The Commodity Speculator Blame Game

Again, the WSJ has published an article about speculation in commodity markets:

Cui, Carolyn, Josephs, Leslie, 2010. A cotton market targets speculators. The Wall Street Journal, Feb. 4.

The article relates how InternationalExchange, Inc. is attempting to circumvent a potential commodity squeeze from happening for Mar. cotton contracts by requiring big players to justify their positions.

From the article:

"Market participants wanting to hold more than 300 contracts, the equivalent of 30,000 bales, during this time, must request approval and prove they have an economic need for the cotton. While this rule hasn't usually been enforced in the cotton market, it is has been regularly applied across other agricultural products."

Having worked in a similar commodity industry for many years, I really can not imagine exactly how an "economic need" can be proven or dis proven.

Folks forget that for commodity markets to function properly there must be buyers, sellers, and speculators. Without speculators liquidity decreases.

In my opinion, speculation is not the issue. The real issue is supply. However, speculators take the blame.

Further, the WSJ article states:

"The move by ICE draws the spotlight back onto the debate over whether speculators play a role in creating swings in commodities markets. The Commodity Futures Trading Commission has long sought to rein in trading by hedge funds and others who are merely placing bets on prices, but has so far failed to prove that speculators have had a big impact."

The bottom line - it is theoretically difficult and perhaps impossible in reality to assess any negative effect of speculation in commodity markets. This confirms an earlier statement in the WSJ (see Food Markets, Price, and Speculation). In some regards, all market players are speculators to various extents.

Finally, this quote from the article should give folks pause to think about the consequences of food price inflation for many parts of the world, including countries like Egypt:

"Those concerns have resurfaced as prices for everything from soybeans to copper set records. Rising prices have grabbed the spotlight. Violent protests in North Africa and the Middle East have triggered unease among governments who fear a repeat of the food crisis of 2007 and 2008, which saw unrest in developing countries around the world." bold added

Supply is the issue. Blaming pure speculators is simply a smokescreen for a lack of supply and inefficient markets.