It’s not often that the CEOs of the nation’s largest airlines and the leaders of some of the biggest cotton merchandising firms come down on the same side of an issue. But that’s what happened recently as the leaders of 11 airlines and major cotton merchants began giving consumers and members of Congress an earful about the impact of index funds and speculators on commodity prices.
The airline CEOs signed a “Dear Customer” e-mail that went to members of their frequent flyer organizations, noting the effect of the skyrocketing cost of fuel from $146-per-barrel oil and its effect on the national economy.
“Twenty years ago, 21 percent of oil futures contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery,” the e-mail said. “Today, oil speculators purchase 66 percent of all futures contracts and that reflects just the transactions that are known.
“Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some experts estimate current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.”
The e-mail was distributed the same day (July 10) the House Agriculture Committee was holding the first of two days of hearings on legislative proposals to amend the Commodity Exchange Act to address “possible manipulation or excessive speculation in the futures markets.”
The committee heard testimony from 25 witnesses representing groups ranging from the New York Mercantile Exchange (NYMEX) to the Airline Pilots Association. Among those testifying was Joe Nicosia, president of the American Cotton Shippers Association.
Nicosia said the massive influx of money into the commodity markets from index funds and over-the-counter traders has rendered the cotton market “ineffective for hedging against price risks and discovering prices.”
The result, he said, is that cotton merchants and cooperatives cannot offer price quotations to growers or end users because they don’t have a mechanism to hedge risk, one of the primary objectives of a futures market.
Another cotton merchandising firm representative expressed his opinion in an e-mail sent out by Plains Cotton Growers. Anthony Tancredi, vice-president with Allenberg Cotton Co., said the cotton industry finds itself “on the precipice of dysfunction, courtesy of the extreme movements in ICE (International Cotton Exchange) futures caused by index funds and speculative activity.
As a number of witnesses pointed out during the House Agriculture Committee hearings, the futures markets were originally created to help provide price discovery and risk management for agricultural commodities.
Over time, the futures market concept has been expanded to include other commodities, including oil and gas, precious metals and now even “carbon credits,” a new environmental area where trading is just beginning.
“This purpose has been shoved aside by big money flowing into commodity markets purely as a speculative investment,” said Tancredi, a past president of the Texas Cotton Association. “The cotton market was not designed to handle such an inflow of investment capital, and, as a result, reacted in totally non-fundamental fashion.”
More than 70 years ago, the airline CEOs noted, Congress “established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed.
“We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight,” the airline CEOs said. “Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.”
Tancredi said the rush of index and hedge fund money into the commodity markets has upset the traditional relationship of the cotton trade and speculators. (Most experts believe speculators play a needed role by helping provide liquidity for the commodity markets.)
“It is completely backwards to have the industry affected by speculative interests instead of the opposite,” he said. “The cotton industry is united in its opinion that the futures market cannot continue to operate in its current condition.”
House Agriculture Committee Chairman Collin Peterson said the July 9-11 hearings gave committee members a lot to ponder as they try to deal with the turmoil in the commodity markets.
“The last three days have demonstrated that any change in the regulation of commodity futures markets should be thoughtful and deliberate,” said Peterson, a Democrat from Minnesota. “This is a very complex issue and major changes to the Commodity Exchange Act could have unintended consequences.
“Nevertheless, we plan to move forward and develop a bipartisan, consensus bill that addresses possible manipulation or excessive speculation in the futures markets.”
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