By KEVIN WALKER
Michigan Correspondent

WASHINGTON, D.C. — There are some signs the Obama Administration might regulate Wall Street bankers – somewhat.
On Aug. 19 the Commodity Futures Trading Commission (CFTC) announced it would close a loophole in the law that allows large investment concerns, such as Goldman Sachs, to exceed speculative positions on commodities laid out by Congress. But the CFTC’s move might be less than meets the eye. That’s because at this time the loophole has been closed for only two investment banks out of many – and Goldman Sachs isn’t one.

Congress created the loophole in 2000. As a result of this new exemption, investment bankers and over-the-counter (OTC) markets have driven up the price of commodities by drastically increasing their holdings in them. This is one of several factors that drove up the price of oil and other commodities last year.

American Feed Industry Assoc. (AFIA) President Joel Newman portrayed the situation as consisting of a combination of congressional ignorance and Wall Street amorality.

“When Congress passed this exemption, it didn’t understand the effect it would have,” Newman said. “Of course, now everyone is fully aware of this.”

He also stated even if the investment banks were speculating to try to drive the market a certain way, it still wouldn’t be illegal and is, as such, irrelevant.

But Newman insisted, “it’s a very strong signal that the CFTC is serious about this issue.”

Right now, there is nothing to stop another run-up in commodities similar to what happened last year. That’s because most of the investment banks are still able to exceed speculative position limits and because the CFTC doesn’t have any authority over the OTC markets.

Newman said the price of oil is more than $70 a barrel despite the fact that demand for the commodity is at record lows. The culprit, he said, is over-investment in commodities such as oil. Investment banks are still holding too many long positions in commodities, he said. “These hedge funds are getting in and just holding the commodity,” creating a false demand, he added.

He went on to explain that commodities index funds are required to hold percentages of certain commodities in their portfolios. If they increase their percentage of oil, then they are required under their own rules to increase their holdings in corn, soybeans and the like in proportion to their holdings in oil. He said for this reason, the price of corn ends up tracking with the price of oil.

Further, according to the AFIA, the correlation between oil prices, corn prices and the Goldman Sachs commodity index fund, for example, is undeniable.

Index fund speculators overall have increased investments in 25 commodities, from $13 billion in 2003 to $260 billion in 2008.
Other factors behind the increase in feed and food prices in 2008 include increased global crude oil demand, population expansion and increased demand for high quality protein, low grain and oilseed inventories, the value of the U.S. dollar and the renewable fuels standard.