Congress needs to focus on putting limits on speculative interference with commodity markets. Like I've stated elsewhere, by family are oil people and my wife's family are farmers. In normal times in commodity markets less than 10% of market investment is speculative. The markets are used, normally, by producers, consumers and shippers to mostly hedge positions. You buy and sell commodities on or off a dated contract price. When one side fixes you offset in the futures market to protect your basis (negotiated profit margin). These are all people who either have to deliver the commodity or take possession of a shipment of a commodity. Speculators do neither. Under normal circumstances their purpose to provide a degree of liquidity to the market, allowing the middlemen (shippers) to protect themselves by making timely trades.
Under normal times the markets adhere closely to stochastic models that follow normal demand-supply pressures in REAL terms. In hyper-speculative times, markets no longer obey these "rules". That's today. Over 60% of the money in the oil market today is speculative, as opposed to 10-15% in normal times.
Speculators are essentially causing almost ALL the problem and if there is a group that needs to have the federal screws applied to their thumbs it is the speculator, NOT the oil companies.
Do you know that Exxon's production profile has barely grown over the past five years but the company spends $20-$30 billion a year in share buybacks?
Did you think that the government should have done something to stop the mania in tech stocks in 1999 or the housing market in 2005-07? Do you think the government should have stopped the insane buying of tech companies and homes by investors? Because it was the inability of the government to do anything as those bubbles inflated while flooding the system with liquidity after the bubbles burst that is a primary driver of commodity inflation today. Investors are merely acting as rational agents in response to economic conditions the government helped create (though we're entering Bubble 3.0 territory).
I agree that speculation is having an effect on the price of commodities. Its hard to say that it is not. However, to say that ALL of the problems are caused by "speculators" is specious at best.
For example, the soaring price of rice has almost nothing to do with speculation. Many speculators didn't even know that rice was traded in America until it started to soar. (Rice is traded on the CBOT) Rice is one of the lowest volume commodities traded on any futures exchange in the world. About 90% of all rice produced is consumed in its home market, and the soaring price has more to do with drought in Australia and infestation in Vietnam.
There is no futures market for liquified natural gas that I'm aware of. However, spot pricing for LNG delivered to South Korea was as high as $20 a month or two ago, far
above the spot price of nat gas in America. This has nothing to do with speculators because there is no speculation in the LNG market.
Also, look at the Baltic Dry Index, which is an index of shipping rates for dry bulk goods. This is back to all-time highs. If speculation was the primary (as opposed to a minor) driver of commodity prices, the Baltic Dry Index would be nowhere near its highs because it represents the prices paid to shippers to transport actual goods. If it were speculators as opposed to the real economy, buyers of commodities in the real economy would not be bidding up shipping rates so high.
http://investmenttools.com/futures/bdi_baltic_dry_index.htm
I find it more than a little ironic that Congress is considering limiting speculation in commodities markets, given how much support it gives farmers and the tax breaks it has given the oil companies. When investors on their own volition bid up prices of foodstuffs, putting money into the pockets of farmers, that's bad. But when Congress supports farm prices through distortionary subsidies which pay farmers not to farm, upsets our trading partners, takes money out of consumer pockets in the form of hidden transfer tax, and supports an ethanol program that is contributing to the skyrocketing prices of commodities around the world (not to mention that subsidies contribute to the deficit, which is inflationary and also contributes to high commodity prices) that's good.
The United States has run an incompetent fiscal policy for most of this decade and an incompetent monetary policy for longer. The dollar is tanking and investors are running for hard assets. Surprise, surprise.
You want Congress to limit "speculators," which include the largest pension funds in the world. Fine, we'll trade out of London, which will create arbitrage opportunities for real producers and consumers to transact out of there, keeping the prices up anyways.
Best of luck with that.
