According to officials with the Commodity Futures Trading Commission, there is little economic evidence that commodity prices are being systematically driven by speculators.

Jeffrey Harris, CFTC's chief economist told the House Agriculture Subcommittee on General Farm Commodities and Risk Management, that the CFTC analysis was based on the following reasons:

  • Prices have risen sharply for many commodities that have neither developed futures markets (durum wheat, steel, iron ore, coal, etc.) nor institutional fund investments (Minneapolis wheat and Chicago rice).

  • Markets where index trading is greatest as a percentage of total open interest (live cattle and hog futures) have actually suffered from falling prices during the past year.

  • The level of speculation in the agriculture commodity and the crude oil markets has remained relatively constant in percentage terms as prices have risen.

  • Our studies in agriculture and crude oil markets have found that speculators tend to follow trends in prices rather than set them.

  • Speculators such as managed money traders are both buyers and sellers in these markets. For example, data shows that there are almost as many bearish funds in wheat and crude oil as bullish funds.

“Simply put, the economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand,” Harris said. “These fundamental economic factors include increased demand from emerging markets; decreased supply due to weather or geopolitical events; and a weakened dollar.

“Together, these fundamental economic factors have formed a perfect storm that is causing significant upward pressure on futures prices across-the-board.”

The testimony flies in the face of testimony made April 22 at an agricultural forum held at the CFTC, where several cotton merchants and grain handlers said speculators were to blame for the extreme price volatility which nearly paralyzed forward contracting of crops in early March.

Joe Nicosia, CEO of Allenberg Cotton Co., said one category of speculator, index funds, “have turned futures contracts into investment contracts, thereby defeating the purposes for which agricultural contracts were created. The result has rendered the agricultural contracts, particularly the cotton contracts, ineffective for hedging against price risks, the discovery of prices and the actual pricing of commercial transactions.”

Nicosia said the CFTC “doesn't have the information to determine what went wrong. So much is taking place off the exchange. Fundamentally what took place was a systematic approach to push prices higher. You saw larger volume and larger prices than ever existed in night sessions while the industry slept.”

Harris said that given the widespread impact of the higher futures prices, the CFTC “will continue to collect and analyze our data closely, including continuing discussions and work with academic institutions, industry experts and other government experts and economists.”