Stop Gambling On Hunger

Despite financial reform progress, Wall Street is still gambling on hunger

(scroll down for updated posts)

Remember when gas was over $4 a gallon in 2008? 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?

Watch this video and explore the rest of the site to learn more about how speculators brought about 2008’s food and oil bubbles. 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.

Campaign to stop excessive commodity speculation continues

The financial reform law signed by President Obama on July 21 does a good job of starting to bring back common sense laws to our commodity markets. But it did not cover everything. There is still work to do.

The campaign will continue on three different fronts:

1) At a Congressional level, we will work on two levels:

a) work to make sure the implementation of the financial reform law doesn’t water it down.

b) to pass Senator Wyden’s (D-OR) Stop Tax-breaks for Oil Profiteering Act or the STOP Act. This bill would make all who participate in commodity markets pay the same tax rates. Currently (and ironically), legitimate commercial end users pay a higher tax rate than financial institutions, and pension funds and endowments pay no taxes on money made in the commodity markets. Wyden’s bill would have all actors pay the same, which would basically end the problem of commodity indexes and exchange-traded funds (ETFs). The current bill only includes energy commodities, but Wyden will soon introduce a new version of the bill that covers food commodities as well. The new bill will be called the STOP Commodity Speculation Act. Please call your Senators and ask them to cosponsor the STOP Commodity Speculation Act. Click here to learn more about the problems with commodity indexes and ETFs.

2) We will also work to convince pension funds and university endowments to divest from commodities. An AIG-sponsored study in 2005 convinced many financial planners that commodities would be a good addition to any investment portfolio. But, beside destroying the smooth functioning of commodity markets, they are not nearly as good an investment as the study suggested.

3) Internationally, we will work with a multitude of civil society organizations to influence the G20, the European Commission and other multilateral institutions to help bring global consensus around common strategies to protect commodity markets from excessive speculation.

Keep returning to this website for updates about these different aspects of the campaign and other information about excessive commodity speculation.

Scroll down for (somewhat) regularly updated posts.

*if you wish to see the video in a higher resolution please try this version instead*

And share the video on your site or blog, use the following code to embed it.

<object width=”425″ height=”344″><param name=”movie” value=”http://www.youtube.com/v/suJlyZDnKYU&hl=en&fs=1&”></param><param name=”allowFullScreen” value=”true”></param><param name=”allowscriptaccess” value=”always”></param><embed src=”http://www.youtube.com/v/suJlyZDnKYU&hl=en&fs=1&” type=”application/x-shockwave-flash” allowscriptaccess=”always” allowfullscreen=”true” width=”425″ height=”344″></embed></object>

A good article that explains some of the problems that Senator Wyden’s STOP Commodity Speculation Act will remedy can be found here.

The author points out that earnings on commodity futures speculation is only taxed at a 23 percent rate, while earnings from equities is taxed at 35 percent, creating an incentive to drive investors into commodity markets. If we are to gain control over the commodity markets again, this tax incentive will have to go.

Luckily, Senator Wyden’s STOP Commodity Speculation Act (soon to be introduced) will make all commodity market users pay the 35 percent tax rate. Please write or call your Senators and ask them to cosponsor Senator Wyden’s bill.

Sean Cota and Dan Dolan, two energy company representatives give a good interview about how the financial reform law will affect energy markets.

The Institute for Agriculture and Trade Policy (IATP) describes how the financial reform bill being signed into law today by President Obama will benefit farmers and consumers around the world. See their press release here.

“This bill will help markets work for agriculture and all Americans, not just for Wall Street and the transnational corporations that hide their deals in private markets”

“Countries dependent on agriculture imports for food security will be able to forward contract at fairer and more predictable prices. Developing countries that rely on agricultural exports will similarly benefit from greater price predictability and stability as they forward contract sales.”

If the influence of speculators on the price of oil and food staples like wheat, corn and soybeans hasn’t caught your attention, then surely the cornering of the cocoa market (where our chocolate comes from!) will. While this may result in higher chocolate prices for consumers in the global North, the increased price volatility brought on by such speculation has had significant effects on countries like the Ivory Coast and Ghana who depend on cocoa exports for a significant portion of their economy.

A number of articles about the recent cornering of the cocoa markets by a single hedge fund manager have proliferated across the internet. Good introductions to the story are here, here and here.

To learn more about Anthony Ward (nicknamed “Choc Finger” by markets analysts), the hedge fund manager that bought 241,000 tons of cocoa, go to here. A Facebook page has even been formed, likely by a number of chocolate lovers, calling out Mr. Ward for his cornering of the market. This article talks of Mr. Ward’s donations to key UK decision makers.

