Stop Gambling On Hunger

Remember when gas was over $4 a gallon? Remember the global food crisis that resulted in dozens of food riots around the world and plunged over 100 million people around the world into hunger?

These crises where not caused by shortages of oil or food. Instead they were caused by massive bets made on Wall Street. A large portion of the higher prices were brought on by the same thing that caused the global economic crisis – market deregulation. While we had to pay more for our gas and food, fat cat investors made a bundle. Luckily, we already know how we can avoid future gas and food bubbles. The answer is proven and cheap – all we need to do is say yes to it.

Watch this video and explore the rest of the site to learn more about how speculators brought about last year’s food and oil bubbles. Most importantly, write to your members of Congress telling them to take action to avoid future bubbles. They need to know that this is important to you. Right now, they are only hearing from Wall Street.

Clearly, this seven minute video is a simplification of a complex issue, but it sums up the history behind and key problems brought on by the deregulation of commodity futures markets. Please explore the rest of the site for more details about this important issue.

Scroll down for updated posts on commodity speculation.

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On February 3rd, Senator Maria Cantwell (D-WA) held a press conference with members of the Derivatives Reform Alliance (DRA), the mega-coalition of organizations including most of those listed on the this site.

Some of the more revealing quotes from the different speakers follow:

Senator Maria Cantwell

“To get our economy on track, we must bring full transparency and capital requirements to the entire derivatives market. This will prevent a repeat of the massive losses in unregulated derivatives trading – losses that taxpayers ultimately paid for”

“The House of Representatives has passed legislation riddled with loopholes, which will not result in change. I will be fighting in the Senate to pass strong legislation to repair the failed financial regulatory system, and I will be working to close all loopholes to prevent any return of risky business.”

Michael Masters, President, Masters Capital Management, LLC

“The failure of AIG, Lehman Brothers, and Bear Stearns. The collapse of our financial markets. The loss of trillions of dollars of wealth by investors in the United States and around the world. A residential and commercial real estate crisis. The failure of hundreds of banks. A surge in firings and layoffs by employers… What’s the connection? Unregulated and non-transparent derivatives markets.”

“The catastrophic effects of unregulated and non-transparent derivative trading are not abating. Already, according to a recent report by the Bank of International Settlements, the level of notional exposure in derivatives by financial intermediaries around the world has grown to over 604 trillion dollars. This level of exposure is higher than all other historical periods, with the exception of June 2008, just before the worldwide financial market collapse.”

“In 2009, financial institutions pushed over 105 billion new dollars into the crude oil markets, buying the equivalent of almost 400 million barrels of crude oil via derivatives contracts. Undoubtedly, this wall of money had a significant upward effect on the price, as crude oil prices almost doubled last year. Moreover, just in January of this year, according to recently released figures, CME volumes in commodities derivatives soared by over 18% over last year as new speculators poured into commodity markets.”

Paul Cicio, President, Industrial Energy Consumers of America

“The price of energy commodities like natural gas to our companies is critical to our global competitiveness and jobs. We are competing with countries like China who actually subsidize and fix the price of natural gas to their manufacturers. That’s right… no volatility and there is price certainty.”

“…too many Senators still do not believe that excessive speculation is a problem. To that point, let me offer you that proof by describing what happened to natural gas prices in.. 2008. During the first half of 2008, the NYMEX price of natural gas rose from $7.17 per mm Btu in January to a high of $13.60 per mm Btu in July before prices began to recede. During the same time period, the Energy Information Administration reports that domestic production increased by 8.6 percent; demand was essentially unchanged from the previous year and national inventories were within the five year average range for that time of year. Based on supply and demand, prices should have fallen.”

Mr. Cicio also referred to a Bloomberg article about the US Natural Gas Fund (UNG), an index fund. “Bloomberg reports…it (UNG) held July NYMEX futures contracts as well as swaps and ICE futures on natural gas equal to 98 percent of the value of the open interest of the July NYMEX that day… This is only one such fund and the number of index funds is expanding rapidly.”

