Skyrocketing Commodity Prices

by Chris Sturr | June 04, 2008

For months, skyrocketing prices of food, oil, and other commodities have bewildered investors and governments, and have also threatened to raise the price of a subsistence-level diet out of the reach of the world’s poorest citizens.

Pundits, investors, and government regulators have offered many explanations for the spike in food commodity prices, including the growing use of biofuels in wealthy countries, a loss of crop production after years of destructive agricultural trade policies, drought, and a recent rise in fertilizer and energy prices.

In addition to these factors, the current combination of a weakening dollar, stagnating financial markets, and roaring inflation rates in the U.S. and abroad has led to a renewed interest in commodities among retail and institutional investors. Although the impact of these new commodity “index” investors on commodity prices has been hotly debated, a number of market participants have argued that this new flood of investment dollars has amplified the recent increase in commodity prices.

In his remarkable testimony to the U.S. Senate last month, the hedge fund manager Mike Masters presented evidence that index funds and institutional investors were responsible for recent price spikes in oil, food, and other commodities, prompting a number of responses among financial bloggers, including Yves Smith.

The U.S.’s commodities regulatory agency, the Commodity Futures Trading Commission has been relatively quiet on the issue of commodity index investment until yesterday, when the CFTC’s acting chair Walter Lukken announced plans to “improve oversight of the futures markets and bring greater transparency and scrutiny to the types of traders in the marketplace, including large index traders.” Ironically, back when he was counsel to Senator Richard Lugar, Lukken helped draft the Commodity Futures Modernization Act of 2000, which opened up U.S. commodities markets to index and retail investment in the first place.

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