In just eight recent trading days, from May 30 to June 10, the December futures contract price for corn at the Chicago Board of Trade soared nearly $1 per bushel. The move, from $6.07 to $7.03, was, of course, historic. No one ever has either bought or sold corn for $7.03 per bushel.

Historic, in fact, is the most often used adjective to describe today’s commodity markets. Wheat, soybeans, gold, crude oil, rice – you pick the product – and it’s likely that either the cash or futures price, or both, has set historic highs in the past year.

Most of the fuel behind the rocket ride, explains a lengthy, May 30, article in the Toronto Globe and Mail, has been supplied by super-rich, almost-totally-unregulated speculative pension and index funds.

Indeed, note Globe and Mail writers Sinclair Stewart and Paul Waldie, “The amount of fund money invested in commodity indexes has climbed from just $13 billion (U.S.) in 2003 to a staggering $260 billion in March 2008, according to calculations based on regulatory filings.”

That 20-fold flood of speculative cash and the havoc it has wreaked, they painstakingly document in the 6,700-word story (for sale online at www.theglobeandmail.com), can be traced directly to the deregulate-everything days of the Reagan Administration and its see-no-evil chair of the Commodity Futures Trading Commission, the politically-connected Wendy Gramm.

Gramm, wife of then-Texas Sen. Phil Gramm, assert Stewart and Waldie, used her perch to redefine – by largely abandoning – the CFTC’s oversight of speculative cash coming into America’s arcane, but growing, futures markets.

The key moment occurred in 1989, they explain, when the CFTC, pushed by Gramm, “issued a policy statement on swap transactions, deals in which a buyer of commodities such as pension funds acts through a middleman or a swap dealer –usually a bank.” The new policy was simple: “The CFTC declared that it would not regulate swap dealers.”

In short, the CFTC action created a massive loophole for unregulated speculation to allow “investors,” such as pension funds, to avoid anti-manipulation trading limits by working through middlemen. The middlemen, usually banks, and the funds quickly sniffed out the loophole.

Here’s how it worked, describe the writers.

“The banks might agree to pay the fund a return on a commodity index—if the index rises 10 percent in the next year, the bank will pay out that 10 percent.

“But the bank doesn’t want to be on the hook for 10 percent, so it hedges its risk by wading into the commodities market using the fund’s money to buy futures.”

The key to the deal was the fund’s ability to transform itself from a speculator – with its strict futures trading limits – to an investor in an instrument created by the bank. The bank completed the transformation by laying off its investment risk in the futures markets as a hedger – a person or entity with no trading limits.
And, abracadabra, highly-regulated, speculative pension billions flow into futures markets as completely unregulated hedges.
It’s those billions, say farmers, livestock producers, food makers and other commercial users, that is roiling today’s commodity markets.

“There’s no ‘food crisis’ in the world today,” a farmer told me at late-May gathering. “The crisis is all the big money pushing up commodity prices.”

Is he right?

The answer – part of it, anyway – may come the week of June 15 when two, key U.S. senators, Democrats Dick Durbin of Illinois and Tom Harkin of Iowa, hold a Senate hearing on the CFTC’s regulatory role. Durbin’s interest is the price of oil; Harkin’s the price of food. The elephant in the hearing room, however, will be the incredibly steep price of deregulation.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Alan Guebert may write to him in care of this publication.