The World Development Movement’s campaign recently released an excellent report titled, “The great hunger lottery – How banking speculation causes food crises,” which gives a good background to the problem of excessive commodity speculation as well as giving concrete solutions to remedy the problem.

The Senate passed a cloture vote on the financial reform bill yesterday, another step toward getting the bill signed into law, hopefully within a few weeks. Members of the Commodity Markets Oversight Coalition created a list of the parts of the bill that will improve the functioning of commodity markets. These changes should help avoid future breakdowns like we experienced in 2008 and help diminish volatility in commodity prices.

The financial reform bill will:

• Fully close the “Enron Loophole” by empowering the Commodity Futures Trading Commission (CFTC) with authority over off-exchange (over-the-counter) derivatives markets, and by requiring across-the-board transparency for all derivatives.
• Require that derivatives be exchange-traded or cleared with real-time reporting, reducing systemic risk and market instability and uncertainty.  The final bill, unlike previous iterations, would also give the CFTC additional tools to enforce this requirement.
• Provide a narrowly-defined hedge exemption for legitimate commercial end-users to clearing and capital requirements for derivatives.
• Close the “Foreign Markets Loophole” by requiring that foreign boards of trade register with the CFTC if they plan on doing business in our markets.
• Provide the CFTC with additional authority to prosecute fraud and manipulation when it occurs. Since its inception, the CFTC has been handicapped by a less-than-adequate legal standard to prove manipulation, especially when compared to the authority provided other agencies and commissions such as the SEC. As a result, the CFTC has only successfully prosecuted one case over the last 35 years. The new measure will remedy this.
• Protects commodity trading “whistleblowers” who cry foul when they see fraud, manipulation or other violations of the law occurring.
• Require banks to “spin-off” their energy swaps trading operations into a separately capitalized entity that cannot access federally insured deposits. Other swaps in commodities (except gold and silver), equities and risky credit default swaps are included as well. This is expected to dampen the willingness of Wall Street speculators to take excessively leveraged positions in commodities, including energy.
• Empower the CFTC to set speculation limits in all markets, and requires them to set aggregate speculation limits across all markets.
• Prohibit “insider trading” in commodity futures, options and swaps on government information that is not yet public or otherwise made available to the trading community.
• Make permanent the CFTC Energy Markets Advisory Committee, which was established in early 2008 at the urging of NEFI and its coalition allies to provide an environment for energy end-users and industry groups to express concerns to regulators.  It further states that hedgers and consumers must be represented on the advisory committee.  Sean Cota (Cota & Cota, Bellows Falls, VT) currently represents our industry on the existing committee.
• Require a study into existing and prospective carbon trading markets.  There has been concern that if government sets a price on carbon through a cap-and-trade scheme or some other method, that such a market could become subject to excessive speculation and volatility, and could become more of an investment opportunity for Wall Street than a tool for reigning in greenhouse gas emissions.  This concern created skepticism among even the most liberal Senators and helped kill an economy-wide cap-and-trade program, at least for now.
• Give regulators one year to enact new rules and regulations, and require them to cooperate and coordinate here there is overlap between multiple agencies.

A number of articles have been published recently erroneously saying that the derivatives reforms in the financial reform bill will cost small and medium businesses millions in added costs. This is not true as commercial end users will be exempt from the new requirements.

The Commodity Markets Oversight Coalition has sent out a letter that spells out what is really in the bill as well as provides a good background to the use of derivatives:

DERIVATIVES REFORM WILL BENEFIT – NOT BURDEN – END USERS

In the course of the two-year long debate on how best to reform the derivatives markets, much attention has been given to the concerns of so-called “end-users,” or businesses that use derivatives to hedge against various forms of risk, including not only airlines, utilities and manufacturers, but also small business farmers, gasoline stations and home heating companies.

However, end-users have had growing concerns about the state of the derivatives markets that predate the 2008 financial collapse. Many have argued that these concerns are addressed, not exacerbated, by proposed reforms included in Wall Street reform package.

For more than a century, derivatives have been used by producers, processors, transporters and marketers of commodities – such as gasoline, home heating oil, wheat and livestock – to insulate their businesses and consumers from price risk. And for much of their history, they were a stable, reliable and transparent means of doing so.

However, if you speak to anyone who has used derivatives products for more than a decade, they will tell you that everything changed in 2000. The financial industry successfully secured blanket exemptions from Congress and federal regulators that led to a transformation of derivatives markets from simple commodity exchanges to the opaque and unregulated, multi-trillion dollar markets we know today.

