Who or what is pushing up prices?
CHICAGO, Illinois (Agriculture Online)-- In late 2007, a market trader made the comment to Agriculture Online that without the speculator funds buying soybean futures, prices would be at least $0.30 cents lower than they are.
As agricultural commodities trade in the stratosphere, the market trader's statement is carrying a lot more weight.
The question being asked is: Are index speculators -- not regular fundamentals -- driving commodity prices higher?
This question became more polarized this week when Jeffrey Harris, Commodity Futures Trading Commission Chief Economist, testified before the U.S. Senate Committee on Homeland Security and Governmental Affairs.
During testimony, Harris says his office has been examining daily position changes and price changes and have determined increased index fund positions do not lead to price increases.
"This more general evidence shows that fund positions have not changed in ways that are consistent with causing recent agriculture price increases," Harris testified. "CFTC staff has tracked daily price changes and daily position changes in these markets, finding that managed money funds are largely trend followers, buying on the day after price increases, for instance."
To further his point, Harris explained that "In fact, record agricultural prices have occurred in commodities for which there is no futures contract (durum wheat and hay, for example) and in markets with little or no index trading." Specifically, Minneapolis wheat futures (not part of any index fund) have risen higher than and have been more volatile than Chicago or Kansas City wheat futures and Chicago rice (with relatively modest levels of index trading) has recently set new, all-time high prices, Harris testified.
Michael W. Masters, Managing Member/Portfolio Manager with Masters Capital Management, LLC testifying before the U.S. Senate Committee on Homeland Security and Governmental Affairs, attempted to make a compelling argument that Index funds are to blame.
Masters is a successful long-short equity hedge fund manager for over 12 years with extensive contacts on Wall Street and within the hedge fund community. "It's important that you know that I am not currently involved in trading the commodities futures markets," Masters testified, according to written testimony obtained by Agriculture Online.
The long-time trader described the current situation as a demand shock coming from a new category of participants in the commodities futures markets: institutional investors. Specifically, Masters categorized these "institutional investors" as including corporate and government pension funds, sovereign wealth funds, university endowments and others.
Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant, Masters says.
"These parties, who I call index speculators, allocate a portion of their portfolios to "investments" in the commodities futures market, and behave very differently from the traditional speculators that have always existed in this marketplace," Masters testified.