S. Hrg. 110–705 

HIGH PRICE OF COMMODITIES—2008 

HEARINGS 

BEFORE THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MAY 7, 2008 

FUEL SUBSIDIES: 

IS THERE AN IMPACT ON FOOD SUPPLY AND PRICES? 

MAY 20, 2008 

FINANCIAL SPECULATION IN COMMODITY MARKETS: 

ARE INSTITUTIONAL INVESTORS AND HEDGE FUNDS 

CONTRIBUTING TO FOOD AND ENERGY PRICE INFLATION? 

JUNE 24, 2008 

ENDING EXCESSIVE SPECULATION IN COMMODITY MARKETS: 

LEGISLATIVE OPTIONS 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
HIGH PRICE OF COMMODITIES—2008 
U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

43–084 PDF 2010

S. Hrg. 110–705 

HIGH PRICE OF COMMODITIES—2008 

HEARINGS 

BEFORE THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MAY 7, 2008 

FUEL SUBSIDIES: 

IS THERE AN IMPACT ON FOOD SUPPLY AND PRICES? 

MAY 20, 2008 

FINANCIAL SPECULATION IN COMMODITY MARKETS: 

ARE INSTITUTIONAL INVESTORS AND HEDGE FUNDS 

CONTRIBUTING TO FOOD AND ENERGY PRICE INFLATION? 

JUNE 24, 2008 

ENDING EXCESSIVE SPECULATION IN COMMODITY MARKETS: 

LEGISLATIVE OPTIONS 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

RYAN MCCORMICK, Legislative Assistant, Office of Senator Joseph I. Lieberman 

ELLEN COHEN, Fellow, Office of Senator Joseph I. Lieberman 

SEAMUS A. HUGHES, Deputy Press Secretary 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

ASHA A. MATHEW, Minority Counsel 

CLARK T. IRWIN, Minority Professional Staff Member 

AMY B. CARROLL, Minority Professional Staff Member 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk and GPO Detailee 

LAURA W. KILBRIDE, Hearing Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Lieberman.................................................................................... 1, 31, 75 

Senator Collins .......................................................................................... 3, 33, 77 

Senator Carper ........................................................................................ 4, 65, 111 

Senator Sununu ................................................................................................ 22 

Senator Coburn.............................................................................................. 24, 54 

Senator Levin ................................................................................................ 36, 99 

Senator Pryor .................................................................................................... 58 

Senator McCaskill ....................................................................................... 63, 105 

Senator Coleman .............................................................................................. 102 

Senator Warner ................................................................................................ 108 

Prepared statement: 

Senator Lieberman for May 7 hearing ........................................................... 119 

Senator Collins for May 7 hearing .................................................................. 120 

Senator McCaskill for May 7 hearing ............................................................. 121 

Senator Stevens for June 24 hearing .............................................................. 122 

WITNESSES 

WEDNESDAY, MAY 7, 2008 

Andrew Siegel, Vice President and Treasurer, When Pigs Fly, Inc. ................... 5 

Bruce A. Babcock, Ph.D., Director, Center for Agricultural and Rural Development, Iowa State University ............................................................................... 6 

Rev. David Beckmann, President, Bread for the World ....................................... 10 

Mark W. Rosegrant, Ph.D., Director, Environment and Production Technology 

Division, International Food Policy Research Institute .................................... 12 

TUESDAY, MAY 20, 2008 

Jeffrey H. Harris, Chief Economist, U.S. Commodity Futures Trading Commission .................................................................................................................. 37 

Michael W. Masters, Managing Member and Portfolio Manager, Masters Capital Management, LLC ......................................................................................... 40 

Thomas J. Erickson, Chairman, Commodity Markets Council ............................ 43 

Benn Steil, Ph.D., Senior Fellow and Director of International Economics, 

Council on Foreign Relations .............................................................................. 46 

Tom Buis, President, National Farmers Union .................................................... 48 

TUESDAY, JUNE 24, 2008 

Hon. Walter L. Lukken, Acting Chairman, U.S. Commodity Futures Trading 

Commission ........................................................................................................... 79 

Hon. James E. Newsome, President and Chief Executive Officer, NYMEX 

Holdings, Inc. ........................................................................................................ 83 

Michael W. Masters, Managing Member and Portfolio Manager, Masters Capital Management, LLC ......................................................................................... 85 

William F. Quinn, Chairman, Committee on Investment of Employee Benefit 

Assets .................................................................................................................... 88 

James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough 

School of Business, Georgetown University ....................................................... 90 

Michael Greenberger, Professor, School of Law, University of Maryland .......... 92 
Page

IV 

ALPHABETICAL LIST OF WITNESSES

Angel, James J., Ph.D., CFA: 

Testimony .......................................................................................................... 90 

Prepared statement .......................................................................................... 268 

Babcock, Bruce A., Ph.D.: 

Testimony .......................................................................................................... 6 

Prepared statement with an attachment ....................................................... 156 

Beckmann, Rev. David: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 162 

Buis, Tom: 

Testimony .......................................................................................................... 48 

Prepared statement .......................................................................................... 219 

Erickson, Thomas J.: 

Testimony .......................................................................................................... 43 

Prepared statement .......................................................................................... 208 

Greenberger, Michael: 

Testimony .......................................................................................................... 92 

Prepared statement .......................................................................................... 278 

Harris, Jeffrey H.: 

Testimony .......................................................................................................... 37 

Prepared statement .......................................................................................... 170 

Lukken, Hon. Walter L.: 

Testimony .......................................................................................................... 79 

Prepared statement .......................................................................................... 222 

Masters, Michael W.: 

Testimony on May 20 ....................................................................................... 40 

Prepared statement with an attachment ....................................................... 191 

Testimony on June 24 ...................................................................................... 85 

Prepared statement .......................................................................................... 246 

Newsome, Hon. James E.: 

Testimony .......................................................................................................... 83 

Prepared statement .......................................................................................... 232 

Quinn, William F.: 

Testimony .......................................................................................................... 88 

Prepared statement .......................................................................................... 264 

Rosegrant, Mark W., Ph.D.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 166 

Siegel, Andrew: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 153 

Steil, Benn, Ph.D.: 

Testimony .......................................................................................................... 46 

Prepared statement .......................................................................................... 212 

APPENDIX 

Charts submitted by Senator Collins ..................................................................... 124 

General Motors Press Releases submitted by Senator Carper ............................ 128 

Charts submitted by Senator Levin ....................................................................... 134 

Charts submitted for the Record by Mr. Masters ................................................. 137 

Charts submitted for the Record by Mr. Lukken .................................................. 139 

Joint Analysis prepared by Majority and Minority Staffs of the Permanent 

Subcommittee on Investigations ......................................................................... 142 

Additional prepared statements submitted for the Record from: 

American Farm Bureau Federation ................................................................ 289 

Governor M. Jodi Rell, State of Connecticut .................................................. 299 

American Cotton Shippers Association ........................................................... 306 

National Grain and Feed Association ............................................................. 314 

American Benefits Council .............................................................................. 321 

Council of Institutional Investors ................................................................... 324 

IntercontintentalExchange, Inc. (ICE) ............................................................ 326 

Responses to Post-Hearing Questions for the Record on May 7 from: 

Mr. Babcock ...................................................................................................... 332 

Mr. Beckmann .................................................................................................. 337 

Mr. Rosegrant ................................................................................................... 339 
Page

V 

Responses to Post-Hearing Questions for the Record on May 20 from: 

Mr. Harris ......................................................................................................... 344 

Mr. Masters ....................................................................................................... 348 

Mr. Erickson ..................................................................................................... 349 

Mr. Steil ............................................................................................................ 351 

Mr. Buis ............................................................................................................. 352 

Responses to Post-Hearing Questions for the Record on June 24 from: 

Mr. Lukken ....................................................................................................... 353 

Mr. Newsome .................................................................................................... 364 

Mr. Masters ....................................................................................................... 369 

Mr. Greenberger ............................................................................................... 371 

Mr. Angel .......................................................................................................... 382 

(1) 

1The prepared statement of Senator Lieberman appears in the Appendix on page 119. 

FUEL SUBSIDIES: IS THERE AN IMPACT ON 

FOOD SUPPLY AND PRICES? 

WEDNESDAY, MAY 7, 2008 

U.S. SENATE,

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in Room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Carper, Pryor, McCaskill, Collins, 

Coburn, and Sununu. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 1

Chairman LIEBERMAN. Good morning and welcome to our hearing today. This is the first of at least two hearings this Committee 

will hold to examine the current rapid increase in the price of food 

that is occurring here in the United States and across the globe, 

to consider actions the Federal Government should take to alleviate 

the pressure these high prices have imposed on America’s families 

and businesses. I want to thank Senator Collins for her suggestion 

that we hold these hearings on this issue, which is of such everyday genuine concern to so many millions of Americans and people 

throughout the world. 

The specific issue that we are going to examine today is the effect of Federal Government subsidies for ethanol on the current 

food price crisis. Our next hearing will occur within a couple of 

weeks, and on that occasion we will focus on the question of whether speculators are driving up commodity prices. 

Food prices in the United States rose 4 percent last year and are 

predicted to rise at least 4 percent, perhaps 5 percent, this year. 

These are the largest increases in annual food prices since 1990, 

18 years. Of course, any of these increases disproportionately affect 

people in relation to their income. Middle-income families are 

squeezed, particularly as gas prices are also rising at the same 

time, and other costs, like health care, are rising and shrinking disposable income. Lower-income consumers are hit hardest because 

their food expenditures make up a larger share of their total household expenses. 

Here is an interesting set of numbers, I think. Overall, American 

households spend 12.6 percent of their income on food. But low-in-
2 

come households spend 17.1 percent on food. So you can see the impact. 

The World Bank reports that global food prices have increased 

83 percent in the last 3 years. That is a devastating rate of inflation. When you apply some of those same statistics I mentioned to 

families abroad, families in Nigeria spend an average of 73 percent 

of their income on food, Vietnamese spend 65 percent, and Indonesians spend about 50 percent on food. 

When you add in an 83 percent increase over the last 3 years, 

you can see why people are suffering. In fact, as we know from the 

news, people have actually already died in food riots in, for example, Somalia. 

Bob Zoellick, who is the President of the World Bank, recently 

warned that 33 other countries are not just suffering hunger, malnutrition, in some cases starvation, certainly stress as a result of 

the increase in food prices, but that 33 nations are at risk of societal unrest as a result of the food price increase and food shortage, 

and one billion Asians are at risk of hunger or malnutrition. 

There are many explanations of how this crisis came to be and 

it is our intention in this oversight Committee to explore the various explanations or suggestions and try to judge the merit of them 

to inform our own legislative behavior. This Committee has the 

unique ability to look across the Federal Government to assess the 

range of policies that influence food prices. This is now the Homeland Security and Governmental Affairs Committee, but the Governmental Affairs responsibility that we have, which is the historic 

responsibility of the Committee, is an oversight Committee not just 

focused on a particular department but on the overall government. 

That is why the questions that we will discuss today, we hope, will 

have the potential to influence debates that will occur on the floor 

of the Senate and the House and at the White House on the best 

way for Congress to respond to this global food crisis. 

In regard to the question we are focusing on, I was thinking 

about the old quote from Pogo, which is a cartoon we don’t see 

much anymore, but the famous Pogo quote said, ‘‘We have met the 

enemy and it is us.’’ It may be that when it comes to ethanol and 

the increase in corn prices, that we have met the problem and we 

caused it: Not with bad intentions, but as everyone knows, in an 

effort to promote American energy independence and help reduce 

greenhouse gas emissions that are causing global warming. Congress has required a five-fold increase in renewable fuels, which in 

turn led to an increase in demand for corn and a further decrease 

in supplies of wheat and soybeans as farmland that traditionally 

was used to grow those crops has been converted to the more profitable corn crops. 

So our question for this excellent group of witnesses we have 

today is, bottom line, did this change in policy by the Federal Government for a good reason cause this bad consequence, which is rising food prices, and if it did, to what extent is it the cause? Is it 

the sole cause, or is it a minor cause as compared to other causes? 

We hold a lot of hearings in this Committee. This probably is as 

significant as any we have ever done to more people in the world 

and the way they live every day. So again, in introducing Senator 
3 

1The prepared statement of Senator Collins appears in the Appendix on page 120. 

2The charts submitted by Senator Collins appear in the Appendix on page 124. 

Collins to deliver her opening statement, I want to thank her for 

being the impetus to this series of hearings that we begin today. 

Senator Collins. 

PREPARED STATEMENT OF SENATOR COLLINS 1

Senator COLLINS. Thank you, Mr. Chairman, and thank you so 

much for agreeing to look into this important issue. 

Today, we consider whether a change in American agricultural 

policy that was aimed at reducing our reliance on imported oil may 

instead be having serious unintended consequences for food supplies and prices. According to the World Bank, as the Chairman 

has indicated, global food prices have increased by 83 percent in 

the past 3 years. Here in the United States, as the chart before you 

shows,2 an analysis of April 2008 prices shows an even more remarkable one-year trend of increases. Wheat, for example, is up by 

95 percent. Soybeans are up by 83 percent. Corn, up by 66 percent. 

And oats, up by 47 percent. 

Such increases in basic commodities naturally work themselves 

through the food supply chain. According to the U.S. Department 

of Agriculture (USDA), consumer prices for all foods increased by 

4 percent last year, and as the Chairman pointed out, that is the 

highest annual rate increase since 1990. Furthermore, the Department projects continued increases. 

The consequences have reached far beyond data cells on some 

spreadsheet. They affect families who are forced to cut back on 

bread, meat, and dairy purchases and to apply their economic stimulus checks to their grocery bills. The nutritional threat, especially 

to very low-income families with children, or to senior citizens living on fixed incomes, is clear. The high prices and shortages also 

hurt small businesses, like a Maine family bakery, whose future is 

less secure due to escalating costs. 

The global consequences are also grim. As the Chairman indicated, the President of the World Bank has identified some 33 

countries around the world that face potential social unrest because of the enormous hike in food and energy prices. For these 

countries where the consumption of food comprises half to threequarters of all the consumption, there is literally no margin for survival. The impact of rising prices, food shortages, and export restrictions has had devastating consequences for the billion people 

around the world who live in dire poverty. 

We need a clear view of how biofuel prices shape this troubling 

picture. So again, I am so pleased that the Chairman has agreed 

to have the Committee carefully examine this important issue. 

Subsidies for ethanol production, tariffs on ethanol imports, and 

mandates for ethanol use have certainly had an impact on the U.S. 

corn crop. In 1997, as this chart demonstrates, only 5 percent of 

the corn harvest was used for ethanol production. That portion 

grew to 20 percent of the 2006 harvest. The Department of Agriculture estimates that 24 percent of last year’s corn crop is being 

used for ethanol and that ethanol’s claim on the 2008 harvest will 

climb to 33 percent. So just look at that astonishing change, from 
4 

5 percent in 1997 to a third of the corn crop next year being diverted to ethanol. 

Not surprisingly, increased demand for corn-based ethanol has 

diverted acreage from crops like wheat and soybeans to corn and 

has had ripple effects on the cost of feed for livestock. The USDA’s 

long-term projections released in February note that the strong expansion of corn-based ethanol production affects virtually every aspect of the field crop sector, from domestic demand and exports to 

prices and allocation of acreage among crops. After 2008, the USDA 

believes that the high returns for corn crops will lead to still further reductions in wheat and soybean planting. As our witness 

from Maine, who runs a family bakery, will attest, such changes 

in the use of distant crop lands can have profound local effects. 

Certainly, American and European policies that promote corn or 

other food crops for ethanol are not the only factors in the sharp 

increase in food prices. Other factors include higher food demand 

in developing countries, higher energy and fertilizer costs, and 

weather events, like the drought in Australia. But most of those 

factors are beyond the control of mankind, much less governments. 

By contrast, however, biofuel subsidies and mandates are within 

the control of government and the International Food Policy Research Institute estimates that, globally, biofuels development may 

account for a quarter to a third of the increased costs of food. 

Therefore, it is incumbent upon us to examine the impact that 

American biofuel policy is having on the global food crisis and 

whether our policy needs to be adjusted to mitigate the unintended 

consequences in the United States and elsewhere. This is not an 

abstract matter of public policy. It affects the poorest people in our 

country and around the world. It affects our bakeries, our markets, 

our restaurants, and our family kitchens here and around the 

world. 

I look forward to hearing today’s witnesses and to obtaining their 

assistance in helping us better understand the trade-offs inherent 

in our current biofuels policy. 

Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks, Senator Collins, for that excellent statement. Your graphs and your statement really made the 

case for why this hearing is so important. 

Senator Carper has asked to be recognized to make a statement. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Just very briefly. I know we don’t do opening 

statements beyond you and the Ranking Member. Thank you for 

doing this. This is a great hearing, timely and very important. 

I met with some folks from General Motors (GM) this week and 

they shared with me that they have taken an equity position in two 

companies, brand new, very promising technology with respect to 

creating biofuels in a way that provides a lot more energy density, 

in a way that uses a whole lot less water to create, and it is just 

some very promising ideas. There is a lot of cutting edge stuff that 

is going on like this at the DuPont Company, as you may recall. 
5 

1The General Motors Press Releases submitted by Senator Carper appear in the Appendix 

on page 128. 2The prepared statement of Mr. Siegel appears in the Appendix on page 153. 

I would just ask unanimous consent to be able to include in the 

record at this point some information, press reports that deal with 

these encouraging developments. Thank you.1

Chairman LIEBERMAN. Thank you, Senator Carper. Without objection, we will do that. 

We will go to the witnesses, and our first witness is Andrew 

Siegel, who is the owner of the When Pigs Fly Bakery in York, 

Maine. We have asked Dr. Siegel to discuss how rapidly rising commodity prices have negatively impacted his business, but before 

you do that, we all want to know what the other part of the sentence is. When Pigs Fly, what? [Laughter.] 

Mr. SIEGEL. The other part was, you will be paying your bills 

when pigs fly by baking loaves of bread. 

Chairman LIEBERMAN. Go right ahead. 

TESTIMONY OF ANDREW SIEGEL,2 VICE PRESIDENT AND 

TREASURER, WHEN PIGS FLY, INC. 

Mr. SIEGEL. Good morning. I am here actually to tell my brief 

story. I do own When Pigs Fly Bakery with my brother and it is 

15 years old. We started out in the beginning baking about 100 

loaves of bread a day and selling them to a few local accounts. Currently, we deliver bread to approximately 250 supermarkets in 

Maine, New Hampshire, Massachusetts. We have some presence in 

Connecticut, Rhode Island, New York, and New Jersey. We have 

also opened five of our company stores where we deliver bread 

fresh 7 days a week, and we also have an Internet Website where 

people can order bread throughout the country. 

What has happened actually from 1993 all the way up until current, there are a lot of challenges with running any kind of business. The challenges that we face are pretty much how to make a 

quality product and get it to our customers at a reasonable price, 

and the dynamics of that have changed significantly in the last 

probably year and a half. 

Over the past 18 months, prices of every food product have increased anywhere in the neighborhood of 50 to 100 percent, and 

owning a bakery, because we use flour as our main ingredient, we 

have really felt the brunt there. But we also bake with propane. 

We deliver our bread in diesel trucks and gas trucks. And the 

breads themselves have lots of fruits, seeds, and nuts, and again, 

prices have increased significantly. 

Back in September, our price of flour—we go through probably 

about 50,000 pounds of flour a week right now, so in dollar terms, 

the flour was costing us $7,700 a week. In October, it had risen to 

about $9,600 a week. And then December came along and it went 

to over $12,000 a week. 

I talked to our flour distributor and he had mentioned what he 

thought some of the concerns were, ethanol being one, and also 

some other items, but he said that there is a good chance that we 

might not have enough flour to get through until the next crop 

comes in, and that is when things got really crazy. 
6 

1The prepared statement of Mr. Babcock with an attachment appears in the Appendix on 

page 156. 

I think the first chart had shown that by the end of April, wheat 

was up 99 percent, and in February at one point, it was up 300 

percent. There were a lot of rumors flying around. We ended up 

buying our flour upwards of about $22,000 per truckload all the 

way from $7,000, and what has that done for us? I mean, we have 

actually gone out and we have raised our prices. People in the bakery, they work very hard and nobody is getting raises. They are all 

feeling the brunt because they have to go to the supermarket and 

pay higher prices for all their food. So it seems like everybody is 

getting squeezed in every area. 

My concern is that at this point, we are going to survive what 

is going on right now. I am more concerned about what is going 

to happen next year. It seems that the weather has had an impact. 

China has had an impact. I think you had mentioned that there 

are going to be some upcoming hearings on commodities markets 

and how their trading might have an impact. 

I know in our business, we have lots of decisions to make every 

day. The decisions that we make are really based on what can we 

or what can’t we control. If we can’t control it, then it is out of our 

hands. But if we can control it, then we take a good hard look at 

it, and I think that the ethanol is a factor in the increasing food 

and wheat prices. So why not reconsider it? 

Why not take a look maybe and my thought is we put it in a little micro environment and perfect it so maybe we can go and do 

the switchgrass and produce ethanol through water, and then once 

we have that technology perfected, we can move into those areas, 

because in my own business, I would never go out and bake a 

bread that I wasn’t sure was good and bake it on a large scale and 

put it out in every supermarket just to have it fail. I would test 

it, and if I did go out and it got to the point where it went full scale 

and it still wasn’t successful, then I would reconsider what I had 

done. 

Chairman LIEBERMAN. Thanks, Dr. Siegel. That was both compelling and very sensible, so I appreciate that very real description 

of how increasing commodity prices are affecting your business and 

your customers and your workers. 

Bruce Babcock is an agro-economist from Iowa State University 

and we welcome you today. Actually, it is a nice sequence here, because from your perspective, we hope you can in some ways help 

not only us, but Dr. Siegel understand what the causes of those 

food price increases for him are. Dr. Babcock. 

TESTIMONY OF BRUCE A. BABCOCK, PH.D.,1 DIRECTOR, CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT, IOWA 

STATE UNIVERSITY 

Mr. BABCOCK. Thank you, Mr. Chairman and Senator Collins, for 

the opportunity to participate in today’s hearing and to share my 

thoughts on the role that Federal policies play in affecting the 

amount of corn ethanol that we produce and the impact these policies have on crop and food prices. 
7 

Many people are confused about the impact of Federal ethanol 

policies. Much of this confusion is caused by people assuming that 

because government support was instrumental in bringing forth 

the ethanol industry, that a withdrawal of that support would get 

us back to a time when prices of corn, soybeans, and wheat were 

less than half of today’s levels. 

The additional demand for corn from the ethanol industry has 

been a major factor causing the price of corn to more than double 

in the last 18 months, from $2.50 a bushel to more than $6 per 

bushel. This link between ethanol and corn prices gives us insight 

into the following question. What would happen to the price of corn 

if we were to eliminate the U.S. ethanol industry? But this link 

does not give us any insight into what would happen to the price 

of corn, food, and gasoline if current Federal biofuels policies were 

relaxed or eliminated. They are two different questions. We need 

to recognize that U.S. ethanol plants will not simply disappear 

with a change in U.S. ethanol policy. Plants will keep operating as 

long as it makes economic sense for them to do so. 

So the three Federal policies that I want to consider in this testimony are the Renewable Fuel Standard (RFS), the blenders’ tax 

credit, and the tariff on imported ethanol. 

The RFS specifies minimum biofuels consumption levels for the 

U.S. Mandated use rises from 9 billion gallons in 2008 to 10.5 billion gallons in 2009. These mandates can be met from either domestically produced or imported biofuels. 

The 51-cent-per-gallon blenders’ tax credit is a direct subsidy 

given to gasoline blenders. The credit increases the willingness of 

blenders to buy ethanol. This increased demand increases the price 

of ethanol, ethanol profits and production, the demand for corn, 

and the price of corn. The tax credit has greatly stimulated the 

growth of the industry. 

The import tariff is a tax on imported ethanol. It has prevented 

the United States from importing large quantities of Brazilian ethanol, except for a short time during 2006 when the phase-out of 

Methyl Teritiary Butyl Ether (MTBE) caused U.S. ethanol prices to 

skyrocket. 

So given the level of concern about current crop prices, I first 

want to examine the short-term impacts of a policy change. By 

short-term, I mean the following: What impact would a change in 

Federal policy have on the supply of ethanol and the market price 

of corn during the period September 1 of this year to August 31 of 

next year? This is the period that corresponds to the marketing 

year for corn and soybeans, so it is a logical time period to look at. 

A focus on corn is warranted because it is the crop most directly 

affected by U.S. biofuels policies and it is the crop that most determines the impacts on the cost of food because of its importance in 

determining the cost of feeding livestock. My graduate student and 

I have considered a number of different policy scenarios, but I want 

to focus on three today. These are: What would happen if we waive 

the mandates but keep the tax credit and the import tariffs? Or we 

could keep the mandates but eliminate the import tariff and the 

tax credits. Or we could eliminate all three. So I want to look at 

these in turn. 
8 

Because both the blenders’ tax credit and the mandate increase 

the demand for ethanol, elimination of only one of them would have 

little impact because the other one would effectively keep the industry operating at close to capacity. Elimination of the mandate 

would reduce expected ethanol production by only about 4 percent. 

