With $135 per barrel
oil,
and perhaps more importantly $4 gas at the pump, the Commodity Futures Trading Commission (CFTC) had no time to celebrate its reauthorization as Acting Chairman Walt
Lukken
was brought before an alphabet soup of Congressional committees to address the role of speculators in rising commodity prices.
Congress has turned up the heat on the CFTC since mid-May, as several experts during Congressional hearings blamed speculators in general and commodity index funds in particular for skyrocketing prices, while the CFTC maintained that traditional supply and demand factors are at fault.
“Index speculators are responsible for a big part of the commodity price increases, and we in Congress ought to do the best we can to protect the public interest in an effort to bring food and energy prices down,” Senator Joseph Lieberman (ID-Conn.) said in a statement after a May 20 hearing by the Senate Committee on Homeland Security and Governmental Affairs. At this hearing, Michael Masters of Masters Capital Management said that assets allocated to commodity indexes have risen to $260 billion in March 2008 from $13 billion at the end of 2003 and that the CFTC has invited increased speculation. Standard and
Poor’s
, operator of the S&P/GSCI Index, estimates the size at $185 billion as of May. Former CFTC Chairman Sharon Brown-
Hruska
says Masters’ testimony “shows a fundamental lack of understanding of that sector.”
The CFTC took action by releasing initiatives on both energy and agriculture. The
ag
initiatives, a response to the agency’s April forum to investigate record volatility, included a review of trader reporting and classification and a withdrawal of the proposals to increase spec limits and exempt certain risk management positions. The exemption would have exempted index funds from speculative position limits under certain conditions. The CFTC has issued two no-action letters on this, which are still valid. The proposal would have codified the exemption to all index funds.
Elaine Kub, analyst at DTN, says the
ag
initiatives “were really nothing more than lip service.” She says the expansion of trader data doesn’t fix the loopholes that allow some index funds or large swap traders to call themselves hedgers and that the initiatives will not affect volatility.