India has halted futures trading in certain types of commodities in an effort to combat inflation by reducing speculation. Observers argue this is likely to be ineffective, arguing that the price rise is fundamentally driven.
It is true that just about every major economy ex the US and Japan is suffering from inflation (and most Americans think inflation is worse than the Consumer Price Index indicates). It is also true that new institutional and retail cash continues to move into commodities, which says the concerns about speculation aren’t baseless (although soyabean oil, rubber, and potatoes, which are not included in the GSCI or other indices favored by financial investors, are not obvious candidates for new financial entrants. Morevoer foreign funds are not permitted to participate in India’s exchanges).
India is hardly alone in trying to dampen frothy-looking markets. The Wall Street Journal reports that a Senate bill to dampen speculation by increasing cash collateral requirements has earned the disapproval of James Newsome, the acting head of the CFTC. Newsome argues that the new rules would simply drive trading to other exchanges. That may well be true, but governmental concern about burgeoning commodities prices is so widespread that a coordinated attack, such as a joint rise in margin requirements, isn’t out of the question.
From Bloomberg:
India, the world’s second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chick peas and potatoes as the government intensified efforts to cool inflation that’s at the highest in more than three years.
Trading has been halted for at least four months from today…
Communist allies of Prime Minister Manmohan Singh want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices. Still, the order comes a week after a government-appointed panel found no evidence a 2007 ban on wheat and rice futures curbed prices of the grains….
The government-appointed panel chaired by economist Abhijit Sen last month didn’t recommend extending the ban to other food commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.
“Prices may start to rise again if supply-side constraints are not eased,” Si Kannan, associate vice president at Kotak Commodity Services in Mumbai, said by phone. “The ban is a short-term measure.”
India’s inflation accelerated to 7.57 percent in the week ended April 19, the fastest pace in more than three years….
Domestic traders, producers and consuming companies are the main participants in India’s commodity exchanges, compared with the 13 million people in the country who invest in stocks. Overseas funds aren’t allowed to trade Indian commodity futures.
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Saw that on bloomberg yesterday. But what’s the alternative? Private deals?!
The ban is more to demonstrate that the Government is concerned about inflation, rather than any hope of getting the prices down.
Haha. It would be funny if it weren’t so sad.
Prices are a hugely valuable signal. Economies and economic agents NEED crisp, clean, reliable and current prices to effectively allocate the means of production and capital.
Preventing the financial markets from pricing these goods does nothing to change the real supply and demand situation on the ground and most definately does not prevent inflation.
As always, central banks and loose monetary policy is the cause and capitalism takes the blame. Capitalism is the ultimate scape goat.
TheFinancialNinja
This is a back door attempt at price control, and it will have the same effect as other forms of price control: hoarding, shortages, and extreme volatility on the spot market.
The “observers” mentioned in the article are correct: prices are being driven by fundamentals. Speculators don’t drive commodity prices, they anticipate them. They are, however, convenient scapegoats for governments trying to duck responsibility, the public who wants to blame someone, and analysts who don’t understand the fundamentals.
Yves, I’d be interested in your take on this article (I’m not sure how credible it is):
PERHAPS 60% OF TODAY’S OIL PRICE IS PURE SPECULATION
http://financialsense.com/editorials/engdahl/2008/0502.html
In my opinion, there is clearly a widespread bubble mentality with respect to oil and other commodities — i.e., long term trends of increasing demand and diminishing supply are used to justify any increase in prices as sustainable, no matter how dramatic. I realize that near-vertical supply and demand curves as well as other non-bubble dynamics can explain sharp price increases, but the pervasiveness of this do-not-question-it mentality seems to make a bubble likely (now or in the future) in any market where the mechanics of exchange and inventory make it feasible.
Has anyone seen attempts at predicting consequences if commodities ARE in a huge bubble? i.e., if peaking speculative interest and a demand shock cause oil prices to drop in half over a period of months, the impacts on agriculture commodity prices, US trade deficit, currencies, etc seem likely to be quite dramatic.
“Chickpeas futures surged 89 percent in the past 12 months on the National Commodities exchange, while rubber rose 41 percent and soybean oil advanced 21 percent in the period.”
That kind of price increase is speculative — especially for chickpeas. To me it does indeed appear that speculators, looking towards inflationary hedges, are creating a self fulfilling prophecy that has no referent to the underlying good being traded.
Note also that the volumes and prices in other less traded futures immediately surged after the ban. That’s immediate evidence of speculative funds and not a sudden increase in demand for these other underlying commodities.
Too much speculative capital has been distorting markets — real estate, lending, etc… — all over the world.
Too much new capital, the $500B that the FED swapped for illiquid securities, the $100B from the BOE, plus the ECB’s contribution (don’t remember the number offhand) have created a huge pool of capital looking for a home.
Interesting that the historical relationship between oiol and dollar is breaking down as the dollar rallies and FT runs headline that US/Europe commited to stronger $. Also interesting that Gold is finding no traction to the upside, despite worsening inflation seemingly everywhere? It was clear the G5-7 was going to attack the dollar bears but what happens when the traditional relationships break. Intended consequences vs. unintended consequences. Seems a timely question these days.
Nobody really knows whether commodity prices are rising because of supply/demand issues or speculation. Let’s see if it works.
I don’t know what Engdahl is smoking. Nearly everyone believes that commodities prices are almost purely speculation. How then can there be much of a bubble?
To me this looks like a belated flight-to-hard-assets, now being fuelled at a fantastic rate due to prevailing negative real interest rates (especially in the US). At least, rates available to high-powered money.
The problem of policy here is those interest rates. The exchanges are working just fine in response to them.
Yo Aaron K., we’re thinking alike on this one, yessir. Western Central Bankers have pushed ‘liquidity’ into financial markets—but it’s pooled at the top, not trickeled down into the debt markets. That liquidity is acquired a real neg rates, plus it’s acquirers are paying interest back to the Central Banks to have the use of it at all: doing nothing just loses Big Finance dough in a situation where they _must_ get return in excess of their capital cost. The flow to ‘hard assets’ seems a real, necessary, and all but desperate process, although these latecomers are just following hedgies and private wealth folks who’ve made the same play for awhile and who will get most of the gains. That the speculative buying of demand-driven commodities only builds momentum works well, if you’re a speculator and if you sell your future while the slingshot is accelerating. Oh BTW, inflationary loose money policies of _some_ central banks narrows the asset range that hot spec dough can throw itself at with prospect of making bread.
I have no love for speculators at all, and their acts are not benign, but misapplied central banking to flood equity when we have a solvency issue is the floor of the elevator which keeps rising under spec prices. To me, anyway.