To remain competitive, regulated exchanges weakened their own prohibitions on speculation, and allowed traders in the U.S. to access new subsidiaries in countries with weaker oversight. Over-the-counter and foreign derivative trading markets boomed, to the detriment of the traditionally stable domestic environments.

These changes lead to a “Wild West”-like environment. Excess volatility became the norm. Price spikes in commodities, most especially those experienced in 2007-2008, seemed to be dislocated from supply and demand fundamentals. Speculators were diving head-long into derivatives, and by 2008, came to dominate commercial hedgers four-to-one.

As commodity speculation swelled, retail gasoline and home heating oil prices surged beyond $4 per gallon. Trade associations attributed as much as $1 or more of these prices to speculation, despite the more than adequate inventories and a decline in demand. Global food prices were similarly rocked and the UN estimates that an additional 130 million people were driven to hunger as a result.

Derivatives reform will address many of these issues. Mandatory reporting, clearing and capital requirements for all derivatives would create transparency and much needed confidence in these markets, while a hedge exemption for bona-fide end-users would protect commercial businesses. It would also require that foreign exchanges doing business in the U.S. register with our regulators and encourage new cooperation with overseas agencies.

The bill also contains new tools that will help the Commodity Futures Trading Commission or CFTC, the principal regulator of derivatives, police against fraud and manipulation. It would also protect end-users from excessive speculation by expanding a 1936 statute requiring the CFTC to limit the size of speculators’ positions to over-the-counter markets and, importantly, in the aggregate across all markets.

Still, news coverage and op-eds have suggested that end-users are unified in opposition to reform due to fears that it will result in new government regulation and capital requirements, despite the well articulated hedge exemption and support for the legislation from airline, trucking, gasoline, home heating, and various agricultural industry groups.

If the “Wild West” was tamed by law and order, then the derivatives markets will be tamed by increased transparency, stability and confidence that legislative reform will bring. An important and reliable tool that hedgers have relied on for years will be returned to them and for this reason, end-users will benefit – not be burdened by – long overdue and comprehensive reform.

The only derivatives users that need worry about this reform are those that have exploited the status quo recklessly and irresponsibly, driving up costs for all Americans and threatening our nation’s economic stability and competitiveness. They fear it, and rightly so.

Jim Collura is a spokesman for the Commodity Markets Oversight Coalition, an alliance of derivatives end-users and consumer advocates in support of derivatives reform. Reach Jim at jimcollura@nefi.com

The Organization for Economic Cooperation and Development (OECD) recently released a study by two Illinois University professors allegedly showing that the recent volatility in commodity markets was not caused by excessive speculation. The study “The Impact of Index and Swap Funds on Commodity Futures Markets” was released strategically in the final days of debate over the financial reform bill.

Luckily, the article apparently had little effect on those debates. A new non-profit called Better Markets, Inc. released a response to the study pointing out its numerous and significant flaws. This response can be found here: Response to OECD study.

The response shows how the study explains the weakness of their own data, but continues to use it anyway. The study also applies a statistical technique – the Granger Causality Test – to commodity future prices even though that technique does not work for data that is as volatile as commodity prices, especially in the past few years.

I highly recommend the response paper for a few great charts. I couldn’t figure out how to put them directly into this post, but here are links to a few of the more interesting charts:

crude 1990-2009 – shows the price of oil from 1990-2009 that clearly started to rise and become more volatile after the deregulation of the markets with the Commodity Futures Modernization Act of 2000.

oil supply and demand 2007-08 – Dept. of Energy charts showing how from the end of 2007 to end of 2008, the global supply of oil increased while global demand decreased. According to supply and demand conditions, prices should have fallen, but instead they increased dramatically because of excessive speculation. This chart completely disproves arguments made by many that increased demand from China was behind the oil price increases in 2008.

The Congressional conference committee voted to pass a version of the financial reform with fairly strong derivatives reform. One financial analyst estimates that 80 to 90 percent of the opaque over-the-counter (OTC) will be required to clear through clearinghouses. These unregulated derivatives were a large part of the overall financial meltdown and had a significant effect on global food and energy prices.

Hedge fund manager Mike Masters gives a great interview to CNBC here. He explains clearly why central clearing is important and how speculation has had undue influence on food and energy prices.

Johann Hari also has an excellent article that explains well what happened with excessive speculation in the commodity markets.

The Center for Media and Democracy also has a good article showing how the financial reform bill will help farmers and agriculture markets.

The World Development Movement in the UK has launched a new campaign to address excessive speculation in commodities. They have created an excellent new website with a host of good, clear information about the issue. Definitely worth taking a look.