New Better Markets Research Report Shows Wall Street Driving Up Food, Fuel Prices
October 14, 2011
Better Markets today released a new research report showing speculative commodity trading pushed by Wall Street is causing market disruptions that have increased prices for American families and farmers.
The analysis reviews commodity markets data over the last 27 years and shows that, since 2005, so-called commodity index funds have triggered an upward price curve in the futures markets when they trade out of an expiring month contract and into a new future month (referred to as the “roll”). This has resulted in rising prices and costs as well as a boom-and-bust cycle by changing the incentives of producers and consumers of commodities. It also has sent misleading and non-fundamental price signals to the market, which have disrupted the futures and physical commodity markets.
“This research report analyzes commodity market activity for more than 25 years and specifically analyzed speculative commodity index fund trading,” said Dennis Kelleher, president and CEO of Better Markets. “This is the first study to directly isolate the impact of the speculative index fund roll trading. The data shows the trading those funds do every month has severely disrupted and dramatically changed those markets, causing food and fuel prices to increase, hedging costs for businesses to rise, and prices to swing erratically up and down, which also raises everyone’s costs.”
“When this research and data is considered with Better Markets’ prior research on speculation, the need to ban commodity index funds is overwhelming,” said Mr. Kelleher.
The Dodd-Frank law requires the Commodity Futures Trading Commission to “diminish, eliminate, or prevent excessive speculation.” In its March 28 comment letter to the Commission, Better Markets called for banning commodity index funds because they are the primary drivers of such speculation, triggering dramatic increases in the price of vital commodities such as food and energy. The CFTC will rule on that matter on Oct. 18.
As detailed in the report, the research found that during this “roll” period, the price spread increases between the expiring contract and the new longer-dated contract, creating an upward price curve known as “contango.” The data shows that this bias toward contango is generally absent during the rest of the trading month.
The analysis also found that this contango bias did not exist prior to the rapid expansion of commodity index funds in 2004. In prior years, the historical price curve norm for longer-dated contracts was actually priced lower than near-term contracts – a structure known as “backwardation." But this has changed since $200 billion to $300 billion in these speculative index funds poured into the futures markets, pushed by the Wall Street firms that have heavily marketed and profited from them.
The research specifically analyzed the same trading dates on which the roll now occurs, going back 27 years. But no contango bias was present prior to creation of the commodity index fund. The study looked primarily at NYMEX WTI Crude Oil and CBOT Wheat. The analysis was also extended to NYMEX Heating Oil, CBOT Corn, NYMEX Natural Gas, and CME Live Cattle.
The data and analysis shows commodity index funds’ speculative trading is causing market distortions, disrupting price discovery, increasing the costs for commercial hedgers and pushing prices needlessly higher.