Features Agronomy Cereals
US food producers square off against speculators

April 23, 2008

Washington DC and Toronto, ON — Food producers lined up against investment fund managers during an extraordinary meeting in Washington yesterday, saying they are partly to blame for driving up food prices and playing havoc with commodity markets.

"Sixty per cent of the current [wheat] market is owned by an index fund," said Tom Coyle, of the National Grain and Feed Association. "Clearly that's having an impact on the market."

Billy Dunavant, president of cotton producer Dunavant Enterprises, was more blunt: "The market is broken, it's out of whack."

The investment fund managers and some researchers said there is no conclusive evidence the funds have caused problems. And both sides agreed that many other factors have roiled the markets, including weather, currency fluctuations and surging demand from China.

The meeting was called by the Commodity Futures Trading Commission, which regulates U.S. commodity markets, in response to growing concerns about soaring prices and volatile markets. Several participants said farmers have become so frustrated with the markets they no longer trust them to properly set prices.

In the past three months, the prices of wheat, corn, soybeans, rice, and oats have hit historic highs, raising not only the cost of food, but also the amount of money farmers and grain elevators have to tie up to participate in the futures market. Trading in some grains became so chaotic earlier this year, the Minneapolis grain exchange had to shut down for several days.

Increased borrowing costs have forced some elevators out of business, and are making it increasingly difficult for farmers to sell future crops at a locked-in price – the one tool they have always used to offset their risk.

"If they can't market their crops at these higher prices, we've got a train wreck coming that's going to be greater than anything we've ever seen in agriculture," Tom Buis of the National Farmers Union told the meeting. "For those who say everything is all right, I'm sorry, maybe I'm wasting my time, but there are problems and it's incumbent on us to try and solve them."

Diana Klemme, a vice-president at Atlanta-based Grain Service Corp., an agricultural brokerage and risk management firm, said corn growers are two rainy weeks away from a "crisis." If anything threatens the current crop, there will be a cascading effect throughout the industry, she said. "Hopefully God will be merciful, but if this impact does come about, it will be devastating," she said in an interview.

A freakish cocktail of factors, including poor global crop yields, increased demand from the likes of China and India, and a weak U.S. dollar have made food prices soar. Yet many farmers and commodities buyers suggested yesterday that another factor has exacerbated these price increases, and incited unpredictable gyrations in the futures market: the growing clout of financial speculators, like large index funds and hedge funds.

Some producers blamed these large speculators for causing a disconnect between the value of a futures contract, and the underlying value of the asset is supposed to represent.

Cotton growers have been among the most vocal critics, having witnessed a baffling surge in prices over a few days in March. In one day, the price of cotton jumped 15 per cent despite reports showing cotton supplies were at near record highs.

Several cotton industry players urged the CFTC to investigate the price movements, and demanded that the regulator make speculators subject to the same rules as commercial players who buy and sell the actual commodities.

Representatives from the speculative-investment side insisted that there is no evidence that they are causing price distortions, despite their larger participation in the market. "I do not see a convincing case that index money has changed the stated objectives of this market," said Bob Greer, an executive vice-president at the fund company Pacific Investment Management Co.

Given the current turmoil, the CFTC said yesterday it was not inclined to move ahead with controversial plans to raise investment limits for speculators. "I believe that before acting, this agency must be certain that additional speculative pressures will not exacerbate the anomalies we are experiencing in these markets," said CFTC acting chairman Walt Lukken. "It is critical that we understand the problem fully so we can get it right and ensure that the cure is not worse than the disease."

FOOD FOR THOUGHT

Some food figures from the agricultural round table in Washington organized by the Commodity Futures Trading Commission:

World wheat consumption has exceeded production in six out of the past eight years.

World wheat stocks are at a 30-year low. Crops in Canada, Europe, the United States and Australia have been below average in recent years.

Big wheat-producing countries Ukraine, Russia, Kazakhstan and Argentina have recently curtailed wheat exports. Vietnam, Egypt, India, Cambodia and China have restricted rice exports.

More than 30 per cent of the U.S. corn crop this year will go to ethanol production. Five years ago, it was 10 per cent.

The price of wheat has increased 95 per cent in the past year, rice is up 118 per cent, corn 66 per cent, soybeans 88 per cent, oats 47 per cent.

Sixty per cent of the wheat trading on U.S. commodity exchanges is owned by investment funds.

The price of some fertilizer for Canadian and U.S. farmers has tripled since last fall; diesel fuel is up about 50 per cent.