are weather events' affects on prices. But what is new are the speculators, index funds, and large institutional interests in the market. This is rightly where the focus should be. Talk of new regulations to modify pension funds investing in the commodities futures markets is exactly where the focus should begin. Funds too should have tighter regulations.

In 2000 Enron pushed through a provision that allows energy securities to be traded outside the New York Mercantile Exchange, which has oversight rules and regulations. These third-party electronic markets also need oversight, as the farm bill Congress passed, but which President Bush vetoed, calls for.

It's terribly clear that investment interests are usurping the common good. Think about it: If oil production has remained relatively consistent why have prices soared? If we have had food crisis issues before, why are the prices on the shelves so inordinately high?

There is another agent at work in the commodities markets, one that is setting the prices of our natural resources and in turn the food on our table and the price of the gas at the pump. This agent isn't a farmer or an oil producer. This agent wears a suit and tie and sits in front of a trading screen. His or her job isn't to produce anything, it's to exploit anything. And it's time we curbed this profession.

Speculation in the commodities futures markets needs to be limited.