The US Commodity Futures Trading Commission should conduct a series of “deep dive” studies to determine whether prices in commodity markets, which have recently come under pressure – as the commissioner has recommended.
“From the lows in 2020, food prices are up 84%, fertilizer prices are up a staggering 220% and, as I mentioned, energy prices have risen sharply and in some cases hit all-time highs,” Commissioner Christy Goldsmith Romero said. At the same time, the Democratic commissioner pointed to a study pointing to record profits for Wall Street’s largest banks, commodity trading houses and commodity-related hedge funds.
Against this backdrop, she called on the Commission to examine all the key elements driving volatility in some key commodities, including food, energy and metals markets, which have experienced significant volatility or price increases.
The results should be released, she said, to boost confidence that derivatives markets are doing their job and that speculation is not artificially inflating consumer prices.
Goldsmith Romero said she made a similar recommendation at CFTC internal meetings a few weeks earlier. The research should examine whether the presence of passive investment vehicles and other speculators provides useful liquidity or other useful functions and does not “distort markets or otherwise undermine the price discovery process,” she said.
Impact on physical infrastructure
The Sept. 20 CFTC Advisory Panel meeting, sponsored by Republican Commissioner Summer Mersinger, was held to discuss how physical energy infrastructure can affect price volatility and the upcoming role of metals in the energy transition.
At the beginning of the meeting, Mersinger emphasized that predictable supply and reliable distribution of physical energy are critical to ensure that CFTC-regulated derivatives markets serve as effective price discovery tools. And she warned of the risks involved.
“Without well-functioning energy futures markets, the financial risks from current global energy-related supply disruptions, as well as the costs of transitioning from traditional energy sources to more renewable forms of energy, have the potential to become systemic risks for our entire economy. ” She said.
Paul Wight, senior legal counsel to Federal Energy Regulatory Commissioner James Danly, an invited speaker, highlighted the problems he sees in wholesale electricity markets with the New England futures capacity market construct.
In his view, the market is being eroded by renewable energy subsidies and a lack of gas pipelines, which are extremely difficult to lay in New England.
While designers of this market needed generating capacity combined with fuel security, he said, “that’s not what their product was designed for.” The end result, he said, is many natural gas generators with no firm contracts for natural gas.
Jackie Roberts of the Public Service Commission of West Virginia, an EEMAC member, suggested that the CFTC could play a bigger role, both in terms of improving the coordination of gas and electric systems and capacity markets.
Several participants discussed the interrelationships between energy and other commodities such as agriculture or metals.
Cortney Cowley, senior economist at the Federal Reserve Bank of Kansas City, spoke about how increased energy input costs can affect farmers’ production and how energy supply cuts can ultimately lead to greater volatility in commodity prices.
Paul Cicio, Associate Member of EEMAC, suggested that gas supply challenges could affect manufacturers’ ability to produce aluminum and steel needed for the energy transition.
“If you look at what’s kind of alarming to us, whether we’re nitrogen, fertilizer, steel, chemicals or plastics, is that we need to produce more gas.”
He also pointed out that there are regional problems with the capacity of natural gas pipelines.
“I turned on manufacturers [Transcontinental Gas Pipe Line] that will likely be restricted this winter,” he said.
And CME Group’s Derek Sammann described the projected increase in demand for virtually all base metals expected to support the energy transition, due to growth in areas such as electric vehicles, energy storage and renewable energy development.
Going forward, the advisory panel voted to recommend that the CFTC consider establishing a subcommittee to produce a report on physical energy infrastructure and its impact on commodity markets. It also agreed to recommend the establishment of a sub-committee to report on the role of metals markets in transition energy.
Source: Platts
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