Brother David Andrews, Senior Representative, Food & Water Watch

“The USDA reports the highest food insecurity since reporting began in 1995. In 2008, 17 million households were food insecure. The 2009 Hormel Hunger Survey reported that nearly a quarter of American adults said they have eaten less this year in order to ensure their children have enough food”

“While food is only part of the costs families incur, perhaps 10 to 17 percent of income expenditure for domestic families, upwards of 2/3 of income is spent on food in developing countries.”

“At the recent Food Summit in Rome, the Pope, Benedict XVI condemned the role of speculation in food price increases, [saying] ‘greed which causes speculation to rear its head even in the marketing of cereals, as if food were to be treated just like any other commodity.”

“Speculation has been a factor in the growth of hunger at home and abroad. This is a serious moral issue that we can deal with if we face up to our responsibilities.”

Sean Cota, Cota & Cota Oil

“One of the main factors that caused oil prices to rise so dramatically is excessively leveraged speculators in the energy derivatives marketplace who have distorted market fundamentals and led to the oil price bubble of 2008 and the price surge seen the last few months.”

“If the markets were to be valued on supply and demand of the actual physical commodity – as used to be done before the investment community took over the commodity markets – American consumers would pay at least $1.00 per gallon less at the pump today.”

“Without sufficient oversight and aggregate position limits, market activity can distort the price of oil. For every one cent per gallon change in gasoline prices – it’s worth one billion dollars to the American consumer.”

Randy Mullett, American Trucking Association, Inc.

“One year ago, oil cost $42 per barrel. Today, oil has jumped to $74. Yet during this past year, global demand remained weak, crude oil inventory in storage was well above average, and the dollar declined by only 8 percent relative to the Euro. In the face of these market realities, excessive speculation is the only other variable left unaccounted for.”

Mr. Mullett offered the solutions that members of the DRA recommend. “The government must require transparency for all markets that trade energy [and food] commodities and establish aggregate position limits across all markets, including over-the-counter markets and foreign exchanges.”

An article in Corporate Counsel shows how the Commodity Futures Trading Commission (CFTC) is unable to prosecute traders even though they admitted to manipulating the propane gas market with their speculative investments. Despite the fact that “BP Products North America Inc., the subsidiary of BP Products North America Inc., the U.S. subsidiary of the British energy giant, had already agreed to pay $303 million to settle civil allegations that it manipulated the propane gas market, the U.S. Department of Justice had taped phone conversations in which one defendant bragged about being able to ‘control the market at will,’ and a fifth trader pleaded guilty and agreed to cooperate, the CFTC lost the case in an appeal.

This is because currently, the CFTC, responsible for regulating the commodities markets, has to prove that speculators had specific intent to do harm rather than merely proving recklessness as the SEC is able to do for the past 75 years. Specific intent is a much more difficult standard to prove.

This is why the third point of our proposed solutions calls for making the burden of proof for the CFTC equal to that in the SEC. The article states that, “derivatives experts say the ruling makes prosecution of commodity futures manipulation virtually impossible. Frank Partnoy, a professor at the University of San Diego School of Law, said that, if the government can’t prosecute, it will never know exactly how much manipulation really goes on. ‘Anyone who’s actually engaging in manipulative trading will be thrilled to read this opinion.’”

An ominous article on Asiaone.com shows why it is so crucial that we bring back common sense rules for our important commodity markets.

There are predictions of lower food production in 2010 here, here, here and elsewhere. If we do not protect the commodity markets,  Wall Street speculators, knowing that prices will rise, will once again be able to pour huge sums of money into commodity futures to take advantage. The problem is the sheer size of their investments in these relatively small markets will drive prices up even further. This is basically what happened in 2008.

Keep coming to this site for updates about what is happening in Congress and elsewhere around commodity speculation.

From the Asiaone article:

“Global food prices are rising again with the United Nations Food and Agriculture Organisation (FAO) food price index hitting 168 points in November, the fourth consecutive month of increase and the highest since September 2008.”

