US farm group seeks crackdown on speculators

20 May 2008 19:12  [Source: ICIS news]

HOUSTON (ICIS news)--Regulators need to crack down on manipulation of US agricultural commodity futures markets before a disastrous collapse in prices takes place, the head of the National Farmers Union (NFU) said on Tuesday.

"Without a properly functioning and regulated futures market, a train wreck is headed straight for rural America that will jeopardise our ability to continue providing a safe, affordable and abundant food supply for this nation," NFU president Tom Buis said.

In prepared testimony to a Senate panel, Buis said the Commodity Futures Trading Commission (CFTC) was using too narrow a definition of speculation and not paying enough attention to over-the-counter (OTC) trading.

"Without a full understanding of these trades or their impact, it is impossible to say that manipulation of the commodity markets is not occurring," Buis said.

Although the US agricultural industry has been buoyed by soaring global prices for food, farmers have also had to face a surge in input costs with record prices for fuel and fertilizers such as ammonia and urea. Ethanol and biodiesel producers have also been squeezed by rising feedstock costs.

Farmers needing to hedge against those input costs have not had the same access to financial instruments as Wall Street players do, Buis complained.

The mere existence of those financial participants was part of the problem, he said.

"What (the) CFTC is failing to recognise is that the deluge of money from Wall Street and hedge funds in and of itself is driving prices artificially high in a potentially destructive manner," he said.

US corn futures reached a peak of 640 cents/bushel earlier this month, compared with around 400 cents/bushel one year ago and around 250 cents/bushel two years ago. The market has cooled in recent days as corn planting has accelerated, and amid doubts about long-term political support for biofuels.

Buis likened the situation in agricultural commodity markets to the shudders put through energy markets in recent years due to big losses incurred by failed trading firm Enron and subsequently by the 2006 collapse of hedge fund Amaranth.

"When Amaranth failed, unexpected declines in price occurred," Buis said. "This same fact pattern can occur in agricultural markets. And farmers, who have been denied the protective tools the commodity markets are supposed to provide, will be the ones taking the fall."

The CFTC said last week that its studies of commodity markets have shown that speculators follow price volatility, rather than cause it.

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