The ethanol price would drop by less than 2 percent. Ethanol imports would fall by 18 percent. And the price of corn wouldn’t 

change. 

Maintenance of the tax credit would keep demand for ethanol 

high and the import tariff would keep imports down. Thus, recent 

calls for an easing of the RFS would do almost nothing to reduce 

food prices or ease the financial pain of the livestock industry, at 

least in the short run. 

The impact of eliminating both the blenders’ tax credit and the 

import tariff but keeping the mandate would be somewhat larger 

because increased imports would reduce the amount of domestic 

ethanol that would be needed to meet the mandate. Domestic ethanol production would decline by about 11 percent and the price of 

corn would drop about 7 percent, so it is something. The impacts 

of this policy change are not any larger because the RFS keeps 

total demand high and the supply of imported ethanol simply is not 

unlimited. 

A rollback of all ethanol incentives and protection would have 

the largest impacts. Domestic ethanol production would drop by 21 

percent. The loss of demand subsidies would cause the price of ethanol to drop by 18 percent. And the price of corn would drop by 

13 percent. So that is the biggest impact I could find. 

We estimate that the drop in ethanol supply would increase gasoline pump prices by about four cents per gallon. That is, the expanded ethanol actually is keeping gas prices down a little bit. 

The livestock industry has been hard hit by the run-up in feed 

costs, but high gasoline prices combined with existing ethanol 

plants means that corn prices in the near term will remain well 

above historical levels, even if the RFS, the blenders’ tax credit, 

and the import tariff were all eliminated. This is not to say, however, that a 13 percent drop in corn prices would not help livestock 

producers and to a lesser extent reduce food prices. A 13 percent 

drop in corn prices would reduce the cost of feeding beef cattle by 

about 5 percent of revenue, hogs by about 7 percent of revenue, 

chickens by 4 percent, dairy cattle by 3 percent. This drop in production costs would eventually translate into consumer prices that 

would be a bit lower than they otherwise would be. 

The longer-term impact of a change in Federal biofuels policy depends crucially on what the price of crude oil is going to be. If we 

were to eliminate all Federal biofuels policies today and future 

crude oil prices support wholesale gasoline prices of about $3 a gallon, then we are looking at about $4 corn, and actually, the ethanol 

industry would expand just from profit incentive. A return of 

wholesale gasoline prices to $2—we should be so lucky—would 

keep ethanol production at about where we are today, maybe a little higher, and corn prices would fall substantially, to $3.60 a bushel. In contrast, if we move to $4 gasoline, corn prices won’t fall 

below $5 and the ethanol industry will expand to take advantage 

of the market opportunities. 
9 

The long-term results reveal two general findings. First, corn 

prices and gasoline prices are now inextricably linked through existing ethanol plants and the knowledge of how to efficiently convert corn to transportation fuel. This link will not be broken unless 

corn industry production is somehow capped. A return to inexpensive feed is simply not going to occur unless crude oil prices dramatically fall and biofuels policy is substantially changed. 

Second, in the long-run, if gasoline prices rise even higher and 

signal that we need alternative fuel, the corn ethanol industry will 

expand even beyond what we project today. 

I would like to now turn to the impact of policy on the prices of 

other crops and food. Expansion of corn use implies a cutback in 

planted acreage and higher prices for other crops. Soybeans are the 

crop most affected by competition for land. Wheat is affected by a 

much smaller amount. U.S. rice acreage is largely unaffected by 

corn prices because corn and rice are grown in different regions 

and it takes a fairly large incentive to move rice producers away 

from rice. The direct link that many people have made between 

U.S. biofuel subsidies and world rice prices is difficult to find. 

With regards to food prices, we must remember that to a large 

extent, Americans do not eat agricultural commodities. Rather, we 

eat food manufactured from these commodities. My colleagues and 

I estimated that a 30 percent change in the price of corn along with 

corresponding changes in the prices of other crops would change 

home food expenditures by about 1.3 percent. 

As I have discussed, altering U.S. biofuels policies will change 

the price of corn by much less than 30 percent, which suggests that 

changing Federal biofuels policies will not dramatically affect the 

price that Americans will pay for food. In the longer run, the price 

of corn and food will be determined largely by the price of crude 

oil. 

Because the United States is a major exporter of corn, soybeans, 

wheat, and rice, a change in biofuels policies that does affect U.S. 

prices will also affect international prices. Again, corn and soybean 

prices are the ones most affected by a change in Federal policy. 

Wheat prices would be affected less. Rice prices would be largely 

unaffected. 

Some may be skeptical of my small estimates of the effects of a 

change in Federal biofuels policies because of the huge run-up in 

wheat, rice, and feed costs over the last 18 months. But again, I 

have not tried to determine the impact of the elimination of the 

ethanol industry on commodity prices. That impact is large. Rather, I am asking what would be the impact on these commodity 

prices from a change in Federal biofuels policies given that we are 

well on our way to having 11 billion gallons of ethanol capacity in 

this country and that markets expect high gasoline prices for the 

foreseeable future. The combination of in-place capacity and highpriced gasoline implies modest impacts of a change in policy. 

In conclusion, there is no doubt that the growth of the ethanol 

industry is an important factor in the run-up in corn and soybean 

prices, but this does not imply that a change in Federal biofuels 

policy would reverse this and make these prices go substantially 

lower. If we continue to see crude oil prices in excess of $100 per 

barrel, then there is little that the Congress or EPA can do in the 
10 

1The prepared statement of Mr. Beckmann appears in the Appendix on page 162. 

short run to significantly reduce the price of corn short of an outright ban on producing ethanol from corn. Thank you. 

Chairman LIEBERMAN. Very provocative testimony, so I look forward to the question period. Thanks, Dr. Babcock. 

Next is Rev. David Beckmann, President of Bread for the World, 

an organization that works to diminish, and, hopefully, end world 

hunger. We have asked Rev. Beckmann to testify today about how 

rapidly rising food prices have led to a global food crisis. 

Thanks so much for your work and thanks for being here. 

TESTIMONY OF REV. DAVID BECKMANN,1 PRESIDENT, BREAD 

FOR THE WORLD 

Mr. BECKMANN. Mr. Chairman, Ranking Member, and distinguished Members of the Committee, I really appreciate your focus 

on this issue and the chance to speak. Bread for the World is a 

Christian advocacy organization that focuses on hunger in our 

country and around the world. 

We haven’t traditionally done much work on biofuels policy, but 

like you, we are, in fact, alarmed by the dramatic increase in world 

hunger in just the last year, and hunger and poverty are increasing 

in our own country right now. So we are grappling with the biofuel 

issues in the same way that this Committee is and I am glad to 

have a chance to talk with you about how we are thinking about 

it. 

I think I should focus first just on hunger in the world, hunger 

in our own country, what we think Congress can do about it, and 

then the role of biofuels and biofuels policy in that picture. 

The increase in world hunger, as Senator Lieberman and Senator 

Collins both discussed, has just been alarming. The world has been 

making progress against poverty, but this sudden and unexpected 

run-up in food prices, especially commodity prices, has reversed the 

progress against hunger and poverty. 

The commodity prices are the killer because the futures prices 

for the basic commodities—wheat, corn, and rice—have all shot up 

by something like two-thirds over the last 12 months and poor people in developing countries spend the bulk of their income on a 

commodity. So they don’t buy corn flakes. They go and they buy 

corn and they grind it up, or they buy rice and they put a little 

vegetable and salt with it. And that food is maybe 75 percent of 

their income, and rice or wheat or corn is 75 percent of that. So 

it is the rapid run-up in commodity prices that are killing children 

in developing countries and causing riots in many countries. 

That is caused by various factors, as others said, by crop failures 

in some places, by increasing incomes in Asia. That is the good 

news. A lot of Asians are eating better. They are eating more and 

they are eating a little bit of meat. That drives up commodity 

prices in the world. The high fuel prices are part of it. And then 

the shift to biofuels is part of it. 

Estimates vary on how much of the cause is the shift to biofuels. 

So the International Food Policy Research Institute (IFPRI) says 

25 to 30 percent, according to their model. The Food and Agricultural Organization says 15 to 20 percent. That seems kind of 
11 

vaguely consistent with what Dr. Babcock found from the way he 

worked at it. Administration officials last Thursday, when the 

President announced a request for additional food aid and agricultural development assistance, estimated that the increase in cornbased industry accounts for only 2 to 3 percent in the increase in 

global food prices. 

So the extent to which biofuels are driving up food prices is controversial, and I take Dr. Babcock’s point that the increase in 

biofuel production is not only driven by policy. I think what is incontrovertible is that the shift to biofuels, and especially corn-based 

ethanol, has helped to drive up commodity prices and there is a direct and immediate link between higher commodity prices and the 

increase in world hunger. 

In our own country, too, hunger and poverty are on the increase. 

We have seen increases in poverty in this country since the year 

2000. So even in good economic times, poverty has slightly increased in our country. Right now, low-income people are being 

buffeted by a number of things. Higher food prices is one factor, not 

the kind of dramatic increases in food prices that poor people in developing countries are seeing, but a significant increase in food 

prices, especially for those foods where the commodity is a big part 

of the food cost. 

So locally baked bread has increased more in price, as opposed 

to bread that is shipped from Timbuktu or someplace, because the 

wheat is a big part, or milk, or eggs. The price of eggs has gone 

up 29 percent because chickens are fed mostly corn. So we have 

seen some increase in food prices, especially rapid increases in 

those that have big portions of commodity in them. But as Dr. Babcock says, mostly what we buy in the grocery store is not commodities. We pay for the marketing, processing, and transportation. 

What is also hitting poor people in this country is higher fuel 

prices directly. They have to fill their gas tank. They have to heat 

their house. Unemployment has gone up somewhat. The credit 

market has tightened. So we know that hunger is increasing. We 

know it mainly because if you go to any food pantry, any food bank 

in the country, they are swamped with people coming in who are 

in need. 

Now, how to respond to that. The two main things that need to 

happen are, first, we need to increase food assistance to people and 

other kinds of assistance to people who are hungry, and then we 

also need to have a more dynamic, responsive agriculture. 

On the food side, the Food, Conservation, and Energy Act of 2008 

(farm bill) is the immediate way to deal with this, and I am 

pleased the conferees have agreed on a $10.4 billion increase in 

food assistance. But they just a few days ago killed the House’s 

proposal for an $800 million increase in the McGovern-Dole International School Feeding Initiative. That doesn’t make sense. 

Within the farm bill, you can also get more food to hungry people 

overseas by reforming food aid, because more than half of our food 

aid dollars go to a handful of shipping companies. So you can reform food aid in the ways that President Bush has suggested and 

you get a lot more food to hungry people in a hurry. 

The farm part of the farm bill is also important because the 

United States should be providing leadership for a dynamic, effi-
12 

1The prepared statement of Mr. Rosegrant appears in the Appendix on page 166. 

cient, responsive global agriculture. It is global agriculture that can 

bring down food prices again. But in fact, what the world has is 

a nation-by-nation, highly-managed, highly-protectionist agriculture. Many developing countries have slapped on food export 

limitations. But we are in no position to preach to them because 

our agriculture is also highly managed and protectionist. 

And the President is right to insist that Congress take a turn, 

set a new direction in farm policy, and make it clear that the future of global agriculture is not big subsidies to wealthy landowners. So with the reforms in the farm bill, I hope the Congress 

gets that job done. We need a farm bill desperately. We need a better farm bill. But reform in the agricultural part of the farm bill 

would also be a way to address the global hunger crisis. 

Finally, on the biofuels issue, I don’t think that the arguments 

for the mandates and subsidies and the tariffs are very strong. I 

think it is another example of the power of special interest politics. 

The environmental and the economic arguments, I don’t find convincing. And the increase in hunger is cause, I think, to reconsider. 

It is not just the next 12 months we are thinking about. The mandates would increase demand for corn-based ethanol over the coming years. So it seems to me there is cause to reconsider here. 

Now, the ethanol plants and ethanol production have revivified 

a lot of struggling rural communities. So this isn’t simple. People 

have changed their lives. They made investment decisions, including a lot of poor people, and you can’t just turn around the next 

year and say, well, we are headed in a different direction. But it 

seems to me that nobody expected this sudden increase in food 

prices. Certainly nobody wants to see lots of people going hungry. 

So I think it is right that you are asking the question whether we 

could modify, slow down, or reconsider our biofuels policy. 

The connection to domestic hunger is not a very strong connection as far as I can see. It is one factor. That poor family also has 

to pay 30 percent more for eggs than last year. But it is the connection to world hunger that is clearest, that you have a lot of babies 

dying in developing countries, and our switch to biofuels has been 

one factor in making that happen. 

Chairman LIEBERMAN. Thanks very much, Rev. Beckmann. Very 

compelling testimony. Straight talk. We will have some questions 

for you. 

Our final witness is Mark Rosegrant, who is Director of the Environment and Production Technology Division of the International 

Food Policy Research Institute. Among other things, we have asked 

Dr. Rosegrant to discuss the impact of global biofuels policies on 

food prices. Thank you for being here. 

TESTIMONY OF MARK W. ROSEGRANT, PH.D.,1 DIRECTOR, ENVIRONMENT AND PRODUCTION TECHNOLOGY DIVISION, 

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 

Mr. ROSEGRANT. Thank you very much, and thank you for the 

opportunity to be here today. As we have already heard, the recent 

dramatic increases in food prices are having severe consequences 

for poor countries and poor people around the world. Food prices 
13 

rose by nearly 40 percent in 2007 and another 40 percent, as we 

saw earlier, in early 2008. Nearly all agricultural commodities, including rice, corn (or maize as it is called internationally), wheat, 

meat, and soybeans have been affected. 

In response to these price increases, food riots have occurred in 

many developing countries, including Egypt, Haiti, Indonesia, and 

Senegal. According to the Food and Agricultural Organization of 

the United Nations, 37 countries are now facing food crises of various levels of severity. 

The primary triggers that have set off this rapidly-spiraling food 

prices are, first of all, as we were discussing here, biofuel policies, 

which as we have heard have led to large volumes of food crops 

being shifted into bioethanol and biodiesel production. 

Second, bad weather in key production areas. This has been very 

clear in the case of wheat, where severe droughts in Australia and 

Ukraine resulted in very high increases in prices in the last 2 

years. 

Third is the higher oil prices, which have contributed to increased costs of inputs, such as fertilizer and pesticide, as well as 

transportation and marketing costs in the food sector. 

But on top of these triggers, prices have moved sharply upward 

in the last few months as a result of poor international governmental policies, such as the rice export ban in Vietnam and import 

subsidies in India and elsewhere, which have tried to protect their 

own consumers but at the cost of higher prices for everyone. These, 

in turn, as you are going to discuss in a future meeting, have led 

to various types of speculative trading and storage behavior in reaction to these kinds of policies. 

However, the preconditions for rapidly rising food prices stem 

from underlying long-term trends in food supply and demand globally during the past decade and longer. Rapid income growth and 

urbanization in Asia has led to increased demand for wheat, meat, 

milk, oils, and vegetables, and has put very strong demand pressure on soybeans, corn, and other coarse grains as livestock feed. 

Something that hasn’t been noticed as widely is that stronger 

economic growth in Sub-Saharan Africa since the late 1990s has 

also significantly increased demand for wheat and rice, which are 

basic staples in Africa. 

On the supply side, long-term underlying factors include severe 

under-investment in agricultural research and technology development worldwide and a rural infrastructure, particularly irrigation 

and roads in developing countries, as well as trends towards growing scarcity of land and water globally. As a result, there has been 

a long-term and severe decline in productivity growth for grains 

such as corn, rice, wheat, and many other crops. 

Let me then take a look specifically at the role of biofuel policies 

in the food price hikes. Rapid increase for demand in production of 

biofuels, and particularly bioethanol from corn and sugar cane, has 

had a number of effects on supply and demand systems, with shifts 

away from producing corn for food and also in shifts of soybeans 

and other crops into corn. Interestingly, even rice has been affected 

by these shifts because in Asia and parts of Latin America, second 

and third season, drier season rice, has also been shifting into corn 

prior to the rapid recent run-up in rice prices. These indirect de-
14 

mand and supply-side effects on other crops have also caused bioethanol production to boost the price of rice and wheat and other 

crops. 

To look more specifically at the impact of biofuel demands on 

food prices, we have done a number of analyses at IFPRI. First, we 

compared actual food price changes since 2000 with a counterfactual simulation with lower biofuel demand corresponding to the 

1990 to 2000 rates of growth in biofuel demand. 

Second, we did a couple of forward-looking assessments somewhat similar to what Dr. Babcock has presented. First was to look 

at an impact on food prices of a freeze in biofuel production from 

all crops at 2007 levels, and then what would happen if there was, 

in fact, a moratorium on biofuel production after 2007. We did 

these analyses using our impact model, which is a global modeling 

framework that covers supply and demand of prices and trade for 

agricultural commodities for 115 countries around the world as 

well as the global totals. 

Turning first to the analysis of price evolution over the last 7 

years, because again, we compared a simulation of actual demand 

for food crops as biofuel feedstock from 2000 to 2007, the scenario 

looking at the slower growth rates prior to 2007, the difference 

then in these two simulations shows the contribution of biofuel demand on price increases. Based on our assessment, the increased 

biofuel demand corresponding to the boom since 2000 accounted for 

about 39 percent of the increase in real corn prices and about just 

over 20 percent of the increase in rice prices and wheat prices during that period. 

We then looked at the projected impact of a freeze, what would 

happen if, in fact, crop-based biofuel production were frozen at 

2007 levels. On this, we projected that by 2010, corn prices would 

decline by about 6 percent and there would be a 14 percent decline 

by 2015. So this is somewhat comparable to some of the simulations that Dr. Babcock has shown. We also get then price reductions for oil crops, cassava, wheat, and sugar, about half of the results for corn prices, and the detailed results are in my written testimony. 

Then what would happen if instead we actually abolished 

biofuel—a very severe policy of abolishing ethanol production from 

food crops in 2008. This would have more dramatic impacts, but 

again, the result would be a 20 percent drop in the price of corn, 

a 14 percent drop in the price of cassava, 11 percent for sugar, 8 

percent for wheat, and only about a 4 percent decline in the price 

of rice. 

So in conclusion, we see that there are various pressures on 

international grain markets that have contributed to rapid price increases during the past several years and biofuels have been just 

one contributor, but certainly a very important one, especially for 

corn. The slowing growth in grain supplies and rapidly growing demand for grain for all uses, including food and feed, which had 

been made worse by recent policy-induced distortions, however, are 

long-term underlying factors that cannot be easily reversed. If the 

world food economy is to meet the increased demand for food, feed, 

and fuel that is being driven by rapid economic growth and also to 

cope with future challenges on land use pressures, and we will see 
15 

soon the increasing pressures from climate change, we also have to 

deal with long-term agricultural productivity growth issues. 

Higher food prices have reduced poor people’s access to food, 

which has possible long-term and irreversible consequences for 

health, productivity, and well-being, particularly if higher prices 

lead to continued reductions in food consumption by infants and 

preschool children. If the current biofuel expansion continues at its 

rapid levels, there can be expected to be a reduction in calorie 

availability in developing countries relative to a slower growth rate 

in biofuels, and you can expect increases in malnourishment in a 

number of countries. 

It is, therefore, important to find ways to keep biofuels from 

worsening the food price crisis, and a reduction in mandates or 

elimination of subsidies for biofuel production would contribute to 

somewhat lower food prices, as we have seen. But it is perhaps 

even more critical to focus on boosting agricultural productivity 

growth and improving investments in rural infrastructure in developing countries. These factors would continue to drive the future 

health of the agricultural sector and provide the largest role in determining food security and human well-being of the world’s poorer 

and more vulnerable populations. 

The United States can play a leading role in boosting agricultural growth by increasing investment in agricultural research and 

supporting reforms targeted at increased productivity on a global 

basis, and a major program of enhanced investment in these areas 

could put the United States back into a very strong moral and 

practical leadership role in boosting agricultural productivity 

growth and reducing world hunger. Thank you. 

Chairman LIEBERMAN. Thanks, Dr. Rosegrant. 

You were an excellent panel. I, for one, learned a lot listening to 

you, so I thank you. Let us do 6-minute rounds because we have 

a number of Senators here. 

Mr. Babcock, let me begin with you. In your testimony, you outline expected corn and fuel prices that would result from a total repeal of the three ethanol incentives and you graded the impact of 

less comprehensive action. Sometime soon, the Senate will vote on 

the farm bill itself, which would, as I understand it now, scale back 

the blenders’ tax credit from 51 cents a gallon to 45 cents a gallon. 

I don’t know whether you have specifically looked at the impact of 

that modest reduction on corn and fuel prices. If you have, I would 

be interested. If not, based on your research, what would you predict is the likely impact? And I suppose a final question is, if you 

want to play the game, if you were a Senator, how would you vote 

on that proposed reduction? 

Mr. BABCOCK. Yes. In fact, we did run that scenario because part 

of my Center’s job is to try to keep track of farm policy and the 

impacts on the price of corn, soybeans, and wheat—— 

Chairman LIEBERMAN. Right. 

Mr. BABCOCK [continuing]. So we actually did run that scenario 

and it had almost no impact on the price of corn. I think it went 

down four cents a bushel or something like that, which is consistent with the testimony here that if you took off the blenders’ 

credit completely, instead of just six cents, it would have a modest 
16 

effect. So taking off just a little bit is going to have a very minor 

effect, because—— 

Chairman LIEBERMAN. Just go back and compare it to what the 

impact—you used the bushel as a standard. If this took off four 

cents a bushel, how about if we go back to your three ethanol incentives. How much would that reduce per bushel? 

Mr. BABCOCK [continuing]. If you took everything off, we estimate about 80 cents a bushel. 

Chairman LIEBERMAN. OK. 

Mr. BABCOCK. So if you keep the mandate in place, a small reduction in the blenders’ credit doesn’t do very much. 

Chairman LIEBERMAN. Right. So how would you vote if your 

name was called in the Senate? 

Mr. BABCOCK. On that particular issue? 

Chairman LIEBERMAN. Yes. 

Mr. BABCOCK. It depends on what you are trying to accomplish 

with it. 

Chairman LIEBERMAN. You have to vote aye or nay. [Laughter.] 

Mr. BABCOCK. And there is no change in the import tariff? 

Chairman LIEBERMAN. Well, let us assume that. I don’t believe 

there is any change in the import tariff contemplated. There may 

be an amendment—well, of course, if it is a conference report, there 

can’t be. But let us just take it alone. 

Mr. BABCOCK. It would be more of a yea if they had an import 

tariff reduction commensurate with the change in the blenders’ 

credit. 

Chairman LIEBERMAN. Right. But alone, you would be likely to 

vote nay because the impact would be negligible? 

Mr. BABCOCK. Right. 

Chairman LIEBERMAN. OK. I squeezed that one out of you. You 

see how hard a job we have. [Laughter.] 

I wish there was a third option—yea, nay, and it depends. 

[Laughter.] 

Because that is true a lot of the time. 

Senator MCCASKILL. Mr. Chairman, you just have to be independent. [Laughter.] 

Chairman LIEBERMAN. Oh, yes. Very good, Senator McCaskill. 

In your testimony, you said, Dr. Babcock, ‘‘unless we have a return to $40 or $50 a barrel crude oil, we can expect the price of 

corn to be well above historical levels for the foreseeable future, 

even if all support for corn ethanol were eliminated.’’ So as policy 

makers, this puts us in an interesting position because that itself 

argues for the development of alternative fuels, not all based on 

corn, but a significant number of which will be based on commodities or raw materials which would also presumably have an impact 

on commodity prices. So how do we decide here? 

Mr. BABCOCK. Well, with high-price gasoline, the markets are demanding and hoping for alternative fuels. We know how to produce 

ethanol from sugar cane and from corn—— 

Chairman LIEBERMAN. Right. 

Mr. BABCOCK [continuing]. And so that is what we would do. So 

I think that if we don’t want the impacts of taking land that can 

be used to grow food and use it to grow fuel, then we need alternatives to food-based transportation fuels. And so the investments 
17 

that the Department of Energy (DOE) is making in trying to figure 

out how to make waste products into transportation fuels, how to 

use corn and wheat residues, maybe some perennial grasses that 

could be grown on land that is not suitable for growing food crops, 

jatropha that can be grown on degraded lands, all of those alternatives are being given a huge boost by the price of gasoline, but 

they also could stand for some public investment in just figuring 

out how to do it. And so DOE’s pilot programs and their investment in research centers, I think is the right path. 

Chairman LIEBERMAN. I cannot resist—thank you—saying at 

this point that the climate change bill that Senator Warner and I, 

and many others, will put before the Senate in June also has an 

enormous flow of revenue that derives from the sale of credits but 

will be reinvested in technologies such as the ones you are talking 

about. 

My time is coming to a close, but Rev. Beckmann, I was really 

interested that you want essentially global, not just American, but 

American and other programs of essentially protectionism price 

supports for agriculture that you would say are also a significant 

contributing factor in the increase in world food prices and, therefore, the increase in hunger. Do you want to talk any more about 

that? 

