For decades, cotton farmers and buyers, like clothing makers, have used commodities futures markets to hedge against natural price volatility, which helps them to survive bad years. Now, however, Wall Street speculators like banks and pension fund have swamped the markets, controlling larger portions than the people who actually use the cotton, McClatchy reports.
These speculators, who have no intention of ever taking delivery of the product and treat futures contracts like a stock, have driven up prices and price volatility, making things harder for the people who grow the product, the companies that turn the raw material into finished goods, and the consumers who purchase those goods:
Such financial speculation helped drive an overheated cotton market to record levels of $2.17 a pound on March 7. Before peaking, cotton prices had risen by more than 140 percent in less than 18 months. … [T]his speculative money from investors who’ll never actually take delivery of cotton is distorting the futures market, driving up cotton prices, and thus raising prices for apparel retailers and consumers alike.
Sifting through CFTC historical data, McClatchy found that the total number of outstanding futures contracts grew by about 80 percent from 1990 to 2010. That’s big growth in a historically small market. Moreover, the number of contracts doubled between 2004 and 2010. This parallels the timeframe when institutional investors began to play seriously in commodity markets, aided by popular commodity indices developed by investment bank Goldman Sachs and the now-disgraced financial giant American International Group.
Unfortunately, the agency that could help rein in speculators and address this problem, the Commodity Futures Trade Commission (CFTC), has been a frequent target of the GOP’s war on regulation. Despite the severity of the speculation problem across various markets, Republican lawmakers last month gave the commission a 2012 budget allocation one third lower than President Obama’s request. That, despite the fact that the CFTC is already stretched thin and will have to take on vast new responsibilities in implementing the Dodd-Frank Wall Street reform law. This funding level so the stingy that the agency may be forced to lay off 60 workers — 8 percent of its staff.
“Without limiting the total speculation in each market, farmers and consumers will continue to needlessly suffer from higher and volatile prices,” said Dennis Kelleher, president and CEO of Better Market, an organization which works for more transparent markets. “We have seen the results of an ill-funded and ill-equipped regulator. It isn’t a pretty picture,” said Bart Chilton, a Democratic commissioner for the CFTC.