Commodities Chaos Has Farmers Crying Foul
Tuesday, April 22, 2008PAUL KANGAS: Oil isn't the only commodity seeing higher prices and a lot of volatility. In Washington, DC today, farmers asked regulators to trim the trading power of big investors pouring billions of dollars into the commodities markets. As Darren Gersh reports, the calls came at a special hearing on this year's record-setting market volatility.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: To many of the agricultural companies at today's Commodity Futures Trading Commission hearing, there is no question that investor speculation is to blame for ongoing distress in futures markets. As an example, cotton merchant Billy Dunavant says one day last month, cotton soared from just under $0.85 a pound to well over a dollar.
BILLY DUNAVANT, CHAIRMAN, DUNAVANT ENTERPRISES: That makes no sense. The market is broken. It is out of whack and somebody's got to step in and give some relief.
GERSH: But that relief does not seem likely to come quickly from the CFTC. Commission economist David Kass argued volatility was just as bad in the futures market for rice, where investors do not trade much, as it is in corn and other markets where investors have poured in billions of dollars.
DAVID KASS, SR. ECONOMIST, CFTC: So we find it hard to find a direct relationship between the amount of indexed trading by percent or otherwise versus some of the volatility and some of the prices rises we've seen of late. At least there is no simple analysis.
GERSH: The CFTC is now considering a plan to make it easier for investors to trade commodities. But representatives from agriculture industry groups like John Popp of the independent bakers urged the CFTC to reverse course and impose higher margin requirements and limit speculative trading.
JOHN POPP, CHAIRMAN, INDEPENDENT BAKERS ASSN: To increase those limits, I think, puts so much power and dominance in the hands of speculative traders.
GERSH: Investors have poured $175 billion into commodity funds in recent years. Money managers at today's hearing say they're simply trying to help protect their clients from inflation risk. Gresham Research's Douglas Hepworth argues surging demand in Asia, falling production in many parts of the world and the diversion of cropland to ethanol production are what's really driving volatile commodities markets.
DOUGLAS HEPWORTH, DIRECTOR OF RESEARCH, GRESHAM INVESTMENT MANAGEMENT: These are the sorts of things that drive up wheat prices. This is a physical market and if you think about it, the futures market is the thermometer. It's not the cause of the hot weather; it's just the thermometer.
GERSH: The Chicago Mercantile Exchange says it may have a way to ease the impact of market price swings. It asked regulators for permission to offer commodity swaps that should help farmers and others better manage their price risks. For their part, regulators say they would go slow on reform, fearing any sudden change might disrupt an already volatile market. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
