London, 20 September 2011: Commodities Now

The Futures and Options Association (FOA) has announced the findings of a report on speculation in commodities markets. The report “The impact of speculative trading in commodity markets – a review of the evidence”, which was compiled by the economic research group, FTI Consulting (FTI), constitutes a literature review of the evidence on market speculation and an investigation into the underlying arguments for and against financial participation in commodity markets.

The report notes that speculation is one element of financial activity in commodity markets (which may also include portfolio hedging and investment diversification). FTI found little evidence to support the common perception that speculation is a direct or major cause of long-term pricing trends but recommends that further work should be undertaken to fully understand the complex interaction between financial and commodity markets. In addition, the report concluded:

• speculation is not a major cause of market volatility, but can amplify underlying price movements;

• the most critical reports accept that, at worst, speculation accounts for no more than 25% of commodity price movements in recent years, leading to the conclusion that 75% of such movements are accepted by all parties as being generated by fundamental supply and demand problems;

• some reports cautioned that ill-informed regulatory action could increase market volatility, destabilise the price formation process and hamper the ability of physical producers and consumers to hedge risk, supporting the view that further work is required; and

• all reports emphasise the benefits of increased price transparency.

Anthony Belchambers, Chief Executive of the FOA said: “There is an inherent conflict between the understandable desire of governments, which are concerned with pricing outcomes in consumer-sensitive commodities, and the role of market authorities, which are more concerned about the integrity of the price formation process.

"This report emphasises the need for a balanced approach in recognising the key role played by speculators in contributing to market liquidity and facilitating the risk management transactions of real economy enterprises – a capability that is critical in the current economic climate.”

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A full copy of the Report is available via the FOA website www.foa.co.uk