Dollars and Sense has published an examination of why supply and demand factors may not be the only cause of global food price inflation. In an article entitled “Hot Commodities, Stuffed Markets, and Empty Bellies,” KLD Research Analyst Ben Collins considers how some investors may be influencing commodities prices:

“…[The] growing presence of buy-and-hold investors in commodity markets has prompted heated debate among commodity traders, economists, and politicians over other possible causes of higher commodity prices. … [The] quantity and liquidity of money flowing through today’s global markets is unprecedented in human history.”

Collins’ commentary includes a recap of how U.S. commodity markets have evolved since they were deregulated in 2000. Since then, new classes of speculators have come to dominate commodities trading. He cites one fund manager’s Senate testimony that commodity index investors’ holdings on traditional U.S. exchanges have increased from $13 billion in 2003 to nearly $260 billion as of March 2008. And as of April 2008, index investors held approximately 35% of all corn futures contracts on traditional exchanges in the United States, 42% of all soybean contracts, and 64% of all wheat contracts, compared to minimal holdings in 2001.

Collins also cites a Commodities Futures Trading Commission (CFTC) estimate that 85% of commodity index investment now takes place on “over-the-counter” markets. These permit investors to “trade commodities futures contracts without any position limits, disclosure requirements, or regulatory oversight.”

Some argue that this type of investing is inherently inflationary:

“Mack Frankfurter, a commodities trading advisor at Cervino Capital Management, suggests that the influx of commodity index investors has transformed commodity futures from tools for risk management to long-term investments, ‘causing a self-perpetuating feedback loop of ever higher prices.’”

Without denying the significance of booming demand or constraints on the food supply, Collins concludes by calling for effective regulation to “restore the accountability of commodity markets to the social interests they were originally established to serve.”

Click here for a New York Times report of Senate hearings on commodities speculation.

Also see “Who is responsible for the global food crisis?” from the Toronto Globe and Mail.

[NOTE: The views published externally by KLD employees do not necessarily reflect those of KLD or its clients.]