Financial Reform Bill Important for Agriculture

The Senate's approval of an
historic financial reform bill last night is a first step toward preventing the
excessive financial speculation that has wreaked havoc in agricultural
commodity futures contracts over the last several years, according to the
Institute for Agriculture and Trade Policy (IATP).

Most importantly for agriculture, the Senate bill requires
that previously unregulated over-the-counter (OTC) trades be traded on public
exchanges. Currently, OTC trades are exempt from regulatory oversight by the
Commodity Futures Trading Commission (CFTC). IATP is part of the Commodity
Markets Oversight Coalition working to close regulatory loopholes that allow
OTC trading and excessive speculation to continue unabated. The Senate bill
must now be reconciled with the House of Representatives' "Wall
Street Reform and Consumer Protection Act."

"The Senate bill helps make the market function like a
market should--in an open and transparent way, instead of like a casino
where only five big financial firms know what is going on," said IATP analyst
Steve Suppan. "Excessive speculation has hurt U.S. agriculture by
undermining the original purpose of commodity exchanges--to help commodity
sellers and buyers manage price risk. We don't want a repeat of 2008,
when prices were so volatile that U.S. grain elevators couldn't hedge
their own risks on commodity exchanges. Some elevators refused to contract to
buy farmers' grain in advance, leading to a cash flow crisis on many
farms. "

By requiring that nearly all trades be executed on public
and regulated exchanges, the Senate bill enables the CFTC to analyze daily
trade data and determine when traders have exceeded the CFTC's
commodity-specific position limits. OTC traders benefit from public exchange
price data but hide the price data of their own deals, a huge and unfair trade
advantage that has benefitted big financial firms. Position limits refer to the
percentage of all commodity contracts open for trade during a specific trading
period. Enforcing position limits enables the CFTC to prevent the excessive
liquidity that induced price volatility on agriculture commodity markets during
2007-2009.

In 2008, IATP first
reported on the role of big financial firms in contributing to steep
food price increases in late 2007 to early 2008. Commodity prices later
collapsed an aggregate of 60 percent between June and November 2008 as the
insolvency of major investors, including commodity index fund dealers, led to
U.S. taxpayer bailouts of Wall Street firms.

The extreme price volatility not only affected U.S. agriculture,
but ultimately contributed to increased hunger in many of the two-thirds of
developing countries that are food-import dependent and that rely on U.S.
markets for predictable purchase prices. The Senate Permanent Subcommittee on
Investigations and the United Nations Commission on Trade and Development
(UNCTAD) have reached similar conclusions on the role of excessive speculation
in creating extreme volatility in agricultural and non-agricultural commodity
prices

"If the Senate and House conference committee
eliminates the loopholes that enabled the crisis in both financial and
commodity markets, President Obama will be able to sign a bill to make markets
work for agriculture and all Americans, and not just for Wall Street and the
transnational corporations that hide their deals in OTC trades," said
Suppan.