Testimony of Michael W. Masters

9 06 2008

In the recent months commodity prices around the world including food and oil has spiked and caused great misery to millions of people. Some are at risk of severe malnourishment and even starvation to the point of death. Aid organizations such as World Food Programme are running out of funds due to the rising cost of food.

Mr. Michael W. Masters is a managing member of Masters Capital Management LLC. On the 20th of May this year, Mr. Masters presented a written testimony to a Congressional sub committee of the United States of America. In his testimony, which I have attached at the end of this post, he exposed Institutional Investors as the cause of these unusual spikes in commodity prices.

The document is rather long but Mr. Masters has made most of his case in the first 5 pages. As I understand it, these Institutional Investors or what he terms as Index Speculators differ from the normal speculator in that they bring with them a huge working fund. They are also insensitive to current prices of the commodity. In the Mr. Masters own words, “They are not concerned with price per unit, they will buy as many futures contracts as they need , at whatever price necessary, until all their money has been “put to work”. Looking at it another way, what Index Speculators have done is to “stockpile” future deliveries in that commodity thus creating an artificial shortage of these contracts. He goes on to say that in the past, the trading of “futures” represented 2% of the trade in that commodity, hardly affecting its price. But in 2004, Index Speculators poured US$25 billion which amounted to 18% of the futures market. In the first 52 days of this year (2008), they have bought up US$55 billion worth of futures contracts. This then drives up the price of all futures contract that become available. It is a rather complex mechanism that I am only starting to appreciate after reading his testimony.

On page 8 Mr. Masters has made a call to eliminate if not outlaw Index Speculators. Here then is his testimony.


Footnote: Japan has recently suspended the trading of rice in the futures market and India has suspended domestic futures trading in a few selected commodities to prevent inflationary effects of the futures trade.




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