In a long-awaited move, the US Commodity Futures Trading Commission on October 18 approved limits on trading in the commodities markets. Specifically, the new rules limit the number of commodity contracts that any investor can hold in agriculture, energy, or metals contracts. The trade limits, originally mandated in the Dodd-Frank Financial Reform Act which was passed in July 2010, stemmed from worldwide concerns that commodity index and other funds contributed to the 2008 surge in food and fuel prices, and could again be contributing to recent price spikes. The new rules are intended to prevent commodities markets from becoming too concentrated, which can lead to speculation and market manipulation. Under the new limits, a single trader would be allowed to hold spot month positions equal to 25% of the estimated physical deliverable supply of a given commodity.
IFPRI research has long highlighted the need to address these issues, citing the adverse effects of excessive speculation in the commodity market on food price volatility and food security. The 2009 research brief When Speculation Matters brought the issue to the forefront, citing a drastic rise in the volume of globally traded grain futures and options from May 2007 to May 2008. Further analysis was provided in the 2011 brief Urgent Actions Needed to Prevent Food Crises, which discusses the need for internationally coordinated efforts to monitor and restrain commodity market speculation and price volatility. IFPRI Markets, Trade and Institutions Division Director Maximo Torero has also proposed [Alternative Mechanisms to Reduce Price Volatility])http://www.foodsecurityportal.org/sites/default/files/Alternative_Mechanisms_Reduce_Price_Volatility.pdf), including an early warning mechanism to identify periods of price abnormalities and volatility. Some of these proposals were included in the Interagency Report to the G20 in June 2011 and was included in the G20 Agriculture Ministers’ Action Plan on Food Price Volatility and Agriculture, put forward the same month. Most recently, the 2011 Global Hunger Index highlights price volatility and commodity market speculation as a driving force behind high food prices, food insecurity, and global hunger. The GHI recommendations include addressing the drivers of price volatility and reducing incentives for excessive speculation in commodities markets.
The new caps on commodities trading by the CFTC are a step toward reducing food price volatility and thus food insecurity.