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Curbing Commodity-Market Speculation

Prices in many commodity derivatives markets remain highly volatile, as hedge funds and other financial firms rush out as rapidly as they piled in. The lack of prompt action to address this suggests that regulators and policymakers are still putting financial interests above the interests of everyone else.

NEW DELHI – Primary commodity prices have been on a roller-coaster ride for the past year, and especially for the past six months. In the futures markets, crude oil prices rose by 39% in the month from February 8 to March 8, 2022, from $89 per barrel to $124 per barrel, and then fell by 23% in the following month to $95 per barrel. The price climbed again, to $122 per barrel, on June 8, but had declined to $88 per barrel on August 4 – below the level of early February.

Global prices of wheat futures have exhibited similar volatility. The price of soft red winter wheat soared from $332 per metric ton in January to $672 per ton in April, but by June had fallen to $380 – still about 50% higher than a year ago, but well below this spring’s crazy peaks.

These dramatic price movements were not triggered by changes in real output and demand. Blaming big commodity-price spikes on supply shortages caused by Russia’s war in Ukraine does not capture the full truth. In particular, the large increases in Big Oil and agribusiness firms’ profit margins indicate that they raised prices of energy and food, respectively, well beyond any level that could be justified by their own cost increases. But frantic speculative activity, mainly by financial companies like hedge funds that dominate trading, has made matters much worse, as I have noted elsewhere.

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