WASHINGTON – Homeland Security and Governmental Affairs Committee Chairman Joe Lieberman, ID-Conn., and Ranking Member Susan Collins, R-Me., Tuesday heard testimony that financial speculation by institutional investors and hedge funds in the commodity markets is a factor in food and oil costs rising to unprecedented levels.
At a hearing called to examine the effect of institutional investors and hedge funds on food and energy price inflation, the Senators discussed possible solutions, including barring certain institutional investors, such as pension funds, from investing in commodity markets through the use of index funds and closing the so-called “swaps” loophole that allows large investors to sidestep limits on speculative activity in the commodity markets.
Lieberman said a future hearing would be held to debate these proposals.
“As everyone knows, the cost of food and energy is at record highs, creating economic distress for millions of working families in America and around the globe,” Lieberman said. “At home, rising food and gasoline prices put a real and immediate strain on family budgets. And overseas, the consequences are even more dire. My own conclusion is that index speculators are responsible for a big part of the commodity price increases, and we in Congress ought to do the best we can to protect the public interest in an effort to bring food and energy prices down.”
Collins said: “Americans are facing record gasoline prices and the fastest rise in food prices since 1990. If the commodity markets have affected these prices, the CFTC must have the resources necessary to better monitor the market and take action. In my own State of Maine the average family uses between 800 and 1,000 gallons of oil during the winter. Many I have spoken with are unable to afford the rising costs of these basic family needs. The Committee will continue its investigation into these issues and may consider legislation to ensure that financial speculation in commodity markets does not affect consumer prices at our gas stations and grocery stores.”
Speculative activity in commodity markets has grown enormously over the last several years. From 1998 to 2008, the share of long interests - that is, market positions that benefit when prices rise - in commodities held by financial speculators has grown from one-quarter to two-thirds of the commodity market. In only five years, from 2003 to 2008, investment in index funds tied to commodities has grown twenty-fold, from $13 billion to $260 billion.
This growth raises justifiable concerns that speculative demand - divorced from market realities - is driving food and energy price inflation and causing human suffering.
This hearing was the second in a series looking at the effect of various federal policies on the spiking costs of food and fuel.
Witnesses included Jeffrey Harris, chief economist of the Commodity Futures Trading Commission; Michael Masters, Managing Member and Portfolio Manager of the hedge fund Masters Capital Management, LLC; Thomas Erickson, chairman of the Commodity Markets Council, a trade association composed of the futures exchanges and members of the commodity futures trading industry; Dr. Benn Steil, a senior fellow and the director of international economics at the Council on Foreign Relations; and Tom Buis, President of the National Farmers Union.