Capital Press

Stricter limits on speculation in the commodity futures market have been blocked by a federal judge until regulators determine whether the new rules are justified.

The U.S. Commodity Futures Trading Commission planned to tighten the "position limits" on the size of bets made by investors who speculate on the shifting prices of crops, livestock, energy and metals.

The agency said the stricter limits were required by the Dodd-Frank financial reform legislation passed by Congress in 2010, but a group representing investors filed a lawsuit claiming the CFTC misinterpreted the law.

U.S. District Judge Robert Wilkins has found that the CFTC wasn't mandated to set stricter position limits regardless of whether they were necessary. The judge has suspended the rules, which were to take effect Oct. 12, while the agency reconsiders them.

Commodity futures experts contacted by Capital Press said it's hard to gauge the role speculation has on crop prices, so it's unclear what kind of impact the position limits would have had on the market.

The necessity of such curbs on speculation remains a hotly disputed topic, experts said. Speculators are seen as amplifying market swings, but they also make it easier for farmers and elevators to buy and sell futures contracts.

"We want speculators to take the other side of it when we want to get in or get out," said Scott Cordes, president of Country Hedging, the financial arm of the CHS farmers cooperative.

Cordes said he takes a neutral view of position limits.

Such restrictions have a role to play in preventing speculators from warping the supply and demand fundaments that market should be based on, he said. However, they shouldn't be so stringent as to impede trading.

"On the one hand, you need liquidity. On the other hand, there are occasional market distortions," said Rich Nelson, director of research for the Allendale brokerage firm.

The immediate effect of position limits probably would have been negligible, because there has been much less speculative "fluff" inflating crop prices this year, said Nelson.

Concerns among investors about global economic growth have tempered their appetite for commodities, he said. Real economic forces, such as the drought, have been more of a deciding factor.

"Prices seemed to go where they needed to this year according to our fundamental models," Nelson said.

Crop prices have fallen from peak levels in the summer and currently are more in line with supplies than with speculator expectations, said Henry Kornegay, principal broker at Jackson Commodities.

"They had a big impact on the way up. They drove it higher than it should have been, which is why we took the break we did," he said.

The long term function of speculators is more complicated, experts say.

Index funds, which seek to track asset classes, have invested in commodities regardless of market forces and may inflate prices, said Mike Krueger, principal broker at MK Commodities.

Other investors, such as hedge funds, tend to react to supply and demand, he said.

"You get more volatility but in the end you reflect fundaments," Krueger said. "They will exaggerate both bearish and bullish moves."

Jim Williams, energy economist at WTRG Economics, said speculators have likely pushed up oil prices.

Investors have bought up futures contracts for oil at a pace that exceeds global demand for the product, he said.

"If you reduce the number of buyers, it would have some negative effect on price," he said.

"Even so, it's difficult to quantify the role of speculators in the oil market because prices are affected by genuine geopolitical risks," Williams said.

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