Mr. BECKMANN. Sure. It just seems to me it is clear that we need 

an economically efficient, responsive, dynamic agriculture, and the 

United States, Europe, and Japan all have highly protected agricultures. The developing countries have recently put these export 

restrictions on food which have made the immediate problem 

worse. 

Chairman LIEBERMAN. I assume they did it because of the price 

increases. 

Mr. BECKMANN. Well, they are afraid, so like India, they put export restrictions on cheap rice—— 

Chairman LIEBERMAN. Right. 

Mr. BECKMANN [continuing]. Because that is what ordinary people eat, but lots of countries have done that, and it has made the 

problem worse. So to have a more dynamic, responsive agriculture, 

it just seems that is going to bring down food prices in the medium 

term, and in particular, as Dr. Rosegrant said, it is agriculture in 

poor countries that is the hope in this crisis because there are 

about 100 million really very poor people who have been adversely 

affected. 

But there are about 600 million people who are equally poor who 

are making their living in agriculture. So I am really delighted that 

the President’s supplemental request for 2009 includes not just 

food aid, but local purchase for food aid and agricultural development through the U.S. Agency for International Development 

(USAID), because if we invest in the agricultural productivity of 

very poor people around the world, they can help to bring down 

food prices for the 100 million, but do it in a way that will raise 

their own livelihood so that you will get permanent progress 

against hunger. 

Chairman LIEBERMAN. Thanks. I appreciate it. Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 
18 

Mr. Siegel, I had a good time visiting your retail store yesterday 

in York and seeing firsthand the enormous variety of breads that 

you produce. I want to make sure that my colleague from New 

Hampshire knows that you sell in New Hampshire, as well—— 

[Laughter.] 

And I am sure he is interested in your testimony, also. 

It is really important that you came today because you are helping us understand the actual impact on a small business. I would 

like to go over with you some of the facts of your business because 

I am not sure that it was as clear in your quick testimony as it 

was when we were talking yesterday. So first, why don’t you tell 

us how many employees you have. 

Mr. SIEGEL. We have about 50 employees right now. 

Senator COLLINS. So you have 50 employees. And am I correct 

that you use some 50,000 pounds of flour a week? 

Mr. SIEGEL. Fifty-thousand pounds of flour a week, yes. 

Senator COLLINS. And tell us how much you spent for that 

amount of flour last September. 

Mr. SIEGEL. Last September, flour was $7,600 a truckload. 

Senator COLLINS. Seventy-six-hundred dollars. And in February, 

you reached the high point so far, and what did you pay in February? 

Mr. SIEGEL. We actually bought in before the peak. We paid 

$22,000 a truckload. 

Senator COLLINS. Twenty-two thousand. So your costs in just a 

matter of months have gone from $7,600 for the ingredient that 

you use the most of to $22,000, is that correct? 

Mr. SIEGEL. That is correct. 

Senator COLLINS. And what has been the impact on your business in terms of pay raises for your employees or plans to expand? 

Has this enormous increase in your costs changed some of your 

plans for your business? 

Mr. SIEGEL. Well, what it has done is the employees aren’t getting any pay raises right at the moment. We are a small business. 

For me, I have always had a comfort level in knowing what it 

would cost to make the bread and what it costs to sell the bread. 

The prices increasing has basically put a big unknown factor in 

there because we don’t know if they are going to keep increasing. 

Now, the prices have come down from their peak of $28,000 a 

truckload down to—I think today it is probably $15,000. For me, 

being a baker, we didn’t know when it went to $22,000 and 

$28,000, it could have gone to $38,000 or $40,000 at some point in 

time. It was just out of control. 

So what has happened with our business is that it is actually— 

we have taken kind of a different stance. We figured the only way 

to combat—we don’t have control over the prices, so we raise the 

prices. We do have a lot of customers that aren’t buying the bread 

anymore. But we are trying to grow our sales. We are just trying 

to increase, because we think that increased sales is the way to 

combat increased costs, and so we are just kind of winging it. We 

are trying to expand and we are going to hope that this will solve 

the problem. 

Senator COLLINS. Thank you, and I think that testimony is very 

compelling because it shows the impact not just on your business, 
19 

but the 50 people who work for you whom you are not able to give 

pay raises to because your raw ingredients have increased, and 

that in turn has a ripple effect on their ability to purchase a new 

car, for example, or to buy more food for themselves. I think that 

is an important point. 

I want to go to Dr. Rosegrant and talk to you a little bit about 

the Federal policy. As Dr. Babcock has pointed out, we are really 

talking about three policies on ethanol, the subsidies, the mandates, and the tariffs. And it seems to me that the combined result 

of those policies has been to distort the market so that food is no 

longer being used for food. Food instead is being used in increasing 

proportions for fuel. 

Now, there is an alternative and that is cellulosic ethanol that 

doesn’t use food. It uses wood chips or fiber or the corn stalks rather than the corn itself. Should our policies be revised so that instead of having this enormous subsidy, restrictive tariffs, and high 

mandates for corn-based ethanol, should we instead be revising 

those policies to encourage the development of cellulosic ethanol? 

Mr. ROSEGRANT. Yes, I would support a shift in priorities along 

those lines. As Dr. Babcock said, even if you reduce the subsidies 

and remove import tariffs now, the U.S. corn-based ethanol industry would not collapse. It would still produce significant amounts, 

but in that case, it would be competing in a sense on a level playing field with other sources, other parts of the corn industry. So I 

think a movement away from those and a reinvestment of the savings, for example, the subsidies, into other types of ethanol could 

have long-term benefits. 

So it is worth noting that even optimistic estimates would say 

that truly commercial cellulosic ethanol is probably 2 to 5 years 

away, and pessimists say 10 years, so I think with additional 

science-based funding that lag could be shortened and the 2- to 5- 

year period could come into play. So I think greater investment in 

those fields could have much stronger long-term payoffs. 

Senator COLLINS. Thank you. Mr. Chairman, I know my time has 

expired. An issue that we haven’t discussed is the cost to the taxpayers of these policies, as well, and whether that money could be 

more profitably invested elsewhere? But I have a feeling that perhaps my colleague from Oklahoma may get into that issue. [Laughter.] 

Chairman LIEBERMAN. Good question. 

Senator COLLINS. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. I have that same feeling. Thanks, Senator 

Collins. Senator Carper is next, to be followed by Senator Sununu. 

Senator CARPER. Mr. Chairman and Senator Collins, thank you 

very much for holding this hearing. This is a wonderful panel, illuminating, timely, and enlightening and we are grateful to you for 

your testimony. 

During opening statements, I mentioned, for those of my colleagues who just arrived, some news that I heard earlier this week 

that GM has taken, I think, an equity position in a couple of firms 

that are involved in producing biofuels in maybe a more cost-effective way. We are going to submit for the record some press reports 

about this, but I just want to share with my colleagues and those 

that are gathered here some of what I have learned. 
20 

The investments to produce ethanol by GM and its partners suggest there might be ways to make biofuels work without having the 

adverse unintended consequences with respect to the environment 

and with respect to food security and food prices. One of the companies that I think GM has partnered with is a company called 

Coskata. And Coskata apparently has developed technology to 

make ethanol from a wide range of products, including garbage, 

automobile tires that are stacking up in our States across the country, and plant waste, among others. We are told by the folks at 

Coskata that its design produces ethanol for less than a buck a gallon and uses less than a gallon of water for a gallon of ethanol. 

They are going to have their first commercial plant up and running 

by 2011 to make anywhere from 50 to 100 million gallons of ethanol, which is not a huge amount of ethanol in terms of our overall 

demand. 

But the reason why I bring it up is to suggest that the free enterprise system, the marketplace, and technology can help us to address and to provide some good solutions to the challenge that we 

face today. I am encouraged by that and hopefully you are, too. 

In terms of the use of better using and better targeting Federal 

dollars, the idea of actually putting Federal dollars into that kind 

of technology, encouraging that technology, makes a lot more sense 

to me and maybe it does to you, as well. My colleagues in the Delaware’s delegation worked to get an $18 million Energy Department 

research grant about 4 years ago to go into work going on at the 

DuPont Experimental Station in Wilmington. That money has led 

to the creation of a fairly large pilot operation, a pilot plant now 

someplace in Iowa with a major partner that is going to hopefully 

get to full-scale cellulosic ethanol production in a few years, not 5 

or 10 years, but hopefully sooner than that. 

And also over at DuPont, they have been working on something 

called biobutanol, working on it with BP. There is actually a commercial operation selling the product now in Great Britain. Biobutanol has better energy density than ethanol. Biobutanol apparently travels in pipelines. Ethanol does not. Biobutanol mixes better with gasoline than traditional ethanol. So there are solutions on 

the way and my hope is that what we will do is be smart enough 

to figure out how to put our scarce Federal tax dollars into nurturing those kinds of technologies. 

That was a long statement. Dr. Babcock, you and Dr. Rosegrant 

talked, as I recall, about the effect and shared with us some numbers about the effect on corn prices and ethanol. But you talked 

about eliminating the blenders’ tax credit, eliminating the import 

tariff, eliminating the ethanol mandate, and I think you both had 

numbers to share with us as to the consequences of doing that. 

Just explain again what you said. It sounds like you are pretty 

close together. But just say it to us again, please. The consequences 

of eliminating the blenders’ tax credit, the import tariff, eliminating the ethanol mandate. What are the consequences? 

Mr. BABCOCK. My testimony is that if you eliminated all three 

of them, that it would drop the price of corn by about 80 cents a 

bushel. It would increase the price of gasoline by about four cents 

a gallon because the ethanol supply would drop. So there is a 

trade-off there. 
21 

If you eliminate them piecemeal, the effects are much lower. So 

if you just get rid of the blenders’ credit, then the RFS kicks in. 

If you get rid of the RFS, the blenders’ credit keeps things operating at capacity. So the maximum—and I am thinking short-run— 

of 80 cents. 

Senator CARPER. All right. And Dr. Rosegrant, my recollection is 

you—— 

Senator COLLINS. Senator Carper, could I just interrupt on that 

point? I think it is important that you get the percentage of the increase because 80 cents sounds very small to us. 

Senator CARPER. Is it 13 percent? 

Mr. BABCOCK. Thirteen percent. 

Senator COLLINS. I just wanted to clarify that point. 

Senator CARPER. Sure. Thank you. Dr. Rosegrant. 

Mr. ROSEGRANT. I think the closest analysis that we did to what 

Dr. Babcock said was—we didn’t look explicitly at the separate 

items, but what would happen if you did a set of policies that 

would leave corn-based bioethanol production at its levels in 2007, 

which I think is what would happen if you implemented these. 

There might be a slight decline. And we ended up with an immediate decline of about 6 percent in corn prices, but a 14 percent decline by 2015 as it works through the system. So, in fact, it was 

quite remarkably similar, given the different kinds of models that 

we are using. 

Senator CARPER. Your advice to us in terms of policy advice? One 

of my colleagues may have put this question to you before, but let 

me just ask it again. What should we do with respect to those three 

policies, the blenders’ tax credit, the import tariff, and eliminating 

the ethanol mandate? Let me just ask everyone, from Dr. Siegel, 

just take it down the line, your advice to us. 

Mr. SIEGEL. Actually, I can’t answer that question. 

Senator CARPER. Thank you very much. Dr. Babcock. 

Mr. BABCOCK. It depends what you want to accomplish, but you 

are going to get very limited impact if you do it piecemeal. 

Senator CARPER. What I want to do is to reduce our dependence 

on foreign oil. Frankly, I would like to be able to somehow supplement farm income to make farmers less likely to want to sell their 

land to developers and to maintain some of our open space and to 

try to find a way where biofuels can actually reduce our dependence on foreign oil and supplement farm income to some extent 

without just turning economics and supply and demand on its 

head. Rev. Beckmann. 

Mr. BECKMANN. Well, I found this really instructive. I think a 13 

percent decrease in the price of corn is not going to depress rural 

America and there are other things that you can do through farm 

and rural development policy that would do a lot more good for 

rural America. So I would get rid of all three. 

Senator CARPER. All right, thank you. Dr. Rosegrant. 

Mr. ROSEGRANT. I think I would be cautious about flipping all 

three off immediately since this kind of off and on signals is—— 

Senator CARPER. I agree. 

Mr. ROSEGRANT. But I think a phase-down of all three would be 

an appropriate policy, and 15 percent isn’t a lot, but it is enough 

to bring some starving children out of hunger in developing coun-
22 

tries. It is not going to solve the food crisis, but it has contributed 

to it. 

Senator CARPER. I think what one of you said, if we would ratchet down the blenders’ tax credit from 51 cents and take it down to 

46 cents over the next couple of years, that does not do much at 

all. I think everybody agrees on that. 

All right. This is a very helpful hearing. Thank you very much 

for holding this hearing today. 

Chairman LIEBERMAN. Thanks very much, Senator Carper. Senator Sununu. 

OPENING STATEMENT OF SENATOR SUNUNU 

Senator SUNUNU. Thank you very much, Mr. Chairman. I want 

to take most of my time to make a few comments, so I may not 

have a lot of questions. I think the panelists have already addressed many of the important points, but I think there are a couple of things we haven’t touched on. 

First, I want to take the time to welcome Dr. Siegel. I know he 

has operations in New Hampshire, and also Massachusetts. I am 

glad to see it is a growing small business. I am well aware of the 

operation because I read Senator Collins’s news clips every day, 

and I saw a wonderful article not just about her visit, but about 

the great work you are doing at the bakery. 

A couple of the panelists made the comment that we have to recognize that the ethanol industry won’t collapse if all of these subsidies are taken away. I think that misses the point entirely because this isn’t a discussion about wanting to make the ethanol industry collapse. This is a discussion about stopping bad policy that 

has significant economic consequences, significant environmental 

consequences, and significant moral implications in dealing with 

the food crisis around the world. It is a question of what kind of 

an impact do these policies have, and frankly, I think they are universally bad and we need to be a little bit more candid about their 

impact. 

It was suggested by a couple of the panelists that it wouldn’t 

make sense to cut back just a little bit. They suggested that we 

shouldn’t support a small reduction in one of these programs because the impact wouldn’t be that great. By that reasoning, the 

way to impose bad policy on America is to create 50 different programs that each imposed just a little bit of damage on our economy, just a little bit of damage on consumers. By that reasoning, 

Congress would never be able to justify rolling back any of those 

policies because rolling back any one of them would only help a little bit. 

We need to be sincere and honest that these policies are damaging. They are increasing corn prices, but they are also increasing 

prices of all the other crops that are crowded out by the 30 million 

acres of corn that is being planted to support the ethanol industry. 

We need to be honest about the fact that there are significant implications when we set up barriers, like a tariff. We get countries 

around the world to do the same thing. Fewer global exchanges of 

goods and services, agricultural products, means higher prices for 

everyone in the world of all of those products, whether they are 

corn-related or not. 
23 

1The chart referenced by Senator Sununu appears in the Appendix on page 126. 

Let us talk about the impact. People say that it is really a small 

impact. It is only a small percent. This is a dramatic chart.1 The 

bars show the percentage of corn in America that is being diverted 

from food to ethanol, a third this year. That is the far end, 2008. 

It will be 33 percent of our corn in America being diverted to ethanol. I don’t think it is suddenly going to drop off in 2009 or 2010 

as the mandate goes from 7 billion gallons to 10 billion gallons to 

36 billion gallons in the future. That mandate is only going to create more pressure on prices, more crowding out on land. It is just 

hard to argue with the striking nature of that graph. 

So let us talk about these impacts specifically. When you are diverting a third of the crop to ethanol, it has a real impact on prices. 

To produce a gallon of ethanol takes 1,700 gallons of water, 30 million acres of land going to support the corn for ethanol mandate, 

and all the associated labor. Those are economic inputs that could 

otherwise go to producing other food crops, other products, other 

services, in a much more efficient way that doesn’t depend on a billion dollars a year in subsidy. 

A lot of the justification early on was made that this was good 

for the environment. The most recent evaluations of the environmental impact, however, are quite different. It takes seventeenhundred gallons of water to produce a gallon of ethanol. We have 

to be honest about the environmental impact in an age of scarcer 

water resources. Also, a recent study published in Science found 

that corn-based ethanol nearly doubles greenhouse gas emissions 

from the land that is cultivated over a 30-year period—a significant 

environmental consequence. 

Finally, I want to address the moral implications in a global food 

crisis. We have terrible economic policies in places like Venezuela 

and Zimbabwe creating local shortages, and terrible military consequences of the fighting in Darfur. We need to have the most efficient, fair production and distribution of food than we have ever 

had before. But unfortunately, we don’t because we have a 54-centper-gallon tax on imported ethanol. We have a 51-cent-per-gallon 

credit for ethanol and we have a mandate of billions and billions 

of gallons per year. 

There is no product in the country where we mandate that consumers buy it and give the production side a tax credit. That is 

outrageous. And if it were any other product or service that we required consumers to buy and then gave the producers a tax credit, 

people would be taking to the streets because they would immediately see the injustice. But this has been papered over because 

of the vehicle that these subsidies move in, papered over because 

I think a lot of misleading information was given about the environmental consequences, and papered over because we didn’t really 

have to suffer the price at the checkout counter until the last couple of years, until these policies have really come home to roost. 

I think there hasn’t been enough candid discussion about this. 

Frankly, there has been too much vague talk about all the different 

areas of production that might come in the future from non-food 

sources, and I think that is an area of promise, whether it is from 

sustainable biomass, switchgrass, non-agricultural areas, or munic-
24 

ipal waste. These are areas where product is lying, not being used, 

and land is not being cultivated. These areas have a lot more promise and would do a lot less damage to our economy, to our environment, and to the global food shortage. 

But these corn-based ethanol subsidies have been a disaster for 

our economy. They have been a disaster for our environment. And 

today, consumers are realizing they are a disaster for their pocketbooks all over the country. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thank you, Senator Sununu. Senator 

Coburn. 

Senator COBURN. Great question. 

Senator SUNUNU. I think I was very candid at the top—— 

Senator COBURN. You were. I loved it. 

Senator SUNUNU. I wanted to take the time to make a few 

points. 

Senator COBURN. I am with you. 

Chairman LIEBERMAN. This seems relevant with a Maine baker 

here that the son of the Maine baker who used to be our colleague 

in the Senate, Bill Cohen, had a knack, which I noticed after a year 

or so, that when he had a 5-minute round of questions, he would 

make a 4 minute and 45 second opening statement, then ask his 

question, and the answer would go on for 5 or 10 minutes. [Laughter.] 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Hopefully I won’t do that. I apologize for missing some of your testimonies. I would like for each of you to let me 

make a statement and ask if it is a correct statement. 

The price of wheat right now really is not in this mix based on 

corn-based ethanol. Basically, we had crop failures in Ukraine, 

South America, and Australia that really drove up the price of 

wheat, is that not correct? 

Mr. ROSEGRANT. That is largely correct. There has been some 

contribution from biofuels, but—— 

Senator COBURN. But the vast majority of the increase in the 

price of wheat has nothing to do with ethanol. Don’t get confused. 

I am not a supporter of ethanol. But I think it is important for us 

to understand that oftentimes, like in Central Oklahoma, it is not 

corn land. You can’t use the land for corn. So we are not seeing 

that, and wheat has moderated considerably since we saw the 

spikes. 

It is also interesting to note that wheat reserves in this country 

are at the lowest level they have been in 40 years, so that is the 

other reason why we saw an increase. 

According to my reading, at $65 a barrel oil, there is a break 

even on ethanol without a subsidy, is that correct or not correct? 

In other words, if you have $65 oil manifested to about $2.50 a gallon gasoline there is no need for a subsidy for blending ethanol. At 

what price of oil is there no longer a need to subsidize the blending 

of ethanol? 

Mr. BABCOCK. Well, I will answer that. Given the existence of 

about 11 billion gallons of plant capacity that we are going to have, 

there is a direct relationship between the price of crude oil and the 

quantity of ethanol you want. So if you want a lot of ethanol, you 
25 

are going to have to subsidize it for a given price of oil. But there 

is a quantity of ethanol at $65 crude that would probably be in the 

neighborhood of seven to eight billion gallons. 

Senator COBURN. But you are taking that completely out of any 

economic model. Let us say we have a real economic model and no 

subsidy. At what price of oil will you have people producing ethanol? 

Mr. BABCOCK. It depends on the cost of corn. It is an economic 

model. The price of corn is linked to the price of crude. You cannot 

have a price of corn that is low and a price of crude that is high. 

If you had that kind of situation, all the ethanol plants would turn 

on. The price of corn would just jump right back up. 

Senator COBURN. So why do we need the incentive? 

Mr. BABCOCK. My testimony here is if you got rid of all the incentives, that it would not have very much impact on the total quantity of ethanol relative to what we are producing now. 

Senator COBURN. So one of my economic primers is greed conquers all technologic difficulties, is not necessarily true. With oil at 

$122 a barrel yesterday, if we had a floor price out would we not 

get the same investment based on an economic model if they knew 

there was a fixed bottom price for the price of oil? 

Mr. BABCOCK. I think, frankly, that at today’s crude oil prices, 

you get rid of all the incentives for ethanol, we are going to grow 

out to the projected volume of about 14 billion gallons of plant capacity, even if you got rid of the incentives today. It just makes 

sense over time. 

Senator COBURN. It makes economic sense. 

Mr. BABCOCK. It makes economic sense. 

Senator COBURN. Because money goes to the bottom line without 

it, and that is an important point. So in terms of policy, is it good 

economic policy to charge poor people taxes to incentivize ethanol 

production and the result of that is the cost of their food goes 

through the roof? 

Mr. ROSEGRANT. Certainly not from an international perspective 

where in my work, I am worried about poor people overseas, as 

well, and obviously that is not a good policy for them. 

Senator COBURN. Actually, what we have is a real inequity in 

this country today. We are going to take $13 to $15 billion worth 

of the taxpayers’ money and incentivize something that otherwise 

economically would be produced with the price of oil where it is. 

Therefore, people with the smallest marginal disposable income are 

going to pay the taxes for it and will have an increased cost of living. What we have really done is we have shifted money away from 

the poorest to help the wealthiest. It is an absolute arcane policy 

that is directly opposite of what we should be about doing in this 

country to raise everybody up. 

Are you all aware of some of the shenanigans that are going on 

today where somebody imports biodiesel into a Southern port, 

blends a gallon of real diesel with it, collects the dollar tax credit, 

and then sells it in Europe because they get a dollar more a gallon 

for the biodiesel than they do here? Are you all aware of that happening? 

Mr. BABCOCK. [Nodding head.] 
26 

Senator COBURN. Would you comment on that from an economic 

model? 

Mr. BABCOCK. Well, one way is to take away all subsidies for 

biofuels. That would do it. The European Union (EU) is trying to 

negotiate something less radical than that. I think the biodiesel 

producers in the United States would rather go see the EU way. 

But clearly, if you took away the dollar-a-gallon blenders’ credit, 

that kind of shenanigan would go away. 

Senator COBURN. Is anybody opposed to taking away the dollara-gallon blenders’ credit for biodiesel? 

Mr. ROSEGRANT. No. 

Senator COBURN. Does anybody think it would have a negative 

impact on future production of biodiesel? 

Mr. BABCOCK. I will speculate that the dollar-a-gallon credit is 

not enough to keep biodiesel plants running right now, given the 

high vegetable oil prices, and they are going to rely on that mandated use that starts kicking in in 2009. 

Senator COBURN. All right. I have no further questions. Thank 

you. 

Chairman LIEBERMAN. Excellent. Thanks very much, Senator 

Coburn. 

Let us do another 6-minute round. Dr. Babcock, I want to come 

back to your research. Incidentally, I really appreciate that you and 

Dr. Rosegrant have presented to us some quite relevant current estimates of the impact of various policies. Of the three policies now 

supporting ethanol, I wanted to ask you, and maybe I missed it 

earlier on, what is your estimated impact of the tariff on imported 

ethanol alone? In other words, if we removed the tariff, what would 

be the percentage reduction in the price of the commodity? 

Mr. BABCOCK. It would have very little impact because we would 

get a lot more imports into the United States, and we would more 

than double our imports of ethanol into the United States, but in 

the next year or two, the supply of ethanol that is exportable by 

Brazil would run out. We would take all their exportable surplus, 

we would bring it into the United States, and it would have some 

impact on the domestic production because we would essentially be 

subsidizing the Brazilian import of ethanol because they would 

qualify for the 51-cent-per-gallon blenders’ credit. 

Chairman LIEBERMAN. I understand. 

Mr. BABCOCK. We would just be sucking the ethanol out of Brazil 

and it would also help meet our mandate. So it would have modest 

effects, though, in terms of the price of corn. It would have a bigger 

effect on the quantity of ethanol produced in the United States. But 

we would still have that 51-cent-per-gallon blenders’ credit. 

Chairman LIEBERMAN. So is that the big one of the three, or really it is all of them and the way they work together? 

Mr. BABCOCK. It is all and how they work together. Does it really 

make a lot of sense to subsidize Brazilian ethanol production—— 

Chairman LIEBERMAN. No. 

Mr. BABCOCK [continuing]. And bring it into the United States? 

