Running for office? Worried about high gas prices? Need a scapegoat, someone to blame? Yes, it must be those greedy commodity traders in Chicago and New York who are running up the price of oil and making a fortune at the public’s expense. But, is that true?
Anyone looking for a headline to promote themselves is attacking the nefarious “oil speculators” these days. President Barack Obama, seeking support from American gasoline consumers - a massive constituency to be sure - recently announced his intention to impose more regulations on the futures industry. On his top-rated cable news show, The O’Reilly Factor, Bill O’Reilly has repeatedly blamed oil “speculators” for the rising price of gas at the pump and has also called for more regulation. At a Senate hearing, Washington Senator Maria Cantwell said excessive oil market speculation is behind skyrocketing prices burdening American families and businesses. But Obama and Cantwell are both up for re-election in November and O’Reilly lives off his TV ratings. With drivers increasingly irritated by each uptick in prices at the pump, the melding of these groups is a perfect storm of headlines, anger and calls for government controls. Do futures traders put up no money at all as O’Reilly has claimed? What are the facts?
Any trader who buys (takes a “long” position anticipating higher prices) or sells (takes a “short” position anticipating lower prices) must provide funds to meet margin requirements in his trading account before being able to place an electronic order. These margin requirements are mandated by the Commodity Futures Trading Commission (CFTC), set by the exchanges and enforced by the member brokerage firms. In the case of oil futures, that requirement is $6,885 of the value of the contract. For gasoline, the requirement is $9,900 per contract. Because of the volatility of oil prices and the greater risk to the trader (and, consequently, to his brokerage firm and to the exchange itself as the final guarantor of performance), the margin requirement for energy contracts is higher than for most other commodities. For example, the margin requirement for the widely held LIBOR interest rate futures contract is $574 per contract; for the Board of Trade’s popular corn contract, the margin requirement is $2,363.
Some traders argue that if margin requirements are increased, smaller traders will be driven from the market risking manipulation by well-financed large traders. Is that what Obama and O’Reilly want? It would also decrease liquidity, the lifeblood of the American futures industry. Increasing margin requirements is like increasing taxes: it makes it more expensive to do business and, therefore, impedes business. Most knowledgeable observers have been critical of O'Reilly and Obama's war on free markets. Lest we forget, for every "speculator" that paid a high price in the futures market, some other "speculator" who thought he was wrong sold it to him.
Monday, April 30, 2012
Sunday, April 01, 2012
New hot commodity: Grains and the "free" markets in Chicago
The U.S. Department of Agriculture surprised the futures markets this morning with a report showing that stockpiles of corn fell 8 percent from a year ago – more than analysts were expecting. As a result, corn futures for May and July delivery rose by the $0.40 daily limit to near $6.50 per bushel. Projected acreage for soybeans and wheat planting was less than 2011 and so prices for those commodities are also much higher. With oil over $100 per barrel and gasoline at the pump flirting with $5.00 per gallon, what does this mean for commodity prices if the U.S. economy ever heats up?
In the robust economy of the 1990s, corn could barely get over $2.00 per bushel and now it’s more than three times the 1990s rate! What changed? Looking at the iTrade price chart of corn on the left, the position marked in red shows the last corn futures price under $2.00/bushel. That was in 2005. Today corn is limit bid at $6.44 and looking for an offer. But what happened in 2005?
In 2005, there was a significant transforming event: the Chicago Mercantile Exchange and the Chicago Board of Trade became “corporate.” For over 100 years, the Chicago exchanges were owned and controlled by its individual members. The markets are now mostly traded by corporations, the memberships are owned by corporations and, in fact, the exchanges themselves are now corporations. In an age where there are cries that oil prices are rigged by corporate speculators, can the same thing be happening to other commodities like corn, soybeans and wheat?
For years, the Chicago futures pits were hailed as the last bastion of open and free markets – a challenging environment of raw capitalism where fortunes were quickly made and lost based on the sheer resourcefulness and energy of individual, entrepreneurial traders. But times have changed. Just as corporations have taken over Las Vegas gambling, they have also taken over the Chicago commodity speculation markets. The CFTC (Commodity Futures Trading Commission) is supposed to be in charge but the CFTC still cannot find over $1.6 BILLION in customer funds that Jon Corzine was responsible for protecting at MF Global!
This is the first in a series of reports on the subject of the “free” markets of the Chicago commodity exchanges and how prices can quadruple even with no demand.
In the robust economy of the 1990s, corn could barely get over $2.00 per bushel and now it’s more than three times the 1990s rate! What changed? Looking at the iTrade price chart of corn on the left, the position marked in red shows the last corn futures price under $2.00/bushel. That was in 2005. Today corn is limit bid at $6.44 and looking for an offer. But what happened in 2005?
In 2005, there was a significant transforming event: the Chicago Mercantile Exchange and the Chicago Board of Trade became “corporate.” For over 100 years, the Chicago exchanges were owned and controlled by its individual members. The markets are now mostly traded by corporations, the memberships are owned by corporations and, in fact, the exchanges themselves are now corporations. In an age where there are cries that oil prices are rigged by corporate speculators, can the same thing be happening to other commodities like corn, soybeans and wheat?
For years, the Chicago futures pits were hailed as the last bastion of open and free markets – a challenging environment of raw capitalism where fortunes were quickly made and lost based on the sheer resourcefulness and energy of individual, entrepreneurial traders. But times have changed. Just as corporations have taken over Las Vegas gambling, they have also taken over the Chicago commodity speculation markets. The CFTC (Commodity Futures Trading Commission) is supposed to be in charge but the CFTC still cannot find over $1.6 BILLION in customer funds that Jon Corzine was responsible for protecting at MF Global!
This is the first in a series of reports on the subject of the “free” markets of the Chicago commodity exchanges and how prices can quadruple even with no demand.
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