Yesterday, the Senate Homeland Security and Governmental Affairs Committee held a hearing on institutional investor influence on commodity prices. In her opening statement, Ranking Member Susan Collins (R-ME) mentioned that she met last week with a PMAA member who is concerned about current futures market activities. PMAA members were in Washington DC last week and visited over 70 Senate offices and 300 House offices to express concern about excessive speculation in the futures market. Sen. Collins quoted: “He’s telling customers to expect home heating oil to rise to $4.50 a gallon next winter. He also said that an elderly customer was forced to hand over half of her Social Security check for her budget-payment plan.” The Ranking Member stated that something is deeply wrong with commodity markets and Congress should take necessary steps to address the price volatility seen over the last several months. Testifying before the committee were: Jeffrey Harris, Chief Economist, Commodity Futures Trading Commission; Michael Masters, Masters Capital Management, LLC; Thomas Erickson, Commodities Markets Council; Dr. Benn Steil, Council on Foreign Relations; and Tom Buis, National Farmers Union.
Committee members were intrigued by the testimony of Michael Masters who had a compelling argument that institutional investors are driving commodity prices to excessive levels. He argued that institutional investors park money in commodity markets (holding long positions meaning that they expect prices to go up) and are not leaving the market anytime soon. This in effect has led to dramatic price increases in all commodities especially crude oil. Masters stated that institutional speculators provide no benefit to the futures markets and recommended that Congress modify the Employee Retirement Income Security Act (ERISA) regulations to prohibit commodity index investing strategies. He also recommended that the CFTC reclassify all the positions of commercial traders to distinguish between positions held by physical hedgers and more passive institutional investors. Finally, he asked that Congress close the “swaps loophole” which allows institutional investors an exemption from speculative position limits when they hedge “over-the-counter” swaps transactions.
Following the hearing, Chairman Lieberman (D-CT) said he was convinced that institutional investors are driving energy costs to excessive levels and that Congress must step up its level of oversight on commodity speculation. In Sen. Lieberman’s opening statement, he stated that between 1998-2008, long positions in commodity markets grew from one-quarter to two-thirds while actual physical traders decreased from three-quarters to just one-third.