“[The] FAO has possibly for the first time highlighted the ‘growing appetite by speculators and index funds for a wider commodity portfolio investments on the back of enormous global excess liquidity’, as exacerbating the situation.”

“Jim Rogers, one of the world’s most astute investors has been bullish on commodities in general for several years. On agricultural (or soft) commodities, he says: ‘Food inventories worldwide are at the lowest in decades as the world continues to consume more than it produces. We even have a shortage of farmers now since agriculture has been such a terrible business for three decades. We should all hope prices go higher or there may soon be a time when there will be little or no food at any price.’”

“CIMB-GK regional economist Song Seng Wun said: ‘A combination of both fundamental factors and speculation may drive prices higher – just as we saw in the energy market which drove crude oil prices to US$150 per barrel.’”

The Telegraph has interesting article on the CFTC’s recent announcement that it will place speculative limits in the four principal energy commodities.

“It is hardly surprising given the CFTC’s light-touch history that its new limits on positions in oil, natural gas, heating oil and gasoline this week provoked scarcely a murmur from the markets.

‘Position limits are so generous that we do not expect any direct market impact,’ analysts from Commerzbank said dismissively after the long-awaited announcement.”

The article shows how speculators are already acting to avoid the rules:

“Hedge and index funds will be the main losers, but there have been suggestions that breaking up into smaller funds could circumvent the new measures.”

It then does a fair job of explaining the OTC, over-the-counter, markets:

“It is here that the most obscurity – of much more concern than speculation in itself – is to be found, both among paper and physical commodity traders. These derivatives are traded directly between parties, without the cost and interference of a clearing house or regulated exchange. They are more complex and risky, with US observers such as Brooksley Born blaming them for uncertainty about junk assets lurking on balance sheets in the credit crisis. Nobody – not the regulators nor the funds themselves – could see who had built up the riskiest positions, adding to the seizure of the markets.”

The article adds, ominously:

“It appears that some of the funds usually trading on the regulated exchanges have already swapped to trading over-the-counter futures.”

The article shows why true financial reform must do away with the OTC markets by making all trades clear through exchanges. As the article states,

“Those against these laws have argued that business could migrate from the West to other financial centres if the rules were too draconian. With 80 [percent] of commodities traded in the US and Europe, it would be a major and unlikely shift for traders to seek loopholes in the looser markets of Asia and the Middle East.

Make sure your Senator has heard from you about this important issue. Click here to send them a message now.

Bill Moyers has a great interview with two journalists who have articles in Mother Jones magazine’s Jan-Feb 2010 issue that denounces Wall Street corporations’ actions in relation to the economic collapse.  The reporters do a good job explaining the state of things in Congress; how Wall Street investment firms still have so much influence there. The House bill that passed in December is full of holes that mean excessive speculation will be able to continue, unless the Senate strengthens the bill – a difficult goal to say the least.

This is why it is so crucial for all who read this to write to our Senators (use the Take Action! process here to make it easy). Encourage your family and friends to write as well. Congress needs to know that this issue is important to more than just those on Wall Street.

As a sign of the importance of re-regulating commodity futures markets, big Wall Street investment firms are pushing commodities as good investments for their clients in 2010. The investment committees of both Bank of America Merrill Lynch and Morgan Stanley Smith Barney recently released their top ten picks for investments in 2010. Both predict rising commodity prices and recommend increasing investments in commodity indexes, which in turn, will help to drive up commodity prices even futher.

If the commodity futures markets are not re-regulated to rein in excessive speculation, the flood of speculative money into these markets will raise prices even more than natural supply and demand issues would do, as occurred in 2008.

At a meeting of two large coalitions working on the derivatives issue, one energy market expert said that over $10 billion has been invested in commodity indexes in just the last 6 days! A report on the precedent-setting meeting can be found here.

