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Kevin Hall: From coffee to oil little has been done about out-of-control commodities speculation

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Now joining us to talk about his work on commodities and speculation is Kevin Hall. He’s the national economics correspondent for McClatchy Newspapers. Thanks for joining us.


JAY: So you’ve been working on the price of coffee, and now you’re working on cotton and the role of speculation in effecting–essentially, creating a kind of price bubble. A couple of weeks ago there was a decision by the Commodity Futures Trading Commission on limiting what they call position limits. So you can maybe explain a bit about that. But is that decision going to control speculation?

HALL: Well, there’s a lot of debate about it. The Commodity Futures Trading Commission is designed to regulate the trading in contracts of future delivery of these products, whether it’s oil, whether it’s wheat, cotton, coffee. And critics say that it’s not going to make a difference, and the reason why is that they’re focusing–this law focuses on thresholds, and thresholds really aren’t the problem. For instance, to try to limit, say, 25 percent of the first 25,000 contracts, that gives you a cap for a single trader. But what’s going on in the markets today is you have what are called these massive passives, or these commodity index funds. They take 3 percent in cotton, 3 percent in coffee, 20 percent weighting in oil, another 10 percent in national gas, and they spread their money across a range of commodities. And the idea is to play it as if you’d play a stock, where you would buy and hold, under the idea that it will only go up in value over time. The difference is the futures market isn’t designed as an equities market where you buy and hold and increase value; it’s designed to hedge against price ranges. So what critics say what this does is it slowly drags up the price. It becomes a self-fulfilling prophecy.

JAY: ‘Cause everybody–especially if you’re holding the product and you look and see, well, they’re going to–six months from now they’re going to pay more than they are now; I might as well even sit on my product until six months from now, ’cause there’s a lot of hoarding going on.

HALL: Even if I’m losing money now, I’m going to lose money over this longer–or I’m going to make money over this longer horizon, because over a longer window this price is–this is all going to go up. So it’s the equivalent of holding a product before it’s produced, which is quite odd.

JAY: So you’re doing some work now, particularly on cotton. How is that affecting the price of cotton?

HALL: Well, we’d looked earlier at oil for quite some time, and then we tried to look at other products, like coffee, for instance. Earlier this year and late last year there were these huge spikes in coffee. It went from from, like, $3.99 a can at the grocery store to $8.29, things like that. Why was that happening? It seemed to be overnight. There didn’t seem to be anything out there. And what we found as we researched it more was that you had the perception of scarcity–not scarcity, per se. You had inventories winding down to the smallest levels. So people said, well, inventories are way down; we could have a–could is the operative word–could have a shortage. And these markets kind of run off of fear, and people are selling fear and the possibility of bad things that you need to hedge against and mitigate. So that kind of happened in coffee. The supplies had gone down at a time when actual production and delivery around the world was up. So there wasn’t really a shortage going on; there was a drawdown in stocks that fueled the market. It’s since balanced out somewhat, but it speaks to the kind of trend, and then–that we found in there, as we’re finding in cotton, that over time you can see the evolution of these financial players who come into the picture. And end users who are hedging, whether they’re a buyer of coffee or a seller of coffee, those historically are the people who play in these markets to hedge against price shifts. Suddenly, they’re crowded out. They–you know, they’re 25, 30, 35 percent of the market. The rest of the market is now financial companies. And so, again, this process of the volatile trading, you have what’s called the flash trading, where they electronically trade on algorithms, and suddenly, you know, one little thing kicks it off and, you know, price of–coffee prices may shoot up $3.00 in a day. So all this volatility, when you talk to the end users, like, either the growers or the buyers of cotton, to make clothing products, for instance, they can live with the price hikes. What they can’t live with is the volatility. You can’t plan anything if one day it’s $2.00, the next day it’s $6.00. You used to see swings of, you know, a couple of cents, and now suddenly you’re seeing dollars. And that makes a–per swing, and that makes a big difference in their ability to plan for the future.

JAY: Now, the Commodity Futures Trading Commission was authorized–more than authorized; told it had to by the Dodd-Frank legislation, to find ways to control what they called excessive speculation and stop this kind of distortion of the market, as they described it. But I guess one of the things that’s contentious is that even though they put some limits on how much–how many contracts an individual enterprise or institution could have, they didn’t seem to limit at all the whole sector of speculation in the market. How important is that?

HALL: Right. No, I think there is a group out there–in particular I think of Mike Masters, a hedge fund manager who’s been very involved in something called Better Markets. And Masters has testified a bunch of times in front of Congress. He’s on talking-head shows on the business channels fairly frequently when this topic is addressed. And his view is you ought to force a return to the traditional balance in this market, where you had 70 percent end users, 30 percent speculators.

JAY: Just to define for everyone that’s watching, end user means you’re actually going to take the jet fuel or corn or whatever it is and do something with it.

HALL: Right, so that you don’t have just these people who are trading contracts that they’ll never take possession of, you actually have the people who need to take possession of the product determining the market. You need a certain amount of speculation–the technical term is liquidity. You need money in there sloshing around, but only so much. And I think Masters’ view is anything over 30 percent of the market being financial players is excessive. Not everyone shares his view, but that’s one view. There are other views. The cotton story that we’re working on, that we’ve been working on, looks at the possibility of–maybe instead of something that draconian, like a hard and fast cap, is simply a requirement that a certain percentage has to physically be clear–that means it has to go to a buyer–which means the financial companies would either have to get out of this business, or they’d have to get into the warehousing and the actual trade of the product to delivery, which is a whole another animal.

JAY: So the problem right now, if I understand it correctly, is they couldn’t pass anything close to the kind of regulation they thought was needed in the CFTC, it’s been so watered down. And, you know, we interviewed Bart Chilton a little while ago, who is a member of the commission, and he was saying the strategy seems to be just slow everything down, drag it down till after 2012 elections, hoping that there’ll be even more opposition to regulation after 2012 in Congress. So what would be the implications [crosstalk]

HALL: And I would amend that to say the strategy has been to slow it down and then now start arguing that this uncertainty is poisoning the atmosphere and killing the ability to create business. You know. So first you slow it down to create uncertainty, and then you blame that uncertainty for inability to–you know, so you need to do away with these horrible regulations.

JAY: So the–I mean, one of the reasons for the crash of the economy was the success of speculation, which killed jobs. But now it’s going to kill jobs if you try to control that speculation.

HALL: Yeah. We haven’t seen a very convincing argument that a lot of these financial players are job creators. They’re mentioned that way sometimes. But these big trading companies aren’t–they’re not the people who are out there, you know, producing tons of wheat or oil or anything of that sort. So I think that’s a pretty hollow argument.

JAY: Thanks for joining us.

HALL: Thanks.

JAY: Thank you for joining us on The Real News Network.

End of Transcript

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Kevin G. Hall, is the national economics correspondent for McClatchy Newspapers. Previously he served as Latin America correspondent. During his career he has reported from Mexico City, Saudi Arabia, Miami, Los Angeles and Washington, D.C., for the Journal of Commerce and United Press International. He speaks Spanish and Portuguese.