Will new legislation end excessive commodities speculation?

By Christine White

Today both the House and Senate are holding hearings on calls to re-regulate commodities markets.

In the past year, a number of all too familiar factors – increasing demand of agrofuels, lack of grain reserves, climate variability, a weak U.S. dollar, and the high price of oil - all played a significant role in the food price crisis of 2008. To add to the havoc in an already fragile food system, deregulation of commodities markets allowed hedge funds and index investors to buy up commodities futures to protect their cash from the stock market crash. This last speculative bubble – caused by unregulated food commodity speculation - pushed many poor consumers over the edge. Now with oil prices once again on the rise and commodities expected to rebound – we could be looking at a repeat of the food price crisis of 2008.

Ending this extreme food price volatility can begin with a simple step – strong legislative reforms. The U.S. Senate needs to take a serious look at the food crisis at hand and make some responsible decisions. Recently there have been legislative advances made in getting good reforms. David Kane of the Maryknoll Office for Global Concerns has reported on some of the recent positive happenings. He says that “Congress is definitely interested in addressing this important issue and a bill will pass this year. The more they hear from us the stronger that bill will be.”

Promising measures for regulation began with a call from the Obama administration for “all derivatives, which would include food and energy commodity futures, to be cleared through a regulated exchange.” The administration’s letter calls for a host of regulations that will close commodities loop-holes. In an effort to strengthen its legitimacy, both Rep. Peterson, chair of House Agriculture Committee, and Rep. Frank, chair of House Finances Committee have endorsed the letter.

An important aspect missing from the letter was a call for commodities Exchange Trading, rather than the administration's initial request of Exchange Clearing. Exchange Trading would provide full transparency to the public, unlike Exchange Clearing, which only allows few regulators to have access to necessary trade information.

Kane points out that “by making contracts trade on an exchange, economists and others will be able to monitor the markets and point out imbalances, dangers, etc. With only exchange clearing, as is currently proposed, we will be dependent on regulators to act. I think the current financial crisis has shown clearly that relying only on regulators is not enough. Full public disclosure is clearly the best way forward.”

A valid point, indeed, and all the more reason to argue for public transparency of our commodities markets. Congress is starting down the right path, but it is important that we push relentlessly to regulate the commodities futures market. This is a pivotal first step to ensure more stable food prices and avoid another food crisis.