It doesn’t to me. So I look at these policies as working together, 

and so just taking one of them off doesn’t do perhaps what you 

think it might. 
27 

Chairman LIEBERMAN. OK. Dr. Rosegrant—because I know you 

are focused on the international aspects of this—am I right that 

Europe, as it has tried to diversify its energy supply, has focused 

on biofuels? 

Mr. ROSEGRANT. And particularly biodiesel, yes. 

Chairman LIEBERMAN. Biodiesel, right. As we have said, Brazil 

has done really very well with sugar-based ethanol, and so far in 

the United States, we are talking about corn-based ethanol. 

Can you evaluate the impact that these three different approaches to the alternative fuel challenge have had on food prices? 

I think you understand my question. 

Mr. ROSEGRANT. Yes. Again, what we did was look at essentially 

the combination—— 

Chairman LIEBERMAN. Right. 

Mr. ROSEGRANT [continuing]. Rather than pricing them out separately, and as we said, we did try to look at the historical impact 

from 2000 to 2007. If we look particularly at the grains, which we 

were looking at because they are such important staple foods, if 

you did a production weighted average, then the increases in 

biofuels since 2000 have caused about 30 percent of the increase in 

grain prices up through 2007. That doesn’t include this policy-driven spike of the last 4 months. But it has had a bigger impact on 

corn, or we project it has contributed to nearly 40 percent of the 

increase, but only about 20 percent of the increase for rice and 

wheat. 

Chairman LIEBERMAN. Is it constructive for there to be more 

international cooperation in the adoption of these commodity-based 

fuel alternatives? Is any of that happening now? If it did, what is 

the institutional way in which that could happen? 

Mr. ROSEGRANT. Yes. Very little has been done on that, probably 

because the different countries have pursued their, in a sense, 

highly subsidized or protected developments of their own markets. 

Chairman LIEBERMAN. Right. 

Mr. ROSEGRANT. And in fact, I think one thing that should happen if, in fact, for example, there was a phase-out of some of the 

subsidies, would be that there should be a multilateral negotiation 

to have transparent markets in crop-based ethanol and diesel products that has not happened yet and try to establish, in a sense, a 

proper international commodity market in biofuels, but one that is 

not driven by the individual distortions in different countries. 

Chairman LIEBERMAN. I am not an expert in this area, but is 

there an existing institutional framework through which that could 

happen? 

Mr. ROSEGRANT. I don’t believe there is anything other than 

working through existing commodity exchanges to try to develop 

that. But there is nothing specific for these that I am aware of, unless the others know. 

Chairman LIEBERMAN. Yes. I mean, the point here obviously is 

that these are now, like everything else, global markets, so what 

we do here has an impact there. What they do there has an impact 

here and everywhere. So that was the question. 

Rev. Beckmann, do you have a thought on this? 

Mr. BECKMANN. Part of it could be the Consultative Group on 

International Agricultural Research, the whole network of agricul-
28 

tural research institutes in developing countries. I don’t know that 

they are doing anything on it, but it makes a lot of sense. There 

is a demand here, and it could be things that Africa is producing 

that now have no economic value could have some economic value. 

Last year, I think almost inadvertently, the foreign aid appropriations dramatically dropped USAID funding for agriculture, including contributions to the Agricultural Research Network. So investing in agricultural research is one way to handle this. 

Also, it seems to me it is the broader question of if what we are 

trying to do here with biofuels is to deal with higher oil prices and 

the negative effects of reliance on fossil fuels, sharing information 

on how to conserve and on other kinds of alternative fuels besides 

agriculturally based sources of energy—I mean, we are not doing 

very much on wind, solar, or all the other possibilities. So I don’t 

know of any international research. It is a really good point. 

Chairman LIEBERMAN. Thank you. We will pursue that. Senator 

Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Babcock, Dr. Siegel mentioned in his testimony the role of 

speculation in the commodity markets, and as the Chairman has 

indicated, we are going to look at that issue in a subsequent hearing. When I look at the price increases in the futures markets, they 

seem to have reacted very sharply to the 2007 energy bill that included the increase in the renewable fuels standard. Would you 

agree that there was a correlation there? Is that something you 

have looked at? 

Mr. BABCOCK. There is a very strong correlation, first of all, in 

the price of corn, and then because the future price of corn went 

up, everyone knew the price of soybeans had to follow, so then soybeans went up right afterward. I am not saying it is causal, but 

it happened. It is a very strong coincidence if it wasn’t causal. 

Senator COLLINS. It leads me to wonder if we revise the three 

ethanol policies whether there would be a similar reaction in the 

futures market where you might see a decline in commodity prices 

beyond what your models show. Could you comment on that issue? 

Mr. BABCOCK. Yes. It is very difficult to figure that out because 

you really have to look at 2 or 3 years down the road. But since 

that time occurred, you have got to remember also that the value 

of the dollar was falling at that time. The price of oil was skyrocketing at that time. And everything was pushing, at the same 

time as the biofuels energy act was passed, the price of corn higher 

at that time. 

But there is the possibility that if Congress made a strong statement by eliminating all support for the corn ethanol industry and 

said, you are on your own, there would probably be an initial reaction that would be larger than what I am estimating. But I am saying that after everything settles down and people look at the fundamental economics of corn ethanol, the plants that are being built, 

and the price of oil, my estimates are probably somewhere in the 

ballpark. 

Senator COLLINS. Rev. Beckmann, do you have any comment on 

the impact on the futures markets in this area? I know that is not 

an area you have looked at directly, but—— 

Mr. BECKMANN. No. That is not in the Bible. [Laughter.] 
29 

Senator COLLINS. Good answer. Dr. Rosegrant. 

Mr. ROSEGRANT. I would essentially agree with what you have 

said and what Dr. Babcock said. I think there could be a larger impact on futures markets than you would see in the fundamental 

spot markets, so it would wring out some of the excesses that you 

are seeing in market prices right now. 

Senator COLLINS. I think that is an important point, given what 

happened when the mandate was put in place. It seemed to cause 

an immediate and sharp increase in prices on the futures markets. 

It seems that if the mandates were reduced, that you would see a 

similar impact in the opposite direction. 

I do want to make clear that I realize that the infrastructure 

that has grown up in Iowa and other States to support the cornbased ethanol industry is significant, and as Rev. Beckmann pointed out, has had an impact on rural communities in a positive way. 

So we do have to be careful as we adjust our policy in this area 

because people relied on those policies. But I do think we are in 

a different situation today because the high price of oil makes the 

rationale for all these subsidies and mandates far less compelling. 

Rev. Beckmann, the EPA has the authority right now to adjust 

the Renewable Fuel Standard mandate if there are unintended effects. That is what the standard is in the law. Do you think we as 

Members of Congress should ask the EPA to reevaluate the level 

of the mandate? 

Mr. BECKMANN. That makes sense to me because when Congress 

made these decisions, I don’t think anybody expected food prices to 

jump like they have. Nobody expected to see 100 million people suffering severe consequences in developing countries. It has a political dimension. There is a security dimension to this. With a lot of 

governments feeling very threatened and the international discussion of this issue, the people who speak for developing countries, 

they see that this is one factor that somebody made a decision and 

it has resulted in severe hardship in their cities and threatens the 

political stability of their countries. 

So in the international discussion of this, the connection that you 

point out between corn-based ethanol and the sudden jump is important. So clearly, circumstances have changed, and I didn’t know. 

If EPA has that authority, they ought to use it. 

Senator COLLINS. Thank you. Mr. Chairman, I want to thank you 

again for holding this very important hearing. I think this is an example, perhaps the best example I have ever seen, of the law of unintended consequences. All of us want to reduce our dependence on 

foreign oil, which I believe poses a threat to our economic and our 

national security. But in doing so, in rushing to embrace the use 

of food for fuel, my concern is that we have exacerbated the problem of hunger worldwide, that we are causing difficulties for small 

businesses such as Dr. Siegel’s bakery, and the policy has had also 

consequences for low-income families right here in our country at 

a time when they are struggling with the high cost of energy. 

So I believe that we need to take a hard look at this policy and 

what appears to me to be a factor that is contributing to the high 

cost of food and a factor that we can control. And that is the important point to me. We can do nothing about drought in Australia. 

There is so much that is beyond our control. But this is a factor 
30 

that we can control and I am very grateful to the Chairman for 

probing this issue. I hope you will all continue to help us find the 

path forward in this area and I very much appreciated the testimony of each of you today. Thank you. 

Chairman LIEBERMAN. Thank you, Senator Collins, again, for inspiring the hearing. I agree with what you have said just now. 

The other lesson I think we learned here is that we saw the 

problem of dependence on foreign fossil fuel and all the impacts it 

has on our economy, our environment, and our security, but we, by 

our own action—well intended—sent a disproportionate set of subsidies to one form of alternative fuel. Presumably if we had passed 

a comprehensive program that sent a lot of signals to a lot of different industries—including cellulosic, biodiesel, and electric cars 

and all the rest, hydrogen fuel cells—I understand that they 

wouldn’t all come online at once, but at least the impact would 

have been reduced, and we didn’t do that. Hopefully, we will have 

an opportunity to do something like that soon. 

But the other point that strikes me here is that none of you have 

said that the policies we adopted with regard to support and inventing corn-based ethanol are the only cause of food price increases. Obviously, there are others, including—this does come into 

your Biblical area of expertise—natural phenomena like drought. I 

was thinking of Joseph, who stored up the grain for 7 years, but 

that is a longer story. 

But I am struck after your testimony this morning—I am building on the point that there is more than one cause of the global 

food price increase and food crisis, but that it may be that the most 

significant positive impact we in Congress can have in the short 

run on food prices is to remove these three incentives for cornbased ethanol. Your testimony has been very helpful, and I appreciate it very much. 

We are going to leave the record of this hearing open for 15 days 

in case Members of the Committee have additional questions they 

would like to submit to you in writing or you have additional testimony you would want to submit for the final transcript of the hearing. 

But I thank you for the work that each of you do, and the service 

that you have given in your testimony this morning. It was extremely helpful. 

The hearing is adjourned. 

[Whereupon, at 11:48 a.m., the Committee was adjourned.] 
(31) 

FINANCIAL SPECULATION IN COMMODITY 

MARKETS: ARE INSTITUTIONAL INVESTORS 

AND HEDGE FUNDS CONTRIBUTING TO 

FOOD AND ENERGY PRICE INFLATION? 

TUESDAY, MAY 20, 2008 

U.S. SENATE, COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Committee met, pursuant to notice, at 10:36 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Levin, Carper, Pryor, McCaskill, 

Collins, Voinovich, Coleman, and Coburn. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 

Chairman LIEBERMAN. Good morning and welcome. This is a 

very important hearing this morning that really matters to a lot of 

people, both in our country and around the world, and I thank our 

witnesses. 

Senator Collins and I just said to the witnesses directly that we 

are approaching this hearing with a great interest in learning 

about a very complicated matter, which is commodity markets, and 

examining the role of institutional investors and hedge funds in 

commodity markets and their effect on steadily rising oil and food 

prices. In other words, financial transactions that are either unknown or unfathomable by most of the country and the world, including not a small number of Members of Congress, are having a 

direct effect on each of us, and a lot of others, when we go out to 

buy food, fill our tanks with gasoline, or heat our homes with oil. 

So directly speaking, we want to know, to the best of our ability, 

whether speculation in commodity markets—unrelated to traditional market factors, such as supply and demand, or weather occurrences—is one of the reasons, perhaps a significant reason, why 

food and energy prices have skyrocketed. 

I will tell you that one of our colleagues said to us the other day, 

just in conversation as he heard about this hearing, that the executives of a major airline were in to see him about their own problems with rising fuel prices and contended that one-third of the increase in fuel prices they were paying was the result of speculation, 

not market factors. Now, I do not know, starting this hearing, 

whether that is right or wrong, but that is a very significant number. 
32 

So as everyone knows, the cost of food and energy is at a record 

high, creating real economic distress for millions of working families in our country and around the world. At home, rising food and 

gas prices put a real and immediate strain on family budgets. In 

some regions of the country, as most of us now know, major retailers have actually started to ration items, such as rice, in response 

to rising demand, low inventories, and, of course, high prices. 

Overseas, the consequences are even more dire. Consumers in 

low-income countries spend as much as 80 percent of their income 

on food. Food riots in Somalia have already occurred and caused 

deaths. World Bank President Bob Zoellick has warned that there 

are 33 other nations, in his calculations, that are at risk of unrest 

as a result of food prices or food shortages, and one billion Asians— 

again, a World Bank number—are at risk of serious hunger or malnutrition. 

In recent years, commodity markets have attracted increasing 

amounts of money from large investors, such as pension funds. 

That much we know and understand. This influx of institutional 

investors and hedge funds into relatively small markets for goods 

such as rice and corn has raised important questions about the 

ability of the markets to absorb those new investors without undermining or distorting fundamental supply and demand forces. 

Speculative activity in commodity markets has grown by staggering leaps and bounds over the last several years, and the numbers here, at least to me, are staggering. From 1998 to 2008, the 

share of so-called long interests in commodities held by financial 

speculators—which is to say market positions that benefit when 

prices rise—has grown from one-quarter to two-thirds of the commodity market. By comparison, during the same period, the share 

of the market held by actual physical traders has dropped from 

three-quarters to just one-third. There is another number that is 

to me staggering. In only 5 years, from 2003 to 2008, investment 

in index funds tied to commodities has grown 20-fold, from $13 billion to $260 billion. 

This unbridled growth raises justifiable concerns that speculative 

demand—divorced from market realities—is driving food and energy price inflation, and causing a lot of human suffering. 

In 1936, Congress authorized limits on speculative activity that 

could threaten the orderly functioning of commodity markets—limits on the size of any one investor’s holdings in the futures markets 

with respect to a specific commodity. The purpose of these limits 

was and is to reduce the threat of market manipulation or congestion and reduce the potential thereby for price distortions. More recently, in 1974, Congress extended the authority for speculative position limits when it created the U.S. Commodity Futures Trading 

Commission. Since that time, 1974, we have, of course, seen tremendous growth in new and complex financial instruments that 

are marketed to large and sophisticated investors in over-thecounter transactions. These instruments, often tied to returns on 

commodities, are sold outside the commodity exchanges and create 

doubts about whether the speculative limits in the law continue to 

work in any meaningful way. And that is a question we are going 

to ask and hope to answer this morning. 
33 

To examine these concerns, which we consider to be urgent concerns, we are really fortunate to have with us a distinguished panel 

of experts representing key actors and institutions that influence 

the commodity markets. And we have asked the experts to address 

several critical questions. First, what effect are institutional investors and hedge funds having on current food and energy prices? 

This is the bottom-line question that our constituents are asking. 

Second, do food and energy price increases constitute irrational 

speculative behavior, a rational response to market fundamentals, 

or a combination of both? Third, are rising prices creating an economic incentive for speculators to accumulate and hold stocks of 

food and energy commodities, therefore, obviously, aggravating 

supply problems? And finally, does the U.S. Commodity Futures 

Trading Commission, which is the primary regulator in our country 

of commodity futures markets, have the authority and the resources it needs today to adequately monitor and regulate commodity trading in the public interest? 

I would say finally that I believe our Committee is uniquely situated to look across the Federal Government and assess the complex 

interaction of economic activities and regulatory policies—that is 

the traditional and longstanding governmental affairs responsibility that this Committee has. The issues we discuss today will 

help shape future debates, we hope, and also potential legislative 

action on the appropriate balance between free market principles 

and regulatory oversight in the commodity markets. 

I really look forward to our witnesses’ testimony and working 

with my colleagues to ensure that Congress takes a thoughtful, 

reasonable, and effective approach to the issues at hand. 

Senator Collins. 

OPENING STATEMENT OF SENATOR COLLINS 

Senator COLLINS. Thank you, Mr. Chairman, and thank you so 

much for holding this very important hearing. I was talking to the 

witnesses prior to the hearing, and I told them, just as you did, 

that this is not a hearing where the Committee is going in believing that we know all the answers and are just simply seeking confirmation from the witnesses, but, rather, it is a true inquiry into 

a very important issue, looking at financial speculation in the commodity markets and what the impact is on the spiraling increase 

in food and energy prices. 

Last December, I participated in the hearing held by the Permanent Subcommittee on Investigations, which Senator Levin chairs, 

where we looked at the causes of the increase in oil prices, and we 

looked specifically at speculation in addition to other factors. At 

that time, oil prices were then headed for $95 a barrel. We thought 

that was an outrage. Now most people would call it a relief. 

With oil now above $125 a barrel, millions of Americans face dire 

hardship. A few days ago, I met with an employee of a home heating oil company from Maine. He is telling Maine customers to expect home heating oil to rise to $4.50 a gallon next winter. In the 

summer of 2005, just 3 years ago, before the disruptions caused by 

Hurricane Katrina, the average price in Maine was $2.09 a gallon. 

Maine has long, cold winters, and oil is the main heating source 

for 80 percent of the homes in my State. Maine’s housing stock and 
34 

people are older and our incomes are lower than the national average. That is a formula for a winter of hardship. My visitor told me 

of an elderly customer who was forced to hand over half of her Social Security check each month in order to meet the demands of her 

budget payment plan for oil. 

I have also talked with countless families who have been forced 

to charge their oil bill to their credit cards—the very worst thing 

that they could be doing, but they have no other option. Maine 

families, on average, use between 800 and 1,000 gallons of oil during the heating season. For our poorest citizens, the Low Income 

Home Energy Assistance Program (LIHEAP) provides a little bit of 

relief, but because the price of oil has soared and the LIHEAP program has not kept pace, it will cover only about 100 gallons at the 

prices that this oil dealer is predicting for this winter. 

Mainers, like other Americans, are facing record gasoline prices 

as well and the highest rate of food price inflation since 1990. As 

my constituent said, ‘‘Something is wrong.’’ 

Truly, something is wrong—deeply wrong. Senior citizens and 

young working families, truckers and fishermen, small shops and 

big factories—all face difficulties and even disaster from the price 

trends in food and energy. Bringing about immediate relief is very 

difficult, but we are beginning to take some initial steps to mitigate 

the distress somewhat. We have just forced the Administration, for 

example, to stop the bizarre practice of taking oil off the market 

and putting it into our already enormous Strategic Petroleum Reserve during a time of record prices. This Committee has also 

begun a tough review of the effects of our ethanol promotion policies on food prices. And the new Food, Conservation, and Energy 

Act (farm bill), due to the hard work of Senator Levin and others, 

has an important provision that eliminates the so-called Enron 

loophole in our commodity regulatory system that exempted certain 

electronic exchanges from the trading and reporting requirements 

imposed on other commodity exchanges, such as those in New York 

and Chicago. This will give the U.S. Commodity Futures Trading 

Commission a clearer view of who is trading, what they are doing, 

what effect they are having, and whether laws against market manipulation are being respected. 

Which brings us to the subject of today’s hearing. Over the past 

few years, a weak stock market and lower interest rates have persuaded many investors—including managers of pension funds, 

401(k) plans, and endowments—to put cash into the commodity 

markets. A recent press release promoting a new commodities fund 

pointed out that commodities offer average returns that beat stocks 

and bonds over time, that they move independent of other investments, and that their prices go up if inflation increases. 

Now, these investors are not buying and selling actual barrels of 

oil, bushels of corn, or herds of live cattle. Their commodity investments—estimated at upwards of $250 billion—are in futures contracts, options, swap agreements, or other financial instruments 

that seldom lead to taking possession of the underlying product. 

These financial markets provide useful services in risk hedging and 

price discovery for farmers and other producers, grain elevator 

companies, commodity brokers, and others who are involved in the 

production and use of physical products. 
35 

Participants in the commercial markets have long used speculators’ willingness to accept risk as a way to lock in prices for crops 

or hedge other risks. But many of them, including the National 

Farmers Union and the National Feed and Grain Association, now 

believe that the massive trading in the non-commercial futures 

market has disrupted the normal flow of price information and has 

caused price movements that may expose them to crippling margin 

calls. 

Federal economists—and we will hear this today—contend that 

index fund and institutional investors tend to follow changes in the 

physical market or react to news rather than directly pushing commercial prices up or down. They tell us that fundamental factors 

like the rising demand in developing countries, the declining dollar, 

weather events, the Organization of the Petroleum Exporting 

Countries (OPEC) production decisions, refinery capacity limits, or 

ethanol policies account for the dramatic developments that we 

have seen in markets for agricultural and energy commodities. 

But many other experts believe that large flows of speculative 

capital into the non-commercial side of futures markets are having 

disruptive and destructive effects. And that view is, of course, consistent with the earlier findings of the Permanent Subcommittee on 

Investigations that speculative investments in excess of what normal commercial risk hedging requires creates a ‘‘virtual’’ demand 

that can have a real effect on commercial markets and prices. 

Today’s hearing should give us robust presentations of both 

views. I do not expect that this single hearing will settle the debate, but I do expect that it will show that we cannot afford to ignore the possibility that financial speculators are influencing the 

markets in unexpected ways. 

A critical point of inquiry must be whether the market monitors 

and the regulators at the U.S. Commodity Futures Trading Commission (CFTC) have adequate resources and authorities for their 

work. I was astonished to learn from Chairman Lukken of the 

CFTC that since 1976, the Commission’s workforce has actually declined by 12 percent while the volume of commodities contracts 

that it must monitor has risen by more than 8,000 percent. 

The Commission, nevertheless, has imposed more than $2 billion 

in sanctions over the past 5 years for actual or attempted manipulation, fraud, and false reporting. Vigorous Commission enforcement requires more resources, especially given the new authority 

that Congress has just voted to grant the Commission. 

I believe that the CFTC must also look into legal practices such 

as large purchases of commodity-linked financial products by institutional investors to ensure that they are not disrupting the essential market functions or exerting artificial pressure on the price of 

the underlying commodities. 

Achieving more transparency and reducing unintended disturbances to food and energy markets is more than a matter of fair 

dealing and economic efficiency. It is essential to help avert disaster for millions of Americans struggling with the soaring costs of 

feeding their families, filling their gas tanks, and heating their 

homes. 

Again, Mr. Chairman, thank you so much for holding this important hearing. 
36 

Chairman LIEBERMAN. Thank you, Senator Collins, for that 

statement and also for your characteristic support and involvement 

in this ongoing investigation. 

As Senator Collins indicated, this is the first time this full Committee, certainly in the midst of this run-up of commodity prices, 

has conducted an investigation. But the Permanent Subcommittee 

on Investigations, which is a historic Subcommittee, not just because of Senator Levin’s age but because it is historic—I could not 

resist—has done some great work here. I want to directly ask Senator Levin if he would like to make an opening statement based on 

all the work that he has done in this area. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Well, thank you so much, Mr. Chairman and Senator Collins, for holding these hearings. As you both mentioned, 

our Permanent Subcommittee on Investigations has had three 

hearings on this subject. Four reports have been issued. We have 

looked at the way in which one hedge fund, Amaranth Advisors, 

surely a speculator, distorted the market in natural gas. We had 

a joint hearing on December 11, 2007, with Senator Dorgan’s subcommittee, the Subcommittee on Energy, of the Committee on Energy and Natural Resources, on this subject as well, and it is very 

important what you are doing here. I want to just commend the 

full Committee for taking on this subject. 

We have closed one loophole where we hope to stop some of the 

excessive speculation that is taking place on the electronic exchange by closing the Enron loophole, but there are other loopholes 

that need to be addressed, one of which we will now call the London loophole. 

Just one quote here, which summarizes what my conclusion is, 

and that is the oil analyst for Oppenheimer and Company, Fadel 

Gheit, who says the oil market is a ‘‘farce’’ and ‘‘the speculators 

have seized control, and it is basically a free-for-all, a global gambling hall, and it won’t shut down unless and until responsible governments step in.’’ 

One of the issues that I know the Committee is interested in is 

whether or not our regulator here, and regulators, are stepping in 

the way we expect when we passed the law which gave them the 

responsibility of prohibiting excessive speculation. But I very much 

appreciate your referring to our efforts in both of your statements, 

and I thank you for the opportunity of saying just a few words. 

Chairman LIEBERMAN. Thank you, Senator Levin. Thanks for 

your substantial contribution, and I am really glad that you are 

here this morning. Your closing words are a perfect lead-in to our 

first witness, who is Jeffrey Harris, Chief Economist at the U.S. 

Commodity Futures Trading Commission. The Economic Division 

of the CFTC has conducted a fair amount of research in an effort 

to understand the role of financial speculators in commodity markets, and we look forward to hearing about that and whatever else 

Mr. Harris would like to tell the Committee. Thank you for being 

here. 
37 

1The prepared statement of Mr. Harris appears in the Appendix on page 170. 

TESTIMONY OF JEFFREY H. HARRIS,1 CHIEF ECONOMIST, U.S. 

COMMODITY FUTURES TRADING COMMISSION 

Mr. HARRIS. Thank you, Mr. Chairman and Members of the Committee. I am Jeffrey Harris, the Chief Economist of the U.S. Commodity Futures Trading Commission, and I appreciate the opportunity to discuss the CFTC’s role with respect to the futures markets and our view of current trends in these markets. 

These are extraordinary times. Many commodity markets have 

hit unprecedented levels. In the last 3 months, the agricultural staples of wheat, corn, soybeans, rice, and oats have hit all-time highs. 

