Everyone in America remembers the summer of 2008 when gas prices rose to over $4.00 a gallon. The puzzling price spike caused hardship for many Americans, but it had a disproportionate impact on farmers given that energy costs are one of farmers biggest costs of doing business. A repeat of this scenario not only threatens consumer pocketbooks and farm livelihoods, but could be a serious setback to an already slow economic recovery.
That possibility just became much more remote due to some last-minute maneuvers involving the Wall Street reform bill slated to be voted on in Congress this week. The derivatives chapter of the bill specifically cracks down on the energy and food commodity speculation that elevates the cost of farming and socks it to consumers.
Congressional reports and the Commodities Futures Trading Commission (CFTC) blamed the 2008 price spikes on rampant food and energy speculation. Chairman Gary Gensler told the U.S. Senate in 2009, "I believe that increased speculation in energy and agricultural products has hurt farmers and consumers." According to the CFTC, a speculator ''does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.''
Yup, that's right, the good old boys on Wall Street ramped up the gambling in energy and food commodities when the housing market went bust. They sometimes speculated on regulated exchanges. For instance, Goldman Sachs has a commodity index that helps investors gamble on foods like wheat, cattle, corn as well as natural gas and crude oil. But the real action was in the unregulated, "over the counter" or dark markets. Harper's magazine has an incredible story in its July edition exposing how Wall Street speculators bumped up food commodity prices 80 percent between 2005-2008 contributing to hunger domestically and around the world.
In a big win for American farmers, consumers and even import-reliant African nations, the Wall Street reform bill winding its way though Congress has unique provisions that apply to food and energy trading.
"The final conference report will clamp down on rampant oil and gas speculation which will saves farmers from the type of cost spikes for diesel and fertilizer that occurred in 2008," said Patrick Woodall of the consumer group Food & Water Watch. He explained that all farms operate as small gas stations for large equipment and that natural gas is a key input into fertilizer. "When speculation is rampant in the energy markets farmers suffer disproportionately."
The bill agreed to by the House-Senate conference committee on financial reform brings this type of speculation out of the shadows and into the light of day. Large Wall Street firms engaged in food and energy derivatives trading will be forced to spin off their derivatives desks into a separately capitalized affiliate, making speculation in these markets much more costly. This spin off provision applies specifically to commodity derivatives and a few other types of trades - advocates lost the fight to make it apply across the board. In addition, all trades will be cleared by regulators and exchange traded where pricing and positions will be transparent. Capital requirements will apply to clearing houses and margin requirements will apply to trades, putting real money behind the bets. Position limits will also apply making it more difficult for a few players to dominate the market.
"If used seriously, these are extremely effective policy tools for inhibiting and bursting speculative bubbles," says economist Robert Pollin who has written about the harm speculative bubbles can cause for developed and developing nations. CFTC chairman Gary Gensler, who supported these reforms, has made it clear he will not hesitate to use these tools.
These provisions are geared toward ending Wall Street gambling in these essential markets. At the same time, the bill exempts legitimate end-users of derivatives, like small farmers who want to hedge their bets against possible price jumps in seed and fertilizer.
The development of robust transparency in the unregulated derivatives market is very good news for farmers and consumers. The crack-down, which was spearheaded by Senate agriculture committee chair Blanche Lincoln (D-Arkansas) was wisely supported by Senator Chuck Grassley (R-Iowa) who bucked his party and voted the reforms out of the Senate agriculture committee. Now its time to get these changes enacted into law. The bill needs the support of other independent-minded farm belt Senators like Richard Lugar (R-Indiana), George Voinovich (R-Ohio) Mike Johanns (Nebraska), John Thune (S.D.) and others.
Without one or two votes from this group of Senators the bill may fail, giving Wall Street another whack at weakening it further. Big bank lobbyists are frantically working behind the scenes in a last-ditch effort to kill these particular reforms. Farm belt constituents need to let their Senators know that the last thing they need is pinstriped gamblers jacking up prices in these essential markets.