Speculation and Commodity Prices
MichaelÂ Masters’ recent testimony before the US Congress is being widely cited in support of the propositionÂ that speculation is having a big impact on upward and downward movements in commodity prices. As a long-standing futures market insider, he arguesÂ quite persuasively that institutional investors such as hedge funds have entered commodities futures markets in a huge way – a $250 Billion increase in trading since 2003 – and that the argument of soem economists that they do not impact prices becasue they do not take physical possession of the traded commodity does not hold water. Indeed, he states and seems to demonstrate that index speculators in futures markets directly impact on prices in spot markets. As he argues, if this were not so, there would be no regulations, and no regulator.
Some other commodities, such as iron ore and potash, are largely traded through negotiated contracts rather than on spot or futures markets. They are not included in the indices discussed by Masters. The skyrocketing prices of these commodities cannot be directly attributed to financial speculation.
Of course, that is not to suggest that these commodity markets are models of â€œperfect competition.â€ As Thomas Palley outlines, a few huge iron producers enjoy substantial pricing power. Potash production is similarly concentrated and the worldâ€™s largest potash company has a fairly explicit policy of managing supply to hold up prices.