We are also witnessing record prices in crude oil, gasoline, and 

other energy products. 

Adding to these trends, the emergence of the subprime crisis last 

summer and the weak returns in debt and equity markets have led 

investors increasingly to seek portfolio exposure in commodities as 

an asset class. 

Futures markets in the United States have served vital functions 

for risk management and price discovery for more than 140 years. 

These markets allow farmers and other commercial producers and 

manufacturers to manage risk. Futures markets also serve the valuable function of price discovery, bringing diverse participants to 

the market in order to determine market prices, the basic future 

contract entered into by buyers and sellers for delivery of the underlying asset in a later month. The writer or seller of the contract 

agrees to sell a pre-specified asset at a pre-specified price for delivery during a future month. The buyer is obligated to purchase the 

asset under the terms of that contract. 

When the contract is written, each party puts down a margin deposit with the clearinghouse to ensure that neither party reneges 

on the obligation written in the contract. These deposits usually 

represent 5 to 8 percent of the value of the underlying contract. In 

our futures markets, profits and losses are settled each day, and 

sometimes twice a day. The margin deposit is used as a performance bond to ensure that losses can be collected on the day that 

they occur. 

Notably, margin in the futures market refers to this performance 

bond and is not really analogous to the buying on margin that occurs in the stock market where purchases are made with borrowed 

money. In the futures markets, these contracts are standardized, a 

feature that enhances liquidity and ensures that market participants can return to the market to offset their existing positions 

when the market or business conditions change. 

The supply of futures contracts is not necessarily limited, but for 

every buyer there must be a seller on the other end to meet or 

enter into that contract. When buyers come to the futures markets, 

new contracts can be written at current market prices without the 

effect of directly bidding up existing contract prices. The number 

of contracts outstanding is known as ‘‘open interest,’’ which reflects 

the number of contracts being written in the marketplace. In both 

agricultural and energy markets, we are witnessing record levels of 

open interest that reflect unprecedented levels of selling interest in 

these commodities largely from commercial participants. 
38 

We are continually doing new analysis of our detailed market 

data, applying new research methods, and building bridges to outside researchers and government entities, all to increase our view 

of the futures markets. And, separately, our Division of Enforcement investigates any specific instances of potential manipulative 

behavior on a case-by-case basis. 

In line with these efforts, the agency convened an agricultural 

forum a few weeks ago in which we brought together a diverse 

group of market participants for a full airing of views and opinions 

on the driving forces in these markets. The agency allowed a 2- 

week period for comment after the forum, and currently, the Commissioners and staff are reviewing the comments we received, and 

the Commission plans to announce several initiatives in the very 

near future in this space. 

The CFTC also recently announced the creation of an Energy 

Markets Advisory Committee and named public members of the 

Committee. Our first meeting of that group is scheduled for June 

10 to look at issues related to energy markets and the CFTC’s role 

in these markets under the Commodity Exchange Act. 

Clearly, the commodity futures markets are experiencing robust 

growth across commodities, particularly with the influx of institutional investors. The CFTC produces public reports detailing commercial and non-commercial trading on a weekly basis in our markets. Within the Commission, however, we analyze more detailed 

data and more detailed categories of positions of traders at the 

daily level. For instance, we can break down commercial traders by 

dealer, manufacturer, or producer categories. The non-commercial 

category can include floor participants, hedge funds, for example. 

We then use this daily data to analyze the impact of institutions 

or funds in our markets. 

There are two basic types of activity that people refer to as 

‘‘funds.’’ Each is identified to some degree of accuracy in our large 

trader reporting system. The first type of fund represents speculative monies that enter the futures markets through various forms 

of managed money, like hedge funds or commodity pools. Managed 

money funds can either be long or short, depending on their speculative beliefs about future prices. 

The second type, referred to as ‘‘index funds’’ or ‘‘commodity 

index traders,’’ has become more important in recent years. These 

funds, commonly pension funds or the university endowments that 

we speak of, seek commodities’ exposure as an asset class, like 

stocks, bonds, or real estate, and aggregated index fund positions 

are relatively large, predominantly long, and passively positioned— 

that is, they simply buy exposure to the commodities in the futures 

markets, maintain their exposure through pre-specified rolling 

strategies before the futures enter the delivery month. It is the 

equivalent to a buy and hold strategy in the stock market. 

In response to the growing activity in commodity index traders, 

the Commission has increased transparency in 12 agricultural markets by publishing weekly data on these positions held by index 

traders since January 2007. Some observers suggest that higher 

crude oil prices and commodity futures prices are being driven by 

speculators in the futures markets and have suggested steps to reduce or limit their actions in our marketplace. The CFTC has been 
39 

actively engaged with industry participants during this time of extraordinary price increases. In addition, we have utilized our comprehensive data to rigorously analyze the role of hedges and speculators in energy and agricultural markets. 

All of the data that we have analyzed and the work we have 

done indicates that little economic evidence exists to demonstrate 

that futures prices are being systematically driven by the speculators in agriculture and energy markets. Generally, a few facts 

speak to this. Prices overall have risen sharply for commodities 

that neither have developed futures markets, like durum wheat, 

steel, and iron ore, or markets where no institutional fund investments exist, like the Minneapolis wheat contract and Chicago rice. 

Markets where index trading is the greatest as a percentage of 

the total open interest—the live cattle and hog futures markets— 

have actually suffered from declining prices during the past year. 

The level of speculation in commodity and crude oil markets has 

remained relatively constant in percentage terms as prices have 

risen. 

Our studies of agricultural and crude oil markets have found 

that speculators do tend to follow prices rather than set prices in 

our marketplace. Speculators such as managed money traders are 

both buyers and sellers in these markets, and data shows that 

there is almost the same number of bullish funds as there are bearish funds in our markets. For example, commercial and non-commercial open interest in crude oil has grown during the recent 22 

months, but generally remains balanced between long and short 

positions among these trader groups. 

Simply put, economic data shows that overall commodity prices 

and levels, including agricultural commodity and energy futures 

prices, are being driven by powerful economic fundamental forces 

and the laws of supply and demand. Fundamental economic forces 

may be the increased demand from engagements, the decreased 

supply due to weather or geopolitical events, and the weakened dollar. Together, these fundamental factors have formed the perfect 

storm that is causing significant upward price pressure on futures 

across the board. 

Given the widespread impact of higher futures prices, the CFTC 

will continue to collect and analyze data closely. The agency prides 

itself on our robust surveillance and enforcement programs complemented by rigorous economic analysis that we use to oversee the 

U.S. futures and options markets. As you know, there is an amendment in the Commodity Exchange Act now that is part of the farm 

bill conference report that largely reflects the Commission’s recommendations on the need for some additional tools to oversee exempt commercial markets. These provisions represent years of 

hard work and bipartisan effort to find the right balance of enhanced market oversight and transparency, while promoting market innovation and competition. 

The Commission strongly supports this legislation, and it would 

give us additional necessary oversight into these markets, particularly in exempt energy trading. Not surprisingly, additional authorities included in the farm bill will mean the need for additional 

funding for the agency above the current funding request of $130 

million for fiscal year 2009. The current staff estimates indicate 
40 

1The prepared statement of Mr. Masters appears in the Appendix on page 191. 

that it may require roughly $6 million in additional funding to hire 

30 additional staff to carry out our new authorities. The legislation 

that is part of the farm bill and commensurate increase in funding 

would ensure the agency has the tools necessary to oversee these 

$5-trillion-a-day markets. 

As a Commission, we are devoting, and will continue to devote, 

an extraordinary amount of resources to ensure that futures markets are responding to fundamentals and serving the role of hedging and price discovery. 

Thank you for the opportunity to testify today, and I look forward to your questions. 

Chairman LIEBERMAN. Thanks, Mr. Harris, for that opening 

statement. I know we will have a lot of questions for you. 

Our second witness is Michael Masters, who is Managing Member and Portfolio Manager at Masters Capital Management. He is 

both a hedge fund founder and manager and has researched the effect of speculators—particularly those operating in over-the-counter 

markets outside the scope of the CFTC’s jurisdiction—on commodity markets. 

Mr. Masters, thanks for being here. We look forward to your testimony now. 

TESTIMONY OF MICHAEL W. MASTERS,1 MANAGING MEMBER 

AND PORTFOLIO MANAGER, MASTERS CAPITAL MANAGEMENT, LLC 

Mr. MASTERS. Thank you, Mr. Chairman. Good morning, and 

thank you, Mr. Chairman and Members of the Committee, for the 

invitation to speak to you today. 

You have asked a question: Are institutional investors contributing to food and energy price inflation? And my unequivocal answer is yes. Clearly, there are many factors that contribute to price 

determination in the commodities markets. However, I am here to 

expose what I believe is one of if not the primary factor in commodity prices. Commodity prices have increased more in the aggregate over the last 5 years than at any other time in U.S. history. 

Today, unlike previous episodes, supply is ample. There are no 

lines at the gas pump, and there is plenty of food on the shelves. 

If supply is adequate, how does one explain a continuing increase 

in demand when many commodity prices have tripled in the last 

5 years? 

What we are experiencing is a demand shock, coming from a new 

category of participant in the commodities futures markets—institutional investors. Specifically, these investors include corporate 

and government pension funds, university endowments, and even 

sovereign wealth funds. Collectively, these investors now account, 

on average, for a larger share of outstanding commodities futures 

contracts than any other market participant. 

These parties, who I call ‘‘index speculators,’’ allocate money to 

the 25 key commodities futures that make up the two most popular 

indices: the Standard & Poor’s Goldman Sachs Commodity Index, 

and the Dow Jones AIG Commodity Index. 
41 

1The chart referenced appears in the Appendix on page 137. 

The first chart shows assets allocated to the commodity index 

trading strategies have risen from $13 billion to $260 billion in the 

last 5 years, and prices have risen by an average of 183 percent 

over that same time frame.1

According to the CFTC and spot market participants, commodity 

futures are the benchmark for prices of actual physical commodities. So when index speculators drive futures prices higher, the effects are felt immediately in spot prices and the real economy. 

Looking at oil prices, the explanation given most often for rising 

oil prices is the increased demand for oil from China. According to 

the Department of Energy, annual Chinese demand for petroleum 

has increased over the last 5 years by 920 million barrels. However, over the same 5-year period, index speculators’ demand for 

petroleum futures has increased by 848 million barrels. The increase in demand from index speculators is almost equal to the increase in demand from China. 

Let me say that again. The increase in demand from index speculators is almost equal to the increase in demand from China. 

In fact, index speculators have now stockpiled, via the futures 

market, the equivalent of 1.1 billion barrels of petroleum, effectively adding 8 times as much oil to their own stockpile as the 

United States has added to the Strategic Petroleum Reserve over 

the last 5 years. 

Chairman LIEBERMAN. Why don’t you repeat that one, too. 

Mr. MASTERS. In fact, index speculators have now stockpiled, via 

the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding 8 times as much oil to their own stockpile 

as the United States has added to the Strategic Petroleum Reserve 

over the last 5 years. 

Chairman LIEBERMAN. Forgive me for interrupting, but just for 

clarity, is that real oil that they are stockpiling or contracts? 

Mr. MASTERS. These are futures contracts, which they roll over 

and over, so the effect is the same. It is via the futures markets. 

It has the same effect as a physical consumer. 

Chairman LIEBERMAN. OK. Go ahead. 

Mr. MASTERS. Looking at food prices, when asked to explain the 

dramatic increase in food prices, many economists focus on the partial diversion of the U.S. corn crop to ethanol production. But institutional investors have purchased over 2 billion bushels of corn futures in the last 5 years. Right now index speculators have stockpiled enough corn futures to potentially fuel the entire United 

States ethanol industry at full capacity for a year. 

Turning to wheat, in 2007 Americans consumed 2.2 bushels of 

wheat per person. At 1.3 billion bushels, the current wheat futures 

stockpile of index speculators is enough to supply every American 

citizen with all the wheat products they can eat for the next 2 

years. 

Demand for futures contracts can only come from three sources: 

Physical commodity consumers, index speculators, and traditional 

speculators. Five years ago, index speculators were a tiny fraction 

of the commodity futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth 
42 

1The chart referenced appears in the Appendix on page 138. 

in their demand has gone virtually undetected by classically 

trained economists who almost never analyze demand in the futures markets. Index speculator demand arises purely from portfolio allocation decisions. When an institutional investor decides to 

allocate 2 percent of their assets to commodity futures, for example, 

they come to the market with a set amount of money. They are not 

concerned with the price per unit. They will buy as many futures 

contracts as they need at whatever price is necessary until all their 

money has been ‘‘put to work.’’ Their insensitivity to price multiplies their impact on commodity markets. Furthermore, commodities futures markets are much smaller than the capital markets, 

so multi-billion-dollar allocations to commodities markets will have 

a far greater relative impact on prices. 

In 2004, the total value of futures contracts outstanding for all 

25 index commodities amounted to only about $180 billion. Compare that with worldwide equity markets which totaled $44 trillion 

at the time. That year, index speculators poured $25 billion into 

these markets, an incredible amount equivalent to 14 percent of 

the total market. The second chart shows this dynamic at work.1

As money pours into the markets, two things happen concurrently: 

The markets expand and prices rise. 

One particularly troubling aspect of index speculator demand is 

that it actually increases the more prices increase. This explains 

the accelerating rate at which commodity futures prices are increasing. Rising prices attract more index speculators who want to 

profit from price increases. We calculate that index speculators flooded the markets with $55 

billion in just the first 52 trading days of this year. That is an inflow of more than $1 billion a day. We believe that this is a primary factor behind the recent spike in food and energy prices. 

There is a crucial distinction between traditional speculators and 

index speculators: Traditional speculators provide liquidity by buying and selling futures. Index speculators buy futures and then roll 

their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures 

markets. 

The CFTC has granted Wall Street banks an exemption from 

speculative position limits when these banks hedge over-thecounter swaps transactions. This has effectively opened a loophole 

for unlimited speculation. When index speculators enter into commodity index swaps, which 85 to 90 percent of them do, they face 

no speculative position limits. In fact, the really shocking thing 

about the swaps loophole is that speculators of all stripes can use 

it to access the futures markets. So if a hedge fund wants a $500 

million position in wheat, which is way beyond position limits, they 

can just enter into a swap with a Wall Street bank, and then the 

bank buys as a surrogate $500 million worth of wheat futures. 

I would like to conclude my testimony today by outlining several 

steps that can be taken to immediately reduce index speculation. 

One, Congress has closely regulated pension funds, recognizing 

that they serve a public purpose. Congress should modify the Employee Retirement Income Security Act (ERISA) regulations to pro-
43 

1The prepared statement of Mr. Erickson appears in the Appendix on page 208. 

hibit commodity index replication strategies as unsuitable pension 

investments because of the damage that they do to commodities futures markets and to American consumers as a whole. 

Two, Congress should act immediately to close the swaps loophole. Speculative position limits must ‘‘look through’’ the swaps 

transaction to the ultimate counterparty and hold that counterparty to the speculative position limits. This would curtail index 

speculation, and it would force all speculators to face position limits. 

In conclusion, is it necessary for the U.S. economy to suffer 

through yet another financial crisis created by new investment 

techniques, the consequences of which have once again been unforeseen by their Wall Street proponents? 

This concludes my testimony. 

Chairman LIEBERMAN. Well, that certainly frames the issue. 

Thank you, Mr. Masters, and we will come back to several of the 

questions you raised. 

Our next witness is Thomas Erickson, Chairman of the Commodity Markets Council, a trade association composed of the futures exchanges and members of the commodity futures trading industry. Mr. Erickson is a former Commissioner of the CFTC and, 

among other things this morning, I know he will share with us the 

insight of someone who has worked on both the regulatory and 

business sides of commodity trading. 

Thanks for being here. 

TESTIMONY OF THOMAS J. ERICKSON,1 CHAIRMAN, 

COMMODITY MARKETS COUNCIL 

Mr. ERICKSON. My pleasure, Mr. Chairman. I am Tom Erickson, 

and I am Chairman of the Commodity Markets Council (CMC). It 

is a pleasure to be here. I also serve as Vice President of Government and Industry Affairs for Bunge Limited, which is a global agribusiness and food company. 

Mr. Chairman and Ranking Member Collins, Members of the 

Committee, the issues you plan to address today and are addressing are very important to markets and their users, and I thank you 

for convening this hearing. The CMC is privileged to participate. 

The Commodity Markets Council is a trade association that represents commodity futures exchanges and their industry counterparts, and the activities reflect the complete spectrum of the commercial marketplace involved in commodity futures. 

First, I would like to discuss the role of institutional investors 

and hedge funds in commodity markets. The CMC considers the investment activity of institutional investors and index funds as appropriate financial hedges. However, we recognize that these investments tend to be passive in nature and are not responsive to 

price levels or supply and demand fundamentals. Given the many 

concerns among commercial market participants about convergence 

of futures with cash, we believe the CFTC’s recent decision to go 

slow in expanding current exemptions for this new class of investors will serve the marketplace well. It will also serve the CFTC 

and the market users, like Bunge, to give us more time to evaluate 
44 

the impact this passively invested money may have on commodity 

markets. 

It is important to note that this type of investment is new and 

different, as has been mentioned, but it is not necessarily bad. 

Equally important is the distinction between passive investment 

and price-responsive investment. Typically, index funds are institutional investors who engage in passive investments. Passive investors typically buy a long position and hold it to a predetermined 

time. On the other hand, hedge funds tend to be more responsive 

to market signals, trading in a manner that is more similar to the 

traditional speculative participant that we have seen historically. 

As such, hedge funds are appropriately subject to speculative position limits of the markets and of the Commission. 

In the last decade, futures markets and physical commodities 

have grown immensely because of the growing relevance of their 

products. Increased liquidity in well-functioning markets aids price 

discovery and generally enhances market efficiency. 

We recognize that passive investment in the commodity markets 

may have some price-lifting impact, but market fundamentals generally support the current price levels seen in the futures markets. 

Today’s markets are reflecting global economics and trends. Speculative activity in futures markets may influence day-to-day prices, 

but it is ultimately relatively powerless in the face of these larger, 

fundamental forces that we are seeing. 

To address the concerns surrounding this new investor in commodity markets—that is, the passive investor—the Commodity 

Markets Council recommends: First, that exchanges and the CFTC 

continue to monitor index fund participation closely and be prepared, if necessary, to examine the structure of the hedge exemptions that have been currently granted. 

Second, the CMC would support legislation and regulations that 

allow the exchanges to continue innovating to provide new products 

to manage risks for those of us on the commercial side. 

And, finally, the Council recommends that the CFTC initiate a 

study of the trend toward ‘‘alpha’’ trading by index and hedge 

funds. It is a relatively new phenomenon where you have got index 

funds actually trading in a way to outperform the market. 

Next, I would like to briefly discuss margin requirements in the 

energy markets. With crude oil prices moving higher and higher, 

the Council shares the concerns of many lawmakers. We are confident in the ability of the CFTC’s professional staff to monitor and 

evaluate trading in the regulated energy markets, as well as their 

conclusions about the impact of speculation on prices in the energy 

futures markets, and we will continue to look forward to working 

with them as we all face these unprecedented times. 

The Council is concerned about a provision in the ConsumerFirst Energy Act. While the organization is generally supportive of 

the legislation, there is a provision that would require the CFTC 

to set ‘‘a substantial increase’’ in margin levels for crude oil. And 

while it appears the intent of the provision is to have some ability 

to lower prices, we believe that increased margin requirements unrelated to market signals could force many market participants offexchange and perhaps into some of these less transparent markets 

that we have talked about and that the Enron loophole fix will at 
45 

least give us some assistance. But that is one concern that we do 

have going forward. 

Finally, the Commodity Markets Council believes that it is important to discuss the unprecedented challenges facing the grain 

markets. The CMC recently brought together exchanges and exchange users to discuss futures market performance in the grain 

industry. The overriding concern expressed by participants and 

producer groups was the financial impact of high commodity prices 

and price volatility. Generally, participants did not blame institutional investors or hedge funds for pushing prices higher. Instead, 

they did identify five macroeconomic trends which I think we are 

all pretty familiar with, but I will list five of them here that came 

out of our own task force: One, strong economic growth in developing countries, such as China and India; two, increased demand 

for commodities used for biofuel production; three, reduced yields 

in some of the major global producing areas due to weather issues. 

Fourth is a relatively new development, and that is export controls. In the face of 60-year-low supplies of wheat and 35-year lows 

of soybean stocks, we are seeing governments respond with export 

controls limiting supply to the global market and limiting the ability of the industry to really move efficiently stocks to areas of scarcity. 

And, fifth, the weakening U.S. dollar. 

Regarding technical futures market performance, participants in 

the Council’s task force cited consistent price convergence as the 

primary area of concern, yet most of those interviewed by the task 

force urged exchanges at this point not to make dramatic changes 

to contracts until the markets can really adjust to this new operating environment of higher prices and increased volatility. 

For the short term, the consensus seemed to be changes were 

needed in the grain contracts that would increase storage rates to 

promote convergence during delivery of corn, soybeans, and wheat, 

and also giving the exchanges the authority to clear over-thecounter grain swaps as a new tool for risk management. 

In conclusion, these are very complicated times for the markets 

and market participants. The Commodity Markets Council believes 

that markets generally are the most efficient filters of information, 

and given time to respond, markets will and should adapt. 

Mr. Chairman, we compliment you and Senator Collins, for your 

efforts in this area, and we look forward to working with you. 

Thank you. 

Chairman LIEBERMAN. Thanks, Mr. Erickson. 

Our fourth witness, Benn Steil, is a Senior Fellow and the Director of International Economics at the Council on Foreign Relations. 

In addition to being an expert on the behavior of institutional investors, Dr. Steil is one of our Nation’s authorities on monetary 

policy. I once heard Bill Cosby say that the worst introduction that 

you could give him is to say he was the funniest man on the Earth, 

so I am worried that I am building you up too much. But the truth 

is you have had a very distinguished career, and we are particularly interested in hearing your thoughts not only on what we have 

discussed so far, but on the extent to which the weakness of the 

dollar today may be affecting commodity prices and obviously the 
46 

1The prepared statement of Mr. Steil appears in the Appendix on page 212. 

relevant next step, which would be how would a stronger dollar affect commodity prices. 

In any case, thank you for being here, and we look forward to 

your testimony. 

TESTIMONY OF BENN STEIL, PH.D.,1 SENIOR FELLOW AND DIRECTOR OF INTERNATIONAL ECONOMICS, COUNCIL ON 

FOREIGN RELATIONS 

Mr. STEIL. Thank you, Chairman Lieberman, Ranking Member 

Collins, and Members of the Committee, for the opportunity to 

present to you this morning my views on the causes of rising financial speculation in commodities markets. 

The sharp recent rises in global commodities prices, particularly 

in the energy and agricultural sectors, are undoubtedly causing 

hardship for many Americans and are indeed threatening the 

health of millions in developing countries. There is also no doubt 

that these price rises have been accompanied by a corresponding 

rise in interest from institutional investors in commodities as an 

asset class. The value of commodity index investments, for example, has grown by about one-third since the beginning of the year, 

to more than $250 billion. 

Certainly, much of this inflow is speculative in the sense that it 

is anticipating future supply constraints and robust demand. Both 

have been very much in evidence in recent years, and to the extent 

that speculation is driven by such factors, it is playing a proper 

and indeed important role; that is, signaling the need to expand investment in production capacity, and providing liquidity to hedgers. 

If this inflow is manipulative, on the other hand, it should be a 

matter of immediate regulatory concern. But there is very little evidence to date that it is. Low and declining levels of inventory for 

major food crops, for example, indicate no potentially manipulative 

hoarding going on in that sector. 

Now, so-called fundamental factors, related to supply of and demand for specific commodities, can certainly account for a goodly 

portion of the run-up in prices in recent years. 

The supply of global farm acreage and crop output is shrinking 

relative to a global population that is rising both in size and 

wealth. 

Rapidly growing demand from China is certainly part of the 

equation. Demand from China accounts for about 30 percent of the 

increase in crude oil demand over the past decade. A 6-percent rise 

in base metals demand last year was driven by a 32-percent increase in demand from China. 

The tripling in oil prices since 2004 has spurred the production 

of biofuels, like corn-based ethanol, which has in turn contributed 

to record prices in corn and rival grains. These in turn have made 

products whose production relies on grain-based feed, such as milk 

and eggs, more expensive. This year, about 30 percent of U.S. corn 

production will go into ethanol rather than into world food and feed 

markets. 

While all of these factors are acting to constrain supply or boost 

demand, governments around the world exacerbate these effects 
47 

through public policy. Governments subsidize consumption of agricultural staples and energy products, for example, with the effect 

that demand does not moderate as it should. Governments have 

also been imposing agricultural export tariffs and bans, with the 

unintended consequence that farmers are motivated to reduce supply. 

Yet all these fundamental factors, as important as they are, cannot explain the magnitude of price rises in recent years. The stories 

about global population growth and the rise of China, for example, 

are by now very old. 

