I spent the better part of 2 weeks working with Gene Epstein on his cover story on the commodity bull markets. Obviously most of the material gets cut. Rightfully so, I am sure. There are a couple of points about the commodity bull markets that I think were missed. Here is the link, although you might have to sign up for a free 4-week trial to read the article:

http://online.barrons.com/article/SB120674485506173053.html?mod=b_hpp_9_0002_b_this_weeks_magazine_home_top&apl=y

First so far as I can tell, small investors trading through commodity index mutual and exchange funds appears to be the minor part of the commodity speculation problem. In trying track down these funds and total their assets, I found less than $40 billion. This leaves $300 billion unaccounted for. How did I arrive at this number?

The commodity indexes most popularly used as benchmarks for commodity investment include in their list a number of British commodity markets. While the US markets, by my estimate quoted in Barron’s, have absorbed $211 billion currently, the total figure including London is $358 billion.

Where is the rest of the money coming from? Institutional investors including pension funds, endowment funds, and even sovereign funds have made significant forays into commodities in recent years as way of boosting and diversifying returns. They have done so up until now in what has to a great extent been a self-fulfilling forecast.

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The CFTC posted this note at their website. Commodity Index Funds have pumped an estimated $70 billion+ into the 12 US commodity markets the CFTC reports in its COT-Supplemental report. They are now the largest long player in these markets, with nearly 40% of the long contracts. If you extrapolate this out for the non-reported markets which are included in popular commodity indexes used as benchmarks, the total “investment” in US commodity markets is upwards of $225 billion. For more background see this post: CFTC Expands Commitments of Traders Reporting.
Release: 5474-08
For Release: March 19, 2008

CFTC Announces Forum to Discuss Recent Events in Agricultural Markets

Washington, DC – Today, the Commodity Futures Trading Commission (CFTC) announced it will convene a public meeting to discuss recent events affecting the agriculture markets – including the lack of convergence between the futures and cash prices, higher margin requirements and the impact on market participants, and the role of speculators and commodity index traders.

“These historic market conditions, particularly in wheat and cotton, require the CFTC to hear firsthand from participants to ensure that the exchanges are functioning properly to discover prices and manage risk,” said CFTC Acting Chairman Walt Lukken.

The forum is scheduled to begin at 9:00 a.m. on April 22, 2008 and will be held in the agency’s Washington, DC headquarters. It will include representatives from the U.S. Department of Agriculture and a broad set of stakeholders in the agricultural markets, such as exchanges, traders, merchandisers and producers. Further details on the forum will be made available in the coming weeks.