Institutional investors are not responsible for rising prices in energy, food and other commodities, according to a paper released today by Ennis Knupp + Associates. Fundamental factors of supply and demand determine prices of commodities, wrote Keith Black, author, associate and senior member of the opportunistic strategies investment management research group of Ennis Knupp. “A substantial portion of the increase in commodities prices in the U.S. can be directly traced to the weak dollar,” he wrote. “Should the dollar increase in value relative to a basket of world currencies, many expect that the dollar price of commodities would decline.”
Institutional investment in commodities — estimated by Mr. Black at $240 billion at the end of March — is a small part of commodity futures trading and amounts to 3.7% of worldwide production of oil and natural gas and 8.1% of food and fiber production, he wrote. Also, he noted, pension plans in commodities futures neither store nor consume commodities.
“Should institutions be regulated out of the futures markets, it is likely that they would simply move their positions to the unregulated over-the-counter markets, where their trading activity may be relatively unchanged from its current level,” he said.
Sen. Joe Lieberman, I-Conn., and Sen. Susan Collins, R-Maine, introduced a proposal June 18 that would prohibit public and corporate pension plans with more than $500 million in assets and most other institutions from investing in energy or agricultural commodities. The provision is part of a package of legislative proposals lawmakers are scheduled to discuss at a hearing Tuesday before the Senate Homeland Security and Governmental Affairs Committee. Mr. Lieberman chairs the committee; Ms. Collins is the ranking Republican on it.