Many have recognized this and have, therefore, asserted that we 

are experiencing a commodities bubble. This conclusion, however, 

presumes that the U.S. dollar, which the world uses to price and 

trade commodities, is a fixed unit of measurement, like an inch or 

an ounce. Yet it is not, and, worryingly, it has become less so in 

recent years. Whereas the prices of oil and wheat measured in dollars have soared over the course of this decade, they have, on the 

other hand, been remarkably stable when measured in terms of 

gold—gold having been the foundation of the world’s monetary system until 1971. 

It is, therefore, reasonable to conclude not that we are a experiencing a commodities bubble but, rather, the end of what might 

usefully be called a ‘‘currency bubble.’’ 

The early 1980s witnessed the painful restoration of the global 

credibility of the dollar under the tight money policy of the Paul 

Volcker-led Federal Reserve. We reaped the benefits of this 

achievement in the subsequent decade. The period of the 1990s 

through the early part of this decade was a golden age for the U.S. 

dollar. Investors around the world bought up dollar-denominated 

assets, and central banks sold off their gold reserves, believing they 

were no longer necessary or desirable, allowing our country to 

enjoy the fruits of a sustained period of low interest rates and low 

inflation. But the Federal Reserve has pushed rates too low and 

held them low for too long, and has since last autumn been exceptionally aggressive in driving them well below the rate of inflation. 

The Federal Funds Rate now stands at 2 percent, while consumer 

price inflation is near 4 percent and wholesale price inflation near 

7 percent. More worrying, the latest survey from Reuters and the 

University of Michigan found that consumers’ 1-year inflation expectations have risen to 5.2 percent, up from 4.8 percent in April 

and 4.3 percent in March. 

The dollar’s value against the euro being tightly linked to the interest rate differential between the currencies, investors have shifted funds dramatically from low-yielding dollars to higher-yielding 

euros in recent years. Much more worrying, however, the correlation between dollar depreciation and commodities prices has become dramatically more pronounced since 2007. 

Institutional investors around the world—prominent among 

them, large U.S. public pension schemes, such as the California 

Public Employees’ Retirement System (CalPERS)—have come to 

view commodities as part of a rapidly growing asset class devoted 

to inflation protection. 

Longer term, governments themselves may actually fuel the upward commodities price trend by diversifying central bank reserves 
48 

1The prepared statement of Mr. Buis appears in the Appendix on page 219. 

into commodities as a way to avoid precipitating further depreciation of their existing huge stocks of dollar-denominated assets—in 

particular, U.S. Treasurys. 

What happens to commodities investment, and therefore commodities prices, going forward is, therefore, heavily dependent on 

the path of inflation and inflation expectations, and this path is 

itself critically dependent on developments in U.S. monetary policy. 

What policy measures, then, could help to relieve the damaging 

upward pressure on global commodities prices? I would identify two 

broad areas that merit attention. 

First, we and other nations need to revisit honestly and objectively the range of subsidies and taxes we apply to encourage or 

discourage consumption and investment in the agricultural and energy sectors. The mix is far from optimal and is becoming more 

damaging over time. 

Second, more of the burden of dealing with the fallout from the 

mortgage and interbank credit crisis should be moved on balance 

sheet. That is, Congress should look to targeted, explicitly funded, 

and market-oriented interventions to help revive the credit markets, which in turn will help revive the broader economy. To date, 

far too much of the burden has been borne by monetary policy, 

which is threatening to cause higher inflation, and leading individuals and institutions around the world to question whether the dollar will remain a credible long-term store of value. One highly undesirable result of this is soaring global commodity prices. 

Thank you, Mr. Chairman. Thank you, Senator Collins. 

Chairman LIEBERMAN. Very interesting. Thank you, Dr. Steil. 

Our last witness is Tom Buis, who is President of the National 

Farmers Union. He is in a very good position, of course, to share 

the perspective of the family farming community, and we thank 

you, Mr. Buis, for being here. 

TESTIMONY OF TOM BUIS,1 PRESIDENT, NATIONAL FARMERS 

UNION 

Mr. BUIS. Thank you, Mr. Chairman and Members of the Committee. I commend you for holding this hearing. This is probably 

the most friendly hearing I have been to in the last few months. 

It seems like everyone wants to blame farmers for everything, and 

we are finally getting the message across that there are a lot of 

other factors. It is not the price of those raw commodities, and I 

did not bring it with me today, Mr. Chairman, but we have a chart 

that we publish on our Website, the farmer’s share of the consumer 

dollar. And it averages less than 20 percent, even at today’s prices. 

And for all those people that want to blame everything on corn ethanol, I may just chime in. I got stuck in traffic for 21⁄2 hours this 

morning, so I might as well blame it on that. 

But there are a lot of factors at play. If you look at the skyrocketing energy prices and the impact that has on obviously food 

production, it is tremendous. You start at the farm. It takes a lot 

of energy to produce a crop. Farmers and ranchers are bearing the 

brunt of those higher energy prices, as our input costs have tripled 

over the past 2 years in many components, including petroleum- 
49 

based fertilizers and pesticides. And there are a lot of hands that 

handle this product from the farmer before it gets to the consumer. 

And everyone has got their hand in the till, so to speak. Even the 

factors we are talking about today, the speculative limits and the 

speculation in the commodity markets, there are other factors that 

have not been discovered that I hope at some future date someone 

takes a look at, maybe some excessive profiteering going on between that farmer and the consumer, because I have been seeing 

the quarterly reports. There are a lot of people that have their 

hand in the till, and it is excessive. 

Energy prices no doubt have a huge impact, weather-related production problems, and like I mentioned, a lot of people want to 

blame corn ethanol for everything, but wheat and corn are not 

grown on the same acreage. That shifted 20 years ago, and that is 

because wheat is a less profitable crop. Most wheat production in 

acreage terms that increased both last year and this year. The 

problem was we had major weather-related disasters in all the 

major wheat-producing areas. 

The other thing was with rice, and we definitely had a worldwide 

problem with rice—not with the U.S. rice crop, which is bigger 

than it was even 3 years ago. But most rice, 90 percent, is consumed within 60 miles of where it is produced. It was other worldwide areas. 

And, of course, there is the weak dollar. Several years ago, we 

did a chart—and I did not bring it with me, Mr. Chairman, but if 

you chart the strength of the dollar versus the value of commodities and commodity prices, you will see that when the dollar is 

weak, and it has reached its 30-year low, you have skyrocketing 

commodity prices on the markets. 

And probably more the issue today is the speculation in the commodities market. Is this having an effect? We would say yes. We 

do not fully know because we feel we do not have the full transparency needed to be able to address the problem. 

We have called on the U.S. Commodity Futures Trading Commission to do the following: 

Conduct a thorough and comprehensive investigation regarding 

the recent activities in the commodities market, including an explanation of the cotton market situation, which in a couple of weeks, 

we saw cotton prices on the futures market skyrocket. And some 

people say, well, that is probably market fundamentals, but it is 

not. We have cotton running out our ears. We have more cotton 

than we know what to do with. And when those prices went up, 

the cotton farmer could not get but about half that price bid to him. 

So there is something funny going on there, and it is not based on 

fundamentals, and we have asked for an investigation. 

We have asked for them to increase the transparency. Obviously, 

some of the sophisticated trading components on the futures markets have allowed certain transactions not to be reported through 

a clearinghouse on swaps, etc. It is pretty tough to say, as I think 

the CFTC has said, we do not see a problem when you do not know 

fully what is going on. 

Place a moratorium on any new commodity index trading, and 

evaluate the role and impact that the over-the-counter trading 

swaps are having on the market. 
50 

Approve a proposal to clear swaps in certain over-the-counter positions in an effort to create more transparency; not expand speculative limits, which was proposed in 2007; and take a broader look 

at the concept of manipulation. 

I am not really an expert on all these trading instruments, but 

last January and February, I started to get calls from the countryside where farmers were being shut out of using one of the most 

important financial risk tools that they have utilized over the 

years, and that was the ability to hedge the price of their commodities into the future, after harvest. 

As I mentioned, a lot of farmers have faced skyrocketing input 

costs, greater than ever. We have seen the biggest increase in inputs, yet they do not have the crop yet. And the way they protect 

their risk is to be able to contract it for delivery in the future. 

Many of those contracts were precluded because the tremendous 

rise in the commodities futures trading, the price on the markets, 

created a demand for margin calls. One country elevator in Kansas 

called me early in February or March and said they had a million 

bushels of wheat contracted with farmers for fall delivery, and 

their margin calls were $600,000 a day, 60 cents for each bushel. 

The problem becomes that the local elevator has a credit limit, 

just like with any business, with their bank. They were bumping 

up against their credit limit. So, in turn, they quit allowing that 

producer that tool to be able to manage his financial risk into the 

future. 

So it has had an impact. It has had an impact that so far we 

have not received satisfactory answers, I think, from the regulators 

or anyone else, and I commend you and the Members for holding 

this hearing. I also commend Senator Levin for his work on the 

farm bill, the veto of which hopefully will be overridden here shortly, and on closing the Enron loophole, and maybe we ought to close 

the latest loophole with the swaps. Thank you. 

Chairman LIEBERMAN. Thanks, Mr. Buis. You provided us with 

a really good perspective from the farm, and I appreciate it. 

Let’s do a 6-minute first round for each of the Senators because 

we have a good number of Senators here. We will keep going as 

long as Senators have questions. 

Mr. Masters has reached, it seems to me clear in his testimony, 

a baseline conclusion, which is that financial speculators, particularly index speculators, are contributing, I would say significantly, 

to higher commodity prices. Have I done you justice in that conclusion, Mr. Masters? 

Mr. MASTERS. That is right, Senator. It is important to understand that index speculators are a different—they are basically a 

subset of traditional speculators. I have no issue with traditional 

speculators. Their very nature of being passive, being long only, 

being buy and hold—these things make them wonderful investors 

in the capital markets, but it makes them terrible investors in the 

commodities markets. 

Chairman LIEBERMAN. In other words, because they have a distorting effect on the markets and on the price of commodities. 

Mr. MASTERS. That is right. You have a situation in which they 

are effectively stockpiling these commodities via the futures markets, and they never use them. It begs the question, is anything an 
51 

asset class? I mean, just because it is uncorrelated or it goes 

against what stocks and bonds have typically done in the past, is 

it worthwhile? Is it something that we should allow? 

Chairman LIEBERMAN. And I take it that you are not saying that 

the index speculators are committing illegal acts. What they are 

doing is legal. In some sense, you are saying it ought to be illegal 

because of its effect. 

Mr. MASTERS. It is clearly a legal strategy, and the issue is the 

pension funds and the institutions that are doing it, they are not 

malicious. There is no malicious intent. There is no manipulative 

intent. But the issue is collectively it adds up. It is the analogy, 

where does the elephant sit in the room? Anywhere he wants. They 

look like one speculator. 

Chairman LIEBERMAN. Yes. And I take it that, for instance, your 

conclusion and your recommendations do not of themselves deny, 

they may even confirm, some of what Dr. Steil has said about the 

impact of a weak dollar on their behavior. 

Mr. MASTERS. That is right. It is important to understand that 

prices do not move by themselves. People buy and sell things. Markets move because people take action. And an institution may decide to allocate to commodities because they have a view of inflation or they have a view of currency fluctuations. But the currency 

fluctuations themselves or their view on fundamentals do not impact the prices. What impacts the prices is their decision to act. 

Chairman LIEBERMAN. Mr. Masters, is it possible for you to reasonably estimate what impact the index speculators, as we have 

defined them, are having on commodity prices, either by percentage 

or by categorizing it as little, moderate, or significant? How would 

you describe it? 

Mr. MASTERS. We think it is personally the single largest impact 

on commodity prices today because the size of the funds have 

grown. It is hard to understand—— 

Chairman LIEBERMAN. In other words, larger than the normal 

rules of supply and demand, weather realities, etc. 

Mr. MASTERS. Well, what is important to understand, Senator, is 

that these are a factor in demand. 

Chairman LIEBERMAN. Right. 

Mr. MASTERS. They have dollars. Just like China is a factor in 

demand, these folks are a factor in demand. So if you are not 

studying investors, it is the old Willie Sutton analogy, if you will. 

Why did he rob banks? Because that is where the money is. I 

mean, if you understand where the money is coming from, then it 

is a little easier to understand what is motivating those decisions. 

Institutional investors are a focus for us because they are a component of demand today. And they are a component of demand that 

is one way, unlike traditional speculators. 

Chairman LIEBERMAN. Right. Let me ask you to just spend a moment and further expand the two recommendations that you made. 

The second one was closing the so-called swaps loophole, and the 

first was to deal, through ERISA, I think you said, with pension 

fund flexibility. So just take them one at a time and just explain 

it in a little more detail what you would have us do. 

Mr. MASTERS. Sure. Well, many of these pension funds, as you 

are well aware, are tax-exempt institutions. They were set up in 
52 

many cases for a public purpose. In many cases also, corporate pension funds are insured by the Pension Benefit Guaranty Corporation (PBGC). And so they have some benefits that are provided to 

them because of the theoretical public purpose that they provide. 

And the question that I ask is given this public purpose that they 

provide, should they be allocating to an asset class that has detrimental effects on American consumers at large? And I argue that 

they should not. 

So in terms of ERISA, it could be ERISA or it could be some 

other regulatory framework. But the practice of index replication 

should be stopped. 

Chairman LIEBERMAN. You would specifically stop it legislatively? 

Mr. MASTERS. Yes. 

Chairman LIEBERMAN. Just explain the swaps loophole one more 

time. I gather you would make sure that banks no longer have access to that loophole, that ability to do things that others cannot 

do in the markets. 

Mr. MASTERS. Right. The swaps loophole effectively circumvents 

position limits, so a small investor is subject to position limits, but 

large investors—— 

Chairman LIEBERMAN. And a position limit means how much you 

can have within the market? 

Mr. MASTERS. That is right. For instance, in wheat, you can have 

a total of 6,500 contracts for a total position limit. That is the total 

amount they have. 

Chairman LIEBERMAN. OK. 

Mr. MASTERS. These are regulated somewhat in the sense that 

they have—the spot market that month, they are not allowed to exercise or to take delivery. But that is not their intent. Their intent 

is just to hold the asset. So it really does not change their behavior. 

Chairman LIEBERMAN. Whereas, the banks uniquely have no 

such limits. 

Mr. MASTERS. I would have to get back to you on—— 

Chairman LIEBERMAN. Whether it is unique? 

Mr. MASTERS [continuing]. The specifics there, but basically 

banks function as a surrogate for investors to be able to go and operate. In other words, if I wanted to buy $500 million worth of 

wheat, I could go to a bank, engage in an index swap. The bank 

would then buy the wheat for me, and I would own a swap contract. 

Chairman LIEBERMAN. Right. 

Mr. MASTERS. Effectively, I would circumvent position limits. 

Chairman LIEBERMAN. OK. And, again, your second suggestion, 

therefore, is for us legislatively to close that loophole. 

Mr. MASTERS. That is right. There should be transparency. 

Chairman LIEBERMAN. Thank you. Senator Collins. 

Senator COLLINS. Mr. Masters, let me pick up where Senator 

Lieberman left off. I find your basic premise to be compelling. It 

seems to me that when you have this massive influx of funds by 

the index speculators who are buying and holding, just rolling over, 

not selling, that would drive up the cost beyond what you would 

otherwise see. 
53 

On the other hand, I suspect if you talk to the managers of major 

pension funds or university endowments, they would argue that 

they are fulfilling their fiduciary responsibility under ERISA to get 

the best possible return for those who are going to be relying on 

those pensions in future years. 

So it seems to me we have an interesting conflict here. Is the 

public better served by limiting the ability of these pension fund 

investors, these institutional investors, to come into the commodity 

markets because it is artificially driving up the cost beyond what 

you would otherwise see? Or is the public good better served by ensuring that those retirees get a better future return as a result of 

the investment in commodities? 

So how do you resolve the conflict given that pension funds having a strong rate of return means fewer of them go broke and thus 

default onto the Federal Government’s pension guarantee authority 

and that we want retirees to be able to have a good standard of 

living? I think that is a hard question. 

Mr. MASTERS. I think it is not maybe as hard as one would look 

at it on the surface, Senator. First of all, for the pension funds, 

they have lots of ways to express their view. If they want to express an inflation view, for instance, they can express it by buying 

TIPS, which are Treasury Inflation-Protected Securities. That is a 

solution. 

If they want to invest in energy, they can buy Exxon. They can 

buy ConocoPhillips. They can buy Halliburton. They can buy many 

other companies. They do not need to buy inventories. The analogy 

that I would use effectively is, should institutions be buying all the 

tickets at Disney World when they could buy Disney World common stock? I mean, it seems ludicrous to buy all the tickets when 

you can just go and buy the stock. Should they be buying inventories that we need for production? I think that is a key issue. So 

they have plenty of opportunities to be able to have returns. 

There is another point which this brings up, and that is, I would 

imagine that if many retirees knew that their own pension funds 

were driving up the price of commodities, the price of gasoline that 

they buy on the way home from work, that they may not be happy 

to know that their own pension fund was costing them more in 

terms of groceries or fuel. I mean, I do not think people know this, 

and so this is one of the reasons I am here today. I wanted to raise 

awareness of this issue. 

Senator COLLINS. Mr. Erickson, why don’t you accept the basic 

premise here. Explain to me why Mr. Masters’ study is not a logical conclusion. 

Mr. ERICKSON. I do not think it is necessarily that there is a disagreement here. We in our testimony acknowledge that these passive investments can have a price-lifting impact on the market. As 

a point of distinction, one of the things that might help in clarifying, is that currently under the CFTC’s rules and regulations, the 

pension funds cannot exceed speculative position limits on their 

own, nor can institutional investors. 

Senator COLLINS. Only if they go through the bank? 

Mr. ERICKSON. Which would be the swap, then. 

Senator COLLINS. Right. 
54 

Mr. ERICKSON. But they are held to the speculative position limit 

so they cannot directly invest in those markets. There are several 

index funds that have petitioned the CFTC successfully in the last 

few years, I believe, to have exemptions from limits. And that is 

why we as an organization are saying to the CFTC it is appropriate 

to go slow here. 

There are a lot of factors that are hitting this market at the 

same time. Demand is one. We have gone through them all. And 

this certainly is another factor that we need to take the time to 

more fully evaluate the potential impact. 

Senator COLLINS. Do you think that there should be limits put 

on the ability of institutional investors to invest in the commodities 

market? 

Mr. ERICKSON. That is a terrific question, and I think that gets 

back to just this whole idea that we really need to evaluate, and 

I will give you an example of a situation that gives us pause. 

The wheat market that you referenced earlier in October 2006 

had an extraordinarily high level of index fund participation, and 

there were underlying market events that required commercial 

users to try and exit their short positions. And what we found in 

that relatively thinly traded market was that those folks were not 

in their roll period and that it was not real liquidity for commercial 

market participants. In other words, there was a seizing up of the 

market for about 2 weeks in wheat in October 2006 that exercised 

a great deal of financial pain for a number of participants. 

So there is that possibility, but we have taken the view that it 

is a reality that there is this interest, but we should not be going 

out and providing broad exemptions to this passive community. 

Senator COLLINS. Thank you. 

Chairman LIEBERMAN. Thanks, Senator Collins. Senator Coburn, 

good morning. You are next. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Thank you. A couple of questions. 

Why should not all players in the commodity market be susceptible to a position limit, no matter where they are coming from? 

Does anybody disagree with that? Why shouldn’t everybody be 

treated the same? Why should you have an advantage through a 

swap with a bank to be able to hold a position greater than what 

you would otherwise? 

Mr. HARRIS. I guess I can speak to that. The position limits in 

the markets actually are set during the expiration month, so most 

of the position limits we are talking about do not actually apply to 

most of the index trading in the sense that in the month before delivery, position limits typically are not binding. We have what we 

call accountability limits where before the expiration month, the 

CFTC views the market, sees who the participants are, and if they 

appear to be large, we basically have a call with them, interface 

with them, and say you are accountable for the position size that 

you have. And so we monitor the market that way. So most of the 

index trading, since they roll out of a commodity before the delivery 

month, do not really actually hit a position limit. 

So the position limits are usually in the marketplace because we 

want to limit the ability of a particular market class or a group of 
55 

market participants to corner the market to try to pinch demand, 

to try to do something on a short squeeze during the delivery 

month. So that is really what position limits were intended to do. 

Senator COBURN. So, in essence, there is no difference between 

a swap and anybody else that is in the market? 

Mr. HARRIS. For the most part. Now, it is true that the commodity index trading—and we monitor this, and I think in response to some of these concerns a few years ago is why we started 

producing information about the index trading in the agricultural 

products because the swap dealers were not handling index trading 

at that time. So when we looked at a swap dealer’s position, it was 

almost always exclusively handling an index trade. 

I guess the loophole might be classified in the oil or energy markets, we do have a large developed swap market that existed prior 

to this index trading. So if you look, for instance, at our data right 

now on swap dealer trades in crude oil, despite the fact that there 

is a tremendous amount of index trading in crude oil, the net position of a swap dealer as a group is actually short so that their business in handling over-the-counter swaps is actually completely offsetting the buying pressure from the index community. 

Senator COBURN. I am having a little bit of trouble with our commodity markets. I thought we had commodity exchanges so that we 

would level out price swings so that the real producer and the real 

consumer could go to the commodities market and hedge their positions so they could have price stability. And it seems from what we 

heard here today, we have anything but that. 

I think we need to go back and look at what the function of the 

commodity markets is if, in fact, they are not allocating this resource in a level way so the market can be transparent so people 

can make good decisions based on what the market is. How have 

we gotten away from the real function of a commodity market? 

I sit here and think, well, if I am a wheat producer, I ought to 

be able to sell into it; and if I am a consumer of wheat, I ought 

to be able to buy into it. And I am not sure, other than the commodity traders, who are the ones that create the liquidity, that we 

ought to have anybody else participating in this market; in other 

words, that the market has gone from what its original function 

was to something that is totally a speculative investment vehicle. 

How do you answer that? 

Mr. HARRIS. Well, I think from the CFTC standpoint, we do monitor it, and this is exactly why we are completely engaged with this 

development in the marketplace, and we are doing everything we 

can, week by week, day by day, to collect information and disseminate that information in hearings like this to make sure that people are informed about who is trading in our markets. Their Commitment of Trader Report comes out every week so we can see this. 

Now, I think it is true, though, historically that there has been 

a large degree of speculation interest in all of our markets. That 

is kind of the way futures markets operate. 

The one thing I would point out is that we have been engaged 

with the agricultural community as well. One of our agricultural 

hearing participants, we questioned them on whether there is a 

limit on the funds that are available, what is happening out in the 

heartland in access to finance, and why are people saying that they 
56 

are not being able to carry their position and being squeezed out 

of the market from their margin calls. We brought Federal Reserve 

employees and got some reassurance that, despite the pain involved in the financing and the arrangement of higher credit limits, 

there is a lot of ingenuity going on out there, people recognizing 

they know what their production costs are going to be, they have 

been able to go to the futures markets and hedge that risk. The 

problem then becomes in maintaining that financing cost and carrying that position to when the crop is harvested. 

Senator COBURN. The elevator cannot do it. 

Mr. HARRIS. One thing I will point out is in these markets there 

is a record number of short positions from commercial participants. 

So the markets do seem to be working, and there is more interest 

now than there has been in the past. 

Senator COBURN. I am about to run out of time. I have two other 

questions. 

One, are pensions presently excluded under their limits from 

doing a swap? 

Mr. HARRIS. No. 

Senator COBURN. So they can participate in the swap index with 

a bank right now. They are not excluded. 

Mr. HARRIS. That is right. 

Senator COBURN. And, number two—and anybody can answer 

this—worldwide demand for oil has risen around 1 percent the last 

2 years. Nobody disputes that. The total global demand. Why are 

we seeing such price inelasticity with this? You have a 1-percent 

rise in demand, and you have a doubling in the price of oil. How 

does that explain a real market? 

Mr. MASTERS. It has to be another factor. 

Senator COBURN. That is right, and what is that other factor? 

Mr. MASTERS. To us, it is financial investors. I mean, they have 

never been here before to any size. Effective in 2003, they showed 

up and they have been here since. Investors, institutional investors, never looked at commodities as an asset class before 2003. 

Senator COBURN. So they are on permanent hold, they are just 

rolling a constant demand through the oil contracts and through 

the commodities contracts, the grain contracts. It is just a constant 

excess demand. 

Mr. MASTERS. Well, it is worse than that because it has been 

growing, so it is more demand every year. And if you think about 

institutional investment in terms of worldwide pension funds, collectively they are around $30 trillion. So they have allocated less 

than 1 percent of their investment to commodity futures as an 

asset class. There are many consultants out there that consult with 

this community that have recommendations as high as 10 percent. 

We can see what prices have done so far with just less than 1 percent of demand. Imagine, if we have another 10 percent, what 

prices will do then. 

There is lots of money on the sidelines looking at commodities as 

an asset class, and, again, that is why I am here. I am trying to 

raise awareness of this issue. This is absolutely important. 

Senator COBURN. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. That is a really important question, and 

with Senator Pryor’s indulgence, Senator Coburn, if you want to 
57 

ask it of any of the other witnesses. I would take a little time, if 

that is all right with Senator Pryor. 

Senator COBURN. Anybody else have a comment on that? 