In a telling article, Business Week shows that the Commodity Futures Trading Commission (CFTC) is getting ready to put limits on speculation in key commodities. From the article:

“Bart Chilton, one of the CFTC’s five commissioners, says the commission will soon propose a rule aimed at preventing any one entity from ‘controlling too much of a given market.. I don’t want commodity markets to become a private jungle gym for speculators.’”

“In a recent survey by Barclays Capital, institutional investors said they expect more than $60 billion to flow into commodities investment in 2010.”

The key will be in the Senate that needs to re-regulate the commodity markets. The bill that passed in the House has too many loopholes and needs to be strengthened.

Keep your eye on this site in the coming weeks as January will be the key month for financial reform in Congress. You and your friends’ participation will be key.

Bloomberg has an interesting, in depth article about Harvard’s financial problems brought on by bad investment decisions made while Larry Summers, current director of the National Economic Council, was president of the university. Mr. Summers, Harvard president from 2001 to 2006, had ambitious expansion plans for the university. To pay for the planned construction, the university’s financial team decided to buy billions of dollars in interest rate swaps, betting that interest rates would rise.

When rates plunged soon after, Harvard’s swaps became huge financial burdens for the school forcing it to borrow $2.5 billion from the state of Massachusetts to buy exit agreements from the toxic swaps.

From the article:

“As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps…”

“The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university.”

“Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers because of the size of its bet and the length of time before all its bonds would be sold.”

“Harvard not only lost money on the swaps last year. The value of its endowment tumbled a record 30 percent to $26 billion from its peak of $36.9 billion in June 2008, and its cash account lost $1.8 billion, according to Harvard’s most recent annual report.”

“’Harvard sold $1.5 billion of taxable and $1 billion of tax- exempt bonds, using $497.6 million of the proceeds to pay investment banks to extract itself from $1.1 billion of interest-rate swaps, according to its annual report released Oct. 16. Separately, the school agreed to pay another $425 million over 30 years to 40 years to the banks to terminate an additional $764 million of the swaps,’ Harvard’s Shore said.”

“’They used many of the investment strategies of the big banks and hedge funds, and when things went badly they could not get a bailout,’ said Kaiser, a history professor at the U.S. Naval War College in Newport, Rhode Island. ‘It would clearly be better for any nonprofit on whom many people depend to pursue safer, more stable strategies.’”

Also, see an earlier post (http://stopgamblingonhunger.com/?p=380) about Pennsylvania school districts that were burnt by the same financial instruments.

All this shows the importance of getting real financial reform through Congress next year. If you haven’t already, click on the link above to write to your legislators.

In a troubling article on Bloomberg.com, food experts and investors predict that 2010 agriculture prices will rise once again, making reform of the commodity futures markets more urgent than ever. Speculators are well aware of the issues brought up in this article and will be pouring money into commodities markets in coming months to take advantage of the rising prices. And by increasing their investments, they will in turn raise prices even further. A repeat of 2008’s food crisis is a very real possibility.

From the article:

“’Agricultural commodities will be a great investment in the next three to five years,’ said Oliver Kratz, who manages $10 billion as head of Global Thematic Strategy investments at Deutsche Bank AG’s DB Advisors in New York, including $3 billion in agriculture. For those who can’t afford to pay more for food, there’s the ‘painful’ risk of hunger, he said.”

“’Inventories are extremely low in a number of grains markets,’ Barclays Capital said Dec. 10. ‘The prospect of a further bout of food-price inflation in 2010 cannot be ruled out since many of the factors that contributed to higher prices in 2007 and 2008 are still a feature.’”

“Stockpiles of corn and rice will drop before the 2010 harvest for the first time in three years, U.S. Department of Agriculture data show. The International Sugar Organization forecasts a second straight global supply deficit in the year through September 2010, and the USDA predicts stores of the sweetener will drop to the lowest level since 1995.”

“’Volatility in price and supply are with us for the predictable future,’ according to Josette Sheeran, the executive director of the UN’s World Food Program. ‘Risk is the new normal when it comes to food.’”