Mr. HARRIS. I would like to address actually what we have seen 

in the data. One of the things we have seen, and particularly in 

the oil market, is that there is not only a demand for buying of the 

oil, but there is a tremendous uncertainty about supplies and uncertainty into the future. Five years ago, you could not buy an oil 

contract on the New York Mercantile Exchange (NYMEX) for beyond 4 or 5 years. Right now you can contract out more than 8 

years in that space. 

So there are tremendous anxieties about world supplies. Since 

we are dealing with a futures market, most of these anticipatory 

events are priced into our markets. So I would not classify it as 

strictly a demand-driven thing. There has to be a buyer and a seller for each one of these commodities. And we find that not only is 

the record short hedging going on in the agricultural markets, but 

the hedging that is going on in the oil spaces extending out way 

beyond what we saw in the past. 

So the demand for hedging and the uncertain times that we live 

in, I think, is the primary factor in these markets. 

Chairman LIEBERMAN. Dr. Steil, and then we will go to Senator 

Pryor. 

Mr. STEIL. Senator, I agree that prices of commodities have skyrocketed, particularly over the past 6 years, and you cannot explain 

all of it looking at ‘‘fundamentals.’’ Fundamentals will only get you 

so far. But that does not mean that the interest in commodities as 

an investment vehicle has been willy-nilly. It tracks very closely 

developments in U.S. monetary policy and the decline of the dollar. 

And there is a deep, historical reason for that. If you go back 

throughout all of human history, until 1971, specific commodities 

played the role of money. It was often gold. It was often silver. But 

whenever people coalesced around one form of commodity as 

money, you saw the price of that commodity go up vis-a-vis other 

things. 

For example, in the late 19th Century, when countries around 

the world decided, voluntarily, to join the gold standard, demand 

for gold around the world went up, and the price of gold vis-a-vis 

other things went up very significantly. 

In the 1970s, that was a very bad period for the dollar and U.S. 

monetary policy, and, not surprisingly, people turned to commodities. 

When the Paul Volcker-led Federal Reserve restored the credibility of the dollar, you saw commodities prices plummet, and we 

really benefited from that for a very extended period of time. 

So when we ask, do commodity index investors push up commodities prices, undoubtedly they do. We have to say that anyone who 

buys commodities because they are looking at them as a substitute 

for money is pushing up commodities prices. And I agree with you, 

we should be deeply concerned about it. But I think it is very important that we ask ourselves why they are doing it. 

Chairman LIEBERMAN. That is very interesting. So really what 

you have said is not inconsistent with Mr. Masters’ conclusions 

about the impact of speculation on commodity prices. You are ex-
58 

plaining why rational participants in the markets, worried about 

the decline of the dollar, the value of the dollar, will move to commodities to maximize their returns. 

Mr. STEIL. The index investors, as it were, are the messengers, 

and I am concerned if we focus all of our public policy attention on 

the messengers, we are just going to induce them to send us the 

message through other vehicles. 

Chairman LIEBERMAN. Yes. This is a good point, and this goes 

back to Senator Collins’ point, because there is obviously a benefit. 

The pension managers are trying to maximize their returns for the 

beneficiaries of the pensions. But then if the managers of the pension funds do it through the commodity index speculation, then, of 

course, it has this terrible effect that we are hearing about or, at 

least, certainly contributes to the extremely high commodity prices. 

So I hear you, too, Dr. Steil. You are saying maybe Mr. Masters 

has a point, we should take some action there, but do not think 

that is the end of the problem; that really the underlying problem 

is that we have got to strengthen the dollar again. 

Senator Pryor. 

OPENING STATEMENT OF SENATOR PRYOR 

Senator PRYOR. Thank you, and I want to thank both of you for 

this hearing. It is both interesting and helpful. 

I would like to start by following up on some of Senator Coburn’s 

questions and also some of the things that you talked about in your 

opening statements and previous testimony. 

Mr. Harris, I will just pick on you since you are first at the desk. 

Just for clarification, the trading volume for commodities over the 

last 10 years has gone up considerably. Is that right? 

Mr. HARRIS. That is right. 

Senator PRYOR. And about how many times has it gone up over 

the last decade? 

Mr. HARRIS. Total, probably like 600 percent or so. 

Senator PRYOR. OK. And I am not sure that I got a clear answer 

on this from earlier testimony, but if we could just try to get a consensus on, for example, in the oil markets, what percentage of the 

price for oil today is based on speculation? If the speculators were 

out of the market, so to speak, how much difference would you see 

in a barrel of oil? 

Mr. HARRIS. I guess from our standpoint, speculators have to be 

in the market to be able to provide prices. 

Senator PRYOR. I understand. 

Mr. HARRIS. I would say we would not have a market if there 

were no speculators. 

Senator PRYOR. Right. But you understand what I am asking? 

Mr. HARRIS. Yes. I mean, this is what we have been chasing 

down. 

Senator PRYOR. Yes. 

Mr. HARRIS. We have been trying to do study after study and trying to figure out the impact of different classes of traders. 

Now, the one thing we do not do in a market is we do not ask 

the traders’ intent when they come to our market, but we know 

generally how they are classified. So we know a swap dealer from 

a floor broker from an index trader, for instance. So in the oil mar-
59 

ket, in particular, we have been looking for any footprint that 

shows from a daily price movement and a daily change of their positions whether commercial participants or non-commercial groups 

have been moving the price. We have yet to date to document that 

any group of speculative trades are moving prices. The general conclusions we get from the day-to-day look on who buys on every day 

and what prices change on those days typically results in the fact 

in my testimony that if prices are up today, we will see a lot of 

speculative types of traders buying tomorrow. So that is the regularity we see. 

Senator PRYOR. But you cannot really point to a dollar amount 

or percentage that type of investor adds to the price. 

Mr. HARRIS. I think my colleague John Fenton last week, I believe, testified. He would say zero. 

Senator PRYOR. OK. 

Mr. HARRIS. Since we cannot find a footprint. 

Senator PRYOR. Does the rest of the panel agree with that? 

Mr. MASTERS. I certainly would not. I mean, what moves prices? 

Magic? There is somebody buying and selling. I mean, clearly speculators, with the increase that they have had, they have to have 

had impact. There is just no question. 

One other comment in clarification of that. We do not actually 

know what the index traders are in crude oil because the CFTC 

does not release that data. We only get it on the 12 agricultural 

commodities. It would be helpful if we could actually get that data 

from the energy markets as well as from the metals markets, something the CFTC currently does not provide. 

Mr. HARRIS. I would interject there that we do not provide it because we actually do not have it. We have classes of traders like 

I mentioned, and since a swap dealer in an agricultural product is 

almost exclusively doing index trading, we know that swap dealing 

trading is index trading. In the metals and the energy space, we 

know the swap dealers have vast amounts of other trading business that contaminates the index trading that they report to us. 

Senator PRYOR. Did you all want to add anything to that? 

Mr. BUIS. Senator, I would just add that I think all this calls for 

the modernization of giving CFTC the tools to accurately monitor 

all these newer trading schemes that have come up over the last 

couple decades. You cannot find out there is a problem if you cannot count it. And through the swaps and other mechanisms, I am 

not sure everyone is having a complete transparent look at what 

is going on. 

Mr. STEIL. Senator, I would just add that the International Monetary Fund (IMF) recently suggested an estimate that about $25 of 

the recent increases in the cost of a barrel of oil could be attributed 

to the change in the level of the dollar since about 2002. One thing 

that I find quite telling is, as you will see in my written testimony, 

these sharp movements in prices of commodities are highly correlated with each other, so that very different assets, like wheat 

and oil, are moving upward together in tandem with the decline of 

the dollar. So you will see in one figure I show side by side the 

price of oil and wheat measured in dollars obviously trending up; 

and the price of oil and wheat measured in gold over the course 
60 

of the decade, and they are both very flat. So this is a phenomenon 

that really cuts across almost all asset classes within commodities. 

Mr. ERICKSON. Two points. First, I think from our perspective, 

speculative liquidity is absolutely critical to well-functioning markets from a commercial perspective. People who are in the markets 

to hedge their risk to price movements need that speculative liquidity day in and day out to be there. The passive investor raises some 

new issues for us. 

Second, just maybe to build on Dr. Steil’s comments, not only 

have we seen this increase in all asset classes of wheat and agricultural commodities with oil, there is an absolute correlation that has 

emerged where agricultural commodities are now tracking energy 

commodities really almost to their parity energy value levels, something that was not seen before the last 5 years. 

Senator PRYOR. And the fact that agricultural commodities are 

tracking so closely with oil commodities, what conclusions do you 

reach from that? Why is that happening? 

Mr. ERICKSON. Well, the energy value of commodities, there has 

been some work done basically trying to correlate Btu energy values of corn and wheat with oil. And at some point, the highest and 

best economic value for the food commodities is to use them as energy because of their energy value. It is not just biofuels. It is decisions of whether to use pure vegetable oil as a substitute for diesel 

fuel in running plants. 

Senator PRYOR. OK. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks very much, Senator Pryor. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. 

I quoted before the analyst for Oppenheimer and Company who 

said ‘‘. . . speculators have seized control and it is basically a freefor-all, a global gambling hall, and it won’t shut down unless and 

until responsible governments step in.’’ 

The president of Marathon Oil Company said that ‘‘$100 oil is 

not justified by the physical demand in the market. It has to be 

speculation on the futures market that is fueling this.’’ 

The oil analyst for Citigroup said that the larger supply and demand fundamentals do not support a further rise and are, in fact, 

more consistent with lower price levels. 

At a joint hearing with Senator Dorgan’s Subcommittee on Energy we held last December at the Permanent Subcommittee on Investigations, a man named Edward Kraples, who is a financial 

market analyst, testified, ‘‘Of course, financial trading speculation 

affects the price of oil because it affects the price of everything we 

trade. It would be amazing if oil somehow escaped this effect.’’ 

So there is a whole lot of expert opinion in terms of the role of 

speculation, and the best estimate we had, Senator Pryor, when 

you asked the question: What percentage of the price of oil could 

be attributed to speculation? Our Subcommittee reached a conclusion, when oil was $70 a barrel, that about $20 of that $70 was the 

result of speculation. 

Senator PRYOR. That is why I asked that question. 

Senator LEVIN. In supply and demand, that is where crude oil 

stocks are, right smack in the middle of the historical level of inventory for crude oil. 
61 

1The chart referenced by Senator Levin appears in the Appendix on page 135. 

2The chart referenced by Senator Levin appears in the Appendix on page 136. 

As a matter of fact, since December 2007, crude oil inventories 

have gone up. At the same time, the price continues to go up. So 

if supply and demand were working, as the supply went up, the 

price would go down. But the price since 2007 has gone up—I had 

the figure here—from $90 a barrel to $127 a barrel. So you cannot 

just point to supply, shortage of supply, when our inventories are 

going up. 

We have a chart, which I want to put in front of our witnesses, 

that has to do with the amount of speculation.1 This is the amount 

of speculative purchase of future contracts, contracts for future delivery of crude oil, since 2000. I think, Mr. Harris, you would probably say, well, that is no proof that there is any relationship to the 

price of gasoline, but it sure has accompanied the increase in the 

price of gasoline. 

You may say, well, the first people who buy are the commercial 

folks, and then the speculators the next morning buy at last night’s 

commercial price. Well, it is also true that tomorrow, then, the 

commercial people will be following the speculators’ purchase 

today. I mean, your solution to the chicken-egg problem here is 

that the speculators are the ones that follow rather than support 

and sustain the commercial purchases, the real hedgers. And I do 

not think there is any more logic for your argument than there 

would be for mine, the reverse. 

What we do know is that the amount of speculation has gone up 

dramatically along with the price of oil and that there is an awful 

lot of experts out there who say that it is speculation which has 

been a significant cause. 

I could not agree with you more that currency differences are a 

cause. Of course, it is a cause. The value of the dollar going down 

is a cause. But to say that does not mean that speculation is not 

the cause. It just means there are other causes. And there are 

other causes. 

Mr. Erickson, I think you talked about some upward push from 

speculation. Have you put a dollar amount on that push? 

Mr. ERICKSON. I have not, no. 

Senator LEVIN. All right. Mr. Masters, you really have pointed 

out very effectively and dramatically the role of additional funds 

into the market in terms of the price of oil. Are you able to estimate how much of the $125-a-barrel price for oil is the result of 

either the hedge funds or the index funds, particularly the index 

funds, coming into the market? Have you been able to put a dollar 

amount on that? 

Mr. MASTERS. I think that is a tough question to answer. I think 

the answer is nobody really knows specifically. But I would say 

that when we talk to refiners and other industry contacts, they 

consistently come back to us and say, net of speculation, oil would 

probably be in the $65–$70 range today. They are the ones that 

make gasoline so I am going to rely on their judgment. 

Senator LEVIN. Another chart that I want to show to our witnesses shows the increase in the amount of speculative purchases 

since 2000.2 The bottom line there is the amount of future con-
62 

tracts. It has gone up about double. The top line is the amount of 

speculative purchasers of future contracts. It has gone up about 

1,100 percent. And, by the way, the bottom line includes the index 

funds, so that if you put the index funds where they belong, which 

seems to me is logically in the speculative category, that lower line 

would probably be totally flat; and that upper line, which is the 

amount of speculation, would be even more dramatically going up. 

So, Mr. Harris, you are CFTC. You are supposed to be the cop 

on the beat here. You are supposed to be regulating excessive speculation, and I do not think you even recognize its existence. I do 

not mean you personally, I mean the agency. 

Mr. HARRIS. Right. Well, I would say exactly the opposite. The 

agency has been engaged with this particular development for 

years. 

Senator LEVIN. Engaged? 

Mr. HARRIS. Yes. We started studying—— 

Senator LEVIN. I do not mean studying. I mean doing something 

about it. 

Mr. HARRIS. Well, I cannot speak to enforcement cases we have. 

We could give you a briefing on some of those. But we do have enforcement cases in this particular market. 

Senator LEVIN. In excessive speculation in oil? 

Mr. HARRIS. Well, I am not privy to everything there, but we 

could arrange for you to talk to—— 

Senator LEVIN. Well, do you know whether or not there has been 

enforcement against excessive speculation in oil? This is oil trading 

I am talking about. 

Mr. HARRIS. We do not have, I believe, any public—— 

Senator LEVIN. I am not asking for the names. I am just asking 

you if you know of any enforcement action. 

Mr. HARRIS. Strictly based on excessive speculation? Not exclusively on that, that I know of. 

Senator LEVIN. Strictly, not exclusively? 

Mr. HARRIS. Right. 

Senator LEVIN. You sound like a hedger. 

Mr. HARRIS. Well, mainly because one of the things we do is segment my fundamental economic research from the Enforcement Division. 

Senator LEVIN. But you could still know whether or not—— 

Mr. HARRIS. Well, I would say our Department of Market Oversight (DMO), and our put-together office monitor this. We have updated these studies. 

Senator LEVIN. You monitor, you update, you study. You do not 

do a darn thing about it. That is the problem. You are supposed 

to be the cop on the beat. You are our regulator. The reason we 

closed the Enron loophole was to get a regulator. There was no regulator when it came to electronic trading, so we wanted a regulator 

there. We want a cop on the beat. You do not see the problem. You 

do not act against that incredible, dramatic increase in speculation, 

as far as I can tell, indeed you do not even recognize it. Your studies cannot even find a relationship between—we had a case involving a hedge fund, Amaranth. They held 70 percent of the natural 

gas market on the NYMEX. Winter natural gas prices went up dramatically. We had a CFTC witness in front of us at the Permanent 
63 

Subcommittee on Investigations who said they could not find any 

role of speculation in that. This was a firm that had 70 percent, 

I believe, of the NYMEX natural gas market. Even then the CFTC 

saw no evil, heard no evil, spoke no evil, and did nothing. 

So I am just telling you, to me, unless the CFTC is going to act 

against speculation, we do not have a cop on the beat. No matter 

how hard we try to close the loopholes, without a cop to enforce it 

our efforts are not going to succeed. 

I went over. I apologize for going over, and I should not close 

without giving our witness a chance, but that is up to the Chairman if he wants to—— 

Chairman LIEBERMAN. To Mr. Harris? 

Senator LEVIN. Yes. 

Chairman LIEBERMAN. Do you want to respond, Mr. Harris? 

Mr. HARRIS. Well, I think we are on record as having a record 

number of enforcement cases. I think Amaranth was an instance 

where—— 

Senator LEVIN. On oil? 

Mr. HARRIS. On natural gas in particular, where we were not 

getting the information. I am fairly certain at this stage that we 

are getting information from all the traders in the oil market. 

There is an over-the-counter market that exists for these products 

that we do not see. That is entirely unknown to us. 

Senator LEVIN. Thank you. 

Chairman LIEBERMAN. Thanks, Mr. Harris. Thanks very much, 

Senator Levin. Excellent questioning. Senator McCaskill. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you. 

I am curious, Mr. Harris. If we have oil company folks up here 

and they raise their hand to take an oath and testify that speculation is accounting for anywhere from $30 to $50 a barrel for the 

price of oil, it seems weird to me that you say we do not think it 

is having any impact. I mean, how come they know it and you do 

not know it? If you are supposed to be in charge of regulating this, 

how come they can say it, how come Mr. Masters can talk about 

it from the refinery capacity, but you say you cannot tell us what 

the oil companies can tell us? Shouldn’t you know that? And if you 

do not know it, what tools do we need to give you so you can figure 

it out? 

Mr. HARRIS. Well, I think we have some tools. One of the things 

we pointed out in my testimony is increased staffing and budgetary 

concerns that we have in being able to monitor these markets. But 

we have actually inquired to a number of people who have looked 

at that speculative premium, and when oil was at $60, we heard 

it was a premium, and it went to $80 and now some people say, 

again, $95 would be a good price. 

And so we do see that there is a moving target from other participants. We have been, like I said, engaged in this debate, trying 

to figure out from the data what is moving prices. The other regularity we do find is when commercial traders come to the market 

to buy, they do move the price. So we can uncover who does move 

the price up in a large number of instances, and particularly in oil. 
64 

So we are doing the work to try to uncover exactly what is going 

on. 

Senator MCCASKILL. Well, I think any specificity you can come 

with as to what you need to get the data—I mean, if you have got 

the data on commodities but you do not have it on oil, the people 

of America are about to take up pitchforks, and we are feeling the 

heat here in Congress—as we should. It is our job to feel the heat. 

And I think that what Senator Levin was trying to communicate 

to you is that it does not appear that our cop on the beat feels the 

heat like we do. And, there seems to be a sense of urgency in these 

halls about this topic, and I know that part of this as your job is 

to be careful, cautious, and modulated. But I think we are all frustrated because it appears that you basically are saying, no harm, 

no foul. And, clearly, that line should worry you. 

Mr. HARRIS. I think clearly it does, and one thing I would welcome actually being here is to convey that message, that we are 

monitoring these markets on a daily basis. We are updating studies. We are referring different instances in particular cases to our 

Enforcement Division, and we do have an active engagement with 

both the commodities in agricultural and energy space. 

Senator MCCASKILL. Well, I think the more you can do and the 

more aggressive you can get—I mean, if you were Popeye, I would 

give you a can of spinach right now. I think it is time to muscle 

up here and get busy, because if you do not do it, we are going to 

figure out some way in Congress to impose it. And sometimes that 

has unintended consequences that probably most of the people at 

this table are worried about. But the pressure is real, and something is going to have to give. 

Mr. Buis, I wanted to ask you from the farmer capacity, what impact are the current market forces having on the plans of farmers 

for crop planting for the next couple of cycles? I am interested from 

a pragmatic standpoint, these incredibly high commodity prices, 

what impact is that having on my producers in Missouri as to their 

planting cycles? 

Mr. BUIS. Well, I think the prices are doing a couple things. One, 

if you can capture the prices—which we have been precluded from 

capturing markets beyond this crop year. I think almost everyone 

has shut off offering hedge contracts for in the future. But you do 

see farmers follow the price. For example, 2 years ago, corn prices 

started to go up. Last year, farmers produced the biggest corn crop 

by far in history, almost 3 billion bushels more, which gave us a 

13-billion-bushel crop. That is unheard of. 

This year, I think you are seeing a shift back to soybeans—— 

Senator MCCASKILL. Because beans got so high. 

Mr. BUIS. Because bean prices came up. You saw more acreage 

go into wheat. With the higher rice prices, I think you are going 

to see it. But farmers are like any other business. They want to 

make a profit. And for a very long time, we have not. We welcome 

the higher prices, but the problem is we are not being able to necessarily able to capture them. And at the same time, we have these 

skyrocketing input costs because of energy. 

President Kennedy once said farmers are the only people that 

buy retail, sell wholesale, and pay freight both ways. It needs to 

be updated today because we also pay fuel surcharges both ways. 
65 

We are price takers, not price makers. We have no ability to pass 

that on. We are at the mercy of the marketplace, and when the 

marketplace does not work, regardless of what the charts show, it 

is not working for farmers out there right at the moment. Action 

needs to be taken. 

Senator MCCASKILL. And the irony is that when I go to the 

Board of Trade in Kansas City, the pitch I get is how important 

that market is for the farmers in terms of predictability. Now, the 

irony of this situation is now we have these futures markets that 

are supposed to be helping the farmers, and they are not being able 

to access them. 

Mr. BUIS. Absolutely. 

Senator MCCASKILL. Now, something is really wrong here, that 

the very ability to be able to forward contract is being cut off to 

the people who need them the most. 

Mr. BUIS. Absolutely, and if you look at wheat, for example—and 

we do have a shortage of wheat. The wheat stocks are at record 

lows. But wheat prices got very high in February and March when 

farmers did not have it and many were shut off from being able 

to forward contract that wheat for delivery after harvest. Now they 

are getting ready to harvest in States like Oklahoma and Texas, 

and prices are down to under $8 a bushel, almost half of what it 

was in those high times when they were shut out. 

Senator MCCASKILL. There is certainly an irony there. Thank 

you, Mr. Chairman. 

Chairman LIEBERMAN. Thank you, Senator McCaskill. Senator 

Carper. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thank you, Senator Lieberman. 

To our witnesses, we are grateful to you for being here. I said 

to Senator Lieberman and Senator Collins, when I was in for a 

short period of time earlier in the hearing, that we just concluded 

a markup in the Senate Banking Committee on a couple of important issues, and I have been detained there, but I am glad to be 

here before you have left, and we appreciate very much your testimony and responses to our questions. 

While I was here for a little bit earlier, one of the things that 

I heard in the conversation was that among the primary factors 

that are driving run-ups in the commodity prices for oil and other 

commodities is the drop in the value of the dollar, and that certainly is understandable. And I once studied economics a little bit, 

and so I believe in the law of supply and demand. As we see demand increases in places like China and India for oil products, that 

certainly would have some effect. 

But I sense from a little bit of what you have said, and what I 

have read and heard elsewhere that there is more than just a drop 

in the value of the dollar; there is more than just a change in supply and demand. There is more going on here than that. And I 

would just ask you, is there any consensus from this diverse panel 

as to what beyond those two factors has caused the price of a barrel of oil to go from, about a year ago, roughly $60 or $70 to, today, 

$120 or so? What else is going on here? And what, if anything, 
66 

should we in Congress do about it? And what, if anything, should 

the Executive Branch of our government do about it? 

I am happy to start with Mr. Harris, if you do not mind. 

Mr. HARRIS. Well, I guess from my perspective, the fundamental 

change in the market was highlighted by Dr. Steil. I mean, that 

particular underlying fundamental factor, interest rates and using 

commodities as a portfolio hedging tool is the driving force here. 

We have been searching for behavior in our markets and behavior across markets, and like I mentioned in my testimony, we see 

market prices falling in live cattle and hog markets, where the percentage of index traders is actually greatest. Almost half those 

markets is participation by index traders, and yet those prices are 

falling. So from the market operations standpoint, we do not see 

where there is a lot of regulation that is going to be beneficial. 

I think the other related topic is that we do have farmers that 

we are hearing from that are having issues with margin calls. One 

of the proposals has been to raise margins. Well, we already know 

what happens when people have higher margins to meet. It drives 

small elevators and grain dealers out of business. And so that gets 

at the wrong end of the problem, I believe. 

So I guess my personal feeling, after looking at all this data perpetually for the last 9 months since I have been in this job, is that 

there are fundamental reasons in the broad economy and worldwide that move these prices. 

Senator CARPER. And the second half of my question was what 

advice do you have for us, if any, as to what we should be doing 

in the Congress to respond to the run-up in the prices, particularly 

the food commodities, but especially oil for my interest. And what 

advice do you have for us? What advice do you have for the Administration? 

Mr. HARRIS. Well, I think the chairman of the CFTC would probably like me to be a little bit more tenuous in those recommendations on policy. But I would focus on those broad economic consequences and broad economic policies rather than trying to pinpoint behavior necessarily in the marketplace. 

Senator CARPER. All right. Thank you. Mr. Masters. 

Mr. MASTERS. Sure. I believe your question, Senator, was—— 

Senator CARPER. I am looking for some advice. I am trying to 

find out what else is going on here other than the two factors we 

have mentioned and what advice do you have for the Legislative 

and Executive Branches. 

Mr. MASTERS. All right. Well, we are really focused on index 

speculators, as we have described in our testimony. We think that 

is the primary or one of the primary drivers here. 

It is interesting that everybody on the panel talks about fundamental factors and whatnot. What we are talking about is participants. Fundamental factors do not drive prices. Participants acting 

on the perception of those fundamental factors drive prices. There 

is a key difference. It takes people to drive prices. 

So, clearly, we feel like index traders or index speculators are a 

group that really have no place in the commodities futures markets 

and their practices should be excluded. 

Senator CARPER. Excluded by whom? 
67 

1The graphic referenced by Dr. Steil appears in the Appendix on page 217. 

Mr. MASTERS. By Congress, either through ERISA or through 

some other legislation. So that would be one solution. 

The other solution we offered earlier in our testimony was to 

close the swaps loophole which allows effectively unlimited speculation by that category of participant and others. And, again, whether or not it is in the contract month is really immaterial. What is 

important is that they have an impact on price. They are never 

going to take delivery, so having a restriction on them in the spot 

month that prevents them from taking delivery is not really a restriction. The key issue is to not allow the practice to begin with, 

because that is where the price behavior starts. 

Senator CARPER. Good. Thanks very much. Mr. Erickson. 

Mr. ERICKSON. Thank you. I guess I would maybe step back a little bit and look at, again, the fundamental of supply and demand. 

In the agricultural sector, we are looking at 60-year-low supplies 

for wheat. We are at 35-year or 40-year lows in global stocks for 

other commodities. And, I think the markets generally are crying 

for supply, and I think that may be in energy as well. 

The International Energy Agency a week or two ago came out 

with its ‘‘sobering finding.’’ It said, that if the world gave up all 

biofuels production tomorrow, we would have to find another million barrels of crude oil every day. 

So I think the market is responding to a sense, a perception of 

scarcity across the board, in addition to other fundamental factors. 

Senator CARPER. Thank you, sir. 

Mr. Steil, I heard some of what you said, but if you want to add 

anything to that, please do. 

Mr. STEIL. On page 6 of my written statement,1 I included a 

graphic showing the changes in correlations between the U.S. dollar and specific commodities, and it is quite interesting. The correlation between the gold price and the price of the dollar has always been very tight, because historically, whenever the dollar has 

depreciated, people have bought gold. 

What is new specifically since last year is the huge increase in 

the correlation between dollar depreciation and the prices of other 

commodities. This is brand new. Or at least we have not seen it 

since the 1970s. 

For example, the correlation between wheat prices and dollar depreciation has become really quite remarkable. So it is clear that 

what is going on in the market is that people have been reacting 

to what the Federal Reserve has been doing very aggressively since 

last summer—that is, cutting interest rates, now for good reasons, 

with good motivations, in order to try to forestall a recession. But 

I would argue that some of the problems that they have tried to 

address with monetary policy—for example, the horrible interbank 

credit crunch—could be better dealt with, as I call it, on balance 

sheet with specific targeted programs that Congress could run that 

are explicitly funded. 

For example, in December, in the Financial Times, I wrote an oped supporting the creation of a new Resolution Trust Corporation 

that would offer to buy up subprime mortgages at very deep discounts, which I believe would induce banks to get these mortgages 
68 

back on their balance sheet once they had a watertight price at 

which they could mark them and would induce other financial institutions in the industry to buy these things up knowing that 

there is a floor to the price. 

Now, by doing something like that, we take the burden off the 

Federal Reserve, the burden off monetary policy, and stop inducing 

people to buy commodities as a substitute for the dollar. 

Senator CARPER. All right. Thanks so much. My time has expired. For our last witness, very briefly do you have anything you 

would like to add? 

Mr. BUIS. I would just add one thing. The most immediate relief 

is what you guys did last week in suggesting that the President 

quit filling the Strategic Petroleum Reserve. I would suggest you 

dip into that. And as far as the prices for farm commodities, I just 

remind everyone this is a country that has never had food shortages. We continue to produce. And as an elderly farmer once told 

me, ‘‘The best cure for high commodity prices is high commodity 

prices. It will attract more production.’’ 

We have been in a decade of low prices, and we are just now 

coming out, and I think you will see the productive capacity of 

farmers respond to higher commodity prices. 

Senator CARPER. Thank you for those words of wisdom. Thank 

you. Mr. Chairman, thanks so much. 

Chairman LIEBERMAN. Thank you, Senator Carper. 

Mr. Buis, I was just thinking, if I am not mistaken, at the end 

of the Clinton Administration I believe President Clinton did go 

into the Strategic Petroleum Reserve and move some of what was 

there out into the market, and it did have an immediate short-term 

effect on prices. So it is something for us to think about, although, 

obviously, that is not the answer to the problem. But it is a form, 

at least, of temporary relief. 

Mr. Harris, I think in having you here as the Chief Economist 

of the CFTC, we have also, based on the direction of the testimony 

and the interest of the Members of the Committee, made you into 

a spokesperson for the Commission overall, probably an unfair 

thing to do to you, but you happen to be the person here. 

I have talked to Senator Collins, and I think that we would like 

to do another hearing here and have the chairman of the CFTC, 

and perhaps some others from the Administration, who design economic policy to respond to some of the specific recommendations 

that have been made here. 

But pending that, and understanding that, and understanding 

your role, am I hearing you correctly in saying that for you personally, there is no additional statutory authority, that you would like 

to see the U.S. Commodity Futures Trading Commission have to 

deal with the run-up in commodity prices? 

Mr. HARRIS. Yes, that is right, I think we have engaged with that 

process. We are happy, I think, with the closing of the Enron loophole that is in the farm bill right now. We are, as I mentioned in 

my testimony, hearing what is going on in the marketplace in agricultural and energy space, and we do have, I think, forthcoming 

fairly shortly some policy changes, and some of the issues there I 

do not think require statutory changes. I think this issue about 

whether index trading is visible in all commodity products is an 
69 

issue we have been engaged with to try to figure out how can we 

be more transparent there. 

We can get estimates of that type of trading in some markets but 

not all, and I think those types of things I think we could probably 

handle internally without legislative input. 

Chairman LIEBERMAN. Am I correct that you cannot handle internally what Mr. Masters has called the ‘‘swaps loophole’’? Or can 

you? Would that require legislation? 

Mr. HARRIS. I think we can handle that ourselves, yes. 

Chairman LIEBERMAN. You do? And actually closing the swaps 

loophole? 

Mr. HARRIS. Well, typically the CFTC does not set position limits, first of all, so we do not set the speculation limits, but we work 

closely with the markets that we oversee to make sure that the 

markets recognize that they are properly functioning correctly in 

our eyes. So I think we would have some moral persuasion and 

some other ways of actually engaging with the industry to say here 

is what we see going on. 

Now, part of that issue is uncovering something that we see that 

is detrimental in our markets, so that is something that we have 

had a proposal from our agricultural market, for instance, to have 

a moratorium on commodity index trading, to have other types of 

things that we could execute within the Commission. 

Chairman LIEBERMAN. Well, I hope you will take back with you 

the sense of urgency and, frankly, the favorable response that I believe most Members of the Committee have had to what Mr. Masters had said, understanding that is not the whole problem, that 

the other response here is that we understand that the weak dollar, which is in part the fault of government policy, is a part of the 

problem. In fact, perhaps it is a significant part of the motivation 

for the speculative activity. I hope you will go back to the Commission on that, and I would look forward, when we call the Chairman, to hearing what more the CFTC can do to deal with this 

problem because I think the current status of the response is unacceptable to us. And, believe me, we are speaking in rational Senate 

language. Our constituents are less diplomatic because they are 

hurting, and that is what it is all about. 

I do want to ask you about one kind of authority you have now, 

which is, as was referenced, the authority to address excessive 

speculation. And as I understand it, the Commission’s use of this 

authority has been limited and has applied primarily to trading 

dates or certain types of contracts and certain types of traders. But 

I wonder whether any of the kind of behavior—and this is perhaps 

a stretch, and if it is, we ought to know because we may want to 

change the law to give you more clearly defined authority—whether some of the kinds of activities that Mr. Masters particularly has 

pointed to of index speculation in the markets comes under that 

statutory power that you have now to deal with excessive speculation. Do you have an opinion on that? 

Mr. HARRIS. Yes, I would agree that defining and determining 

what excessive speculation is is difficult. 

Chairman LIEBERMAN. How would you define it? 

Mr. HARRIS. Usually we look for a connection, and the way we 

are looking at that, is any one group of trader or type of trader 
70 

moving prices in response to their trading? So is there a real reason for the trading? And does that trading move prices in any way 

to the detriment to the rest of the market? That is precisely the 

types of analyses we are doing. We are doing it on a daily basis. 

We are aggregating it up to a weekly basis. We are looking at different time horizons, different intervals. 

Chairman LIEBERMAN. Right. 

Mr. HARRIS. Believe me, we are actively engaged in—— 

Chairman LIEBERMAN. Sure. And are you looking for an effect on 

the integrity of the markets or on the price? 

Mr. HARRIS. A little bit of both. We determine market share of 

each individual trader, for instance, to make sure that there is no 

one group or one set of market participants in addition to each individual market participant not having a big market share. And 

then we try to connect changes within each individual trader or 

types of trader groups. We aggregate up to the commercial/noncommercial. We have been looking at moving the swap dealers into 

the non-commercial. We have been looking at different combinations of each subgroup of types of traders that we have in an effort 

to try to connect either their trading behavior with the price movements or their trading behavior with some excessive amount of participation in the market. And that is where we really come to the 

conclusion that since each trade involves a buyer and a seller, 

somebody is speculating and someone is hedging, despite the fact 

that there is this separation between hedgers and speculators, the 

amount of volume in our markets reflects a large degree of hedging 

in our market as well. 

Chairman LIEBERMAN. As a baseline, do you believe that there 

can be such a thing as too much speculation in the commodity markets? 

Mr. HARRIS. Yes, and that is, in fact, why we are updating our 

study on a weekly basis. We are looking at the numbers as they 

come out each week. We get a daily report. We have been running 

the thing. And one of my concerns is exactly that, we want to make 

sure we are at the cusp or we are in touch with the fact when 

prices seem to deviate from what we would expect to be happening 

in the marketplace. 

Chairman LIEBERMAN. OK, thanks. My time is up. Senator Collins. 

Senator COLLINS. Thank you. 

Mr. Harris, my question is along the same lines. ‘‘Excessive speculation’’ seems to be a very vague term. You have talked a lot 

about studying the different movements in the markets, the players, and I guess the frustration that some of us have is it sounds 

very academic when we are dealing with oil prices at $127 a barrel. 

And it sounds very academic when our constituents cannot afford 

to heat their homes or fill their gas tanks. 

What we are trying to get a better understanding of is not only 

the factors that are pushing up the prices, which seemed unrelated 

to some extent to normal supply and demand, as Mr. Masters has 

said, but also whether the Commission has the authority and the 

resources to do this job, to police these markets. So let me end by 

asking you a couple of questions. 
71 

First of all, in my opening statement I referenced what the chairman of the Commission told me about the staff declining by 12 percent over the past 30 years, and yet the volume of trade soaring 

by 8,000 percent. Do you believe that the Commission has adequate 

resources to monitor what is an increasingly complex market with 

new players? 

Mr. HARRIS. I think we are doing the best job with what we 

have. I mean, one of the things we can do is use technology to leverage up and so if we have a market that is reporting 100 trades 

or 100,000 trades, basically our same analysis can run a couple 

nanoseconds slower. But I think it is a well-known fact that we are 

at record low staffing levels, that our budgets have been operating 

on a stilted budget for the last 2 or 3 years, that reauthorization 

is in the farm bill so we have plans already to do a technology upgrade to try to connect better with our marketplace, to try to make 

the transition from the data into the analysis smoother, that we 

have the people there that when we flag illicit behavior or suspect 

behavior in our markets, that we have the enforcement staff to go 

after those people. 

So is there more we can do? Obviously. I think there is always 

more you can do in these markets. 

Senator COLLINS. Well, let me ask you a second question, and 

that is about your authority. How would you define ‘‘excessive speculation’’? There is a definition of fraud. You can probably identify 

price manipulation when you see it. But ‘‘excessive speculation,’’ 

what does that mean? 

Mr. HARRIS. Well, I would say I think we have been looking at 

this problem exactly that way. In the futures market, when two 

buyers show up, you are bidding on the same actual item in the 

futures market, you could each have a contract, and if a third person shows up in the market, we could write a third contract. 

One of the areas that we are looking at is that mechanism and 

whether we can find some aspect of the writing of these contracts 

leveling off while prices continue to go up so that there does not 

seem to be liquidity added into the system, and yet prices still rise. 

So those are the types of analyses we are trying to get our hands 

on. 

Senator COLLINS. Well, Senator Levin showed you what I 

thought was a very compelling chart that shows the increase of 

speculative trades. Does volume determine whether you are finding 

excessive speculation? 

Mr. HARRIS. I would caution against using volume as a proxy. 

One of the things that came out of that that we did not address 

is that one of the things we are finding is that we know, for instance, in the oil and energy space, there was a very well developed, large, over-the-counter trade going on. One of, I think, the 

positive developments of the last 5 years as partially reflected in 

those charts is the fact that more and more of these over-thecounter trades are based on whether it is credit concerns or other 

concerns that they have about counterparties are moving more of 

that trading onto our markets. So part of that increase reflects, I 

believe, trades that would have happened prior to this, over the 

counter with the traders on their trading desks without reporting 

to the authorities. 
72 

We think or we are fairly certain that a large degree of that is 

trades that we are seeing now that 5, 10 years ago we were not 

seeing. So in that regard, that is also consistent with the fact that 

our reported volumes are higher. 

Now, we have talked with people on Wall Street who say that 

you can still contract in oil out to 2023, so if you want to get a 15- 

year oil contract, you cannot get it at the NYMEX but you do that 

over the counter. So there is still a large, over-the-counter market 

that we are not seeing, but I think part of the positive sign of that 

chart was that we are seeing more people in the organized exchanges, where we can see them, where we can monitor them; and 

when we see them acting in a way that is not beneficial to the rest 

of the market participants, we can step in. 

Senator COLLINS. What would be your assessment of the impact 

on the markets if we were to adopt Mr. Masters’ recommendation 

and somehow either amend ERISA or take other actions to limit 

or even prohibit large institutional investors from trading on the 

commodities market? 

Mr. HARRIS. I think it is related to what I just said. One of the 

things we do know is that there is a large over-the-counter market 

for a number of these products, at least in the energy space. 

Senator COLLINS. So you think that it would just go to the overthe-counter markets? 

Mr. HARRIS. That would be part of the shift, I believe, yes. 

Senator COLLINS. Mr. Masters. 

Mr. MASTERS. I think that if you eliminated the practice through 

ERISA or some other regulation, they would not be able to go on 

the other markets. If it is a prohibited practice, they cannot do it, 

period. So whether it is traded on the CFTC exchange markets or 

it is over the counter, no pension trustee is going to do something 

that is blatantly illegal. They are just not going to do that. 

Senator COLLINS. Right. 

Mr. MASTERS. So, clearly, if you change the practice or prohibited 

them, it would make their decision much easier. They just would 

not do the practice. 

Senator COLLINS. Mr. Harris, I am trying to get at a more fundamental issue, and that is, would it harm the commodities markets? 

Mr. HARRIS. One concern we have—well, I guess generally speaking markets are most healthy when you do not have artificial limitations on who can participate. We have seen that when people are 

limited to the commodity space or futures in particular, they will 

transfer their trading to the options market. Or we noticed in the 

Minneapolis Grain Exchange, when their wheat contract went way 

up, a large degree of that trading went to the Chicago Board of 

Trade wheat contract, which really is not the same underlying 

product, but people were looking for an asset that is related. 

So I think in some respects, you would be diminishing the effectiveness of hedging. We do not know how much information would 

not get to the market if that were the case. 

Senator COLLINS. OK. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks very much, Senator Collins. 

I do not want to go on too much longer at all, but, Mr. Masters, 

I appreciated your answer to the question about if we just tell pension funds they cannot do this kind of speculation and index specu-
73 

lation in commodities, that they will not be able to do it anywhere. 

And that would have a significant effect on the problem you are describing, but what about others who we would not cover with that, 

who might either go to the over-the-counter or even overseas markets in commodities? Is there an answer for that? 

Mr. MASTERS. I do not think that you can prohibit every investor 

from ever doing anything. 

Chairman LIEBERMAN. Right. 

Mr. MASTERS. We are in a large, interconnected world. That 

being said, it is extremely unlikely that the investment consultant 

community is going to recommend to university endowments, sovereign wealth funds, other pension funds, especially on this politically charged issue, to engage in index replication strategies when 

you have banned it for one group. I think that it is likely that 

many of those groups would probably get the message that this is 

not the kind of behavior that we like to see from our institutional 

investors. 

Chairman LIEBERMAN. OK. This has been a very productive 

morning, and I thank all of you for the time and expertise you have 

brought. This is a wonderfully diverse panel. We had a good exchange of ideas. I think we learned a lot. 

My own thought, just to provoke us to the next stage and try to 

focus the question, is that we might try to—and I am going to ask 

my staff to work with you, Mr. Masters. We might try to at least 

outline legislation in the two areas that you mentioned—limitations on index speculating by large institutional investors and closing the swaps loophole—and then bring in another panel of witnesses, including the chairman of the CFTC, and perhaps some 

others, and essentially ask them why not do this; or why, if they 

agree that we should. And that may focus the discussion. 

My own conclusion is that index speculators are responsible for 

a significant part of commodity price increases that are really hurting a lot of individuals, a lot of businesses, and we ought to see if 

we can do something about it. Again, it is not illegal behavior. It 

is the old line from that old book. This was an alleged, slightly fictional New York City political boss at the beginning of the 20th 

Century: ‘‘I seen my opportunities, and I took ’em.’’ And the reasons, as Dr. Steil has said, come back to the rest of the work we 

have to do to strengthen the dollar. But sometimes in the public 

interest we have got to limit the opportunities that people have to 

maximize their profits because the rest of us end up paying 

through the nose as a result, including a lot of people who really 

cannot afford to pay through the nose. 

So that will take us to the next step, but I thank you very much. 

We are going to keep the record of this hearing open for 14 days. 

That is to allow any of you who want to add anything to your testimony to do so. You may get some questions. I know Senator Coleman, for one, had another hearing he had to go to, but he will file 

questions for the witnesses because he is very interested in this 

subject. 

Again, I thank my colleague Senator Collins, and I thank all of 

you. 

The hearing is adjourned. 

[Whereupon, at 1:03 p.m., the Committee was adjourned.] 

(75) 

ENDING EXCESSIVE SPECULATION IN COMMODITY MARKETS: LEGISLATIVE OPTIONS 

TUESDAY, JUNE 24, 2008 

U.S. SENATE,

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:30 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Levin, Carper, Pryor, McCaskill, 

Collins, Coleman, and Warner. 

Also Present: Senator Isakson. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 

Chairman LIEBERMAN. Good morning. The hearing will come to 

order. Welcome to this Committee’s third hearing on the subject of 

skyrocketing food and energy prices. 

In the last two hearings, we focused on the role of financial speculators to determine if their increasing participation in the commodity markets is a cause of rising food and fuel prices. Evidence 

presented to this Committee has persuaded me that speculators 

are, in fact, a significant contributing factor to the economic distress now being felt by American consumers every time they stand 

in the grocery store checkout line or pay for a fill-up at the gas 

pump. That distress, obviously, is being also felt in many ways by 

American businesses, small and large. 

That is why, at the end of our last hearing, Senator Collins and 

I asked our staffs to draft legislation that might address this problem. Last week, we made those drafts public, posted them on the 

Committee Website, and solicited public comment. Today, we are 

going to take testimony on these draft proposals which we hope 

and believe can bring relief to American family and business budgets. 

Since we initiated this inquiry nearly 2 months ago, a lot has 

happened on this subject and with this problem. The U.S. Commodity Futures Trading Commission (CFTC) itself has announced 

at least four new initiatives to address speculative activity. And 

last week, the chief executive of the New York Stock Exchange 

(NYSE) said that investments by large institutional investors, particularly pension funds, were completely altering the supply and 

demand for commodities. Our colleagues here in Congress have introduced at least eight bills on this subject, most of them focusing 
76 

on market transparency. But some go further by seeking to bring 

foreign or over-the-counter markets under Federal regulation. 

Concern about speculation in commodity markets and its impact 

on prices is not confined to the United States. At the recent G–8 

meeting, a number of our closest allies and trading partners, particularly France, Italy, and Japan, raised this concern. And, in fact, 

the final G–8 statement from that meeting asks national authorities, ‘‘to examine the functioning of commodity futures markets and 

to take appropriate measures as needed.’’ 

Austria has proposed a European-wide tax on commodity speculators, and a report recently released by the International Monetary Fund (IMF) concluded that, ‘‘Speculation has played a significant role in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures (and 

gold).’’ 

So what we are doing here today is not in isolation and not without very credible support. The three draft discussion documents 

Senator Collins and I made public last week would: One, extend 

transparency to unregulated commodity markets by closing the socalled swaps loophole; two, create a seamless system of speculative 

position limits that would apply to all commodity trading—on the 

exchanges, over the counter, and on foreign exchanges; and, three, 

restrict commodity investments by large institutional investors that 

invest through index funds. And I want to stress that the legislative proposal would restrict commodity investments by large institutional investors only so far as they invest through index funds. 

I want to be clear that when I talk about financial speculators, 

I am talking about those looking to commodity price appreciation 

or depreciation to generate profits. Increasingly left on the sidelines 

are bona fide hedgers—the farmers, the fuel oil dealers, and others 

for whom the commodity markets were originally created as a way 

to reduce their risk by locking in prices on next year’s crops or oil 

production. 

Let me also be clear that I understand that some speculation in 

commodity markets helps them function, but the speculation taking 

place now has gone way beyond that. One of the public comments 

we received through the Committee Website is, I think, particularly insightful and instructive. It came from a commodity broker 

in Iowa, and it reads like this: ‘‘I have seen firsthand the effect 

that these index funds have had on the agricultural markets. My 

customers are farmers, and they are getting tired of not being able 

to make sense of the markets. Although they are happy with the 

price of grains, almost to a man they will tell you that prices are 

too high. With these high prices, the price of their inputs has gone 

up as well, i.e., land, rent, fertilizer, seed, etc. To my customers, 

the fundamentals of supply and demand mean nothing anymore. 

These index funds and exchange-traded funds are not living by the 

same rules that the CFTC set up for speculators. They need to be 

made to come into compliance with the speculative limit the rest 

of the market participants have to abide by.’’ 

That is real common sense from the heartland, and I think that 

voice of that commodity broker from Iowa is one that we should 

keep in mind as we consider what Congress can and should do 

about this legislation and this problem. 
77 

I also want to say—and I think it is important to say—that speculation in the food and fuel futures markets is not illegal. But that 

does not mean that it is not very hurtful. To paraphrase a character in an early 20th Century political novel, speculators are just 

seeing their opportunities and taking them. Motivated by the weakness of the dollar and rising demand for oil and food, speculators 

are moving enormous amounts of money into commodities markets 

for the obvious purpose of making more money. But in so doing, 

they are artificially inflating the price of food and fuel futures and 

causing real financial suffering for millions and millions of people 

and businesses. The steady upward climb of the cost of food and 

energy in recent months is not simply the result of natural market 

forces at work. Speculation has passed the point where it provides 

stability to the commodity markets. It is now excessive and has 

consequences that are very harmful. 

And that is why I believe our government must step in as soon 

as possible to protect our consumers and our economy because 

against the forces that are raising the cost of food and fuel, the average person simply cannot protect himself or herself. 

Senator Collins. 

OPENING STATEMENT OF SENATOR COLLINS 

Senator COLLINS. Thank you, Mr. Chairman, for holding this 

critically important hearing this morning. 

High energy costs are having a devastating impact on our economy and on our people, especially people in large, cold, rural States 

like Maine. Truck drivers, small business owners, fishermen, farmers, and countless others are struggling with the high cost of oil 

and gasoline. In Maine, where 80 percent of our homes are heated 

with oil, many families simply do not know how they are going to 

cope with the record high cost of heating oil this coming winter. 

For many of them, it is truly a crisis. 

The high cost of energy is also taking a toll on businesses 

throughout our Nation. For example, the paper mill in Millinocket, 

Maine, recently announced that it would be closing down because 

it is no longer profitable due to the cost of oil. If this occurs, the 

community will be devastated by the loss of more than 200 good 

jobs. 

What is troubling to me is that the harmful spike in energy cost 

does not appear to be caused solely by supply and demand factors, 

as the Chairman has pointed out. Compelling evidence gathered by 

this Committee suggests that excessive speculation in futures markets is also a significant factor pushing up the price of oil. 

The increased cost of energy certainly reflects fundamentals, including the increased demand from China and India and the depreciation of the dollar. But massive new holdings of oil futures contracts by pension funds, university endowments, and other institutional investors who neither produce nor take delivery of oil also 

appear to be driving up prices. Their intentions may be simply to 

provide good returns and investment diversification, but many experts believe their activities are distorting commodity markets and 

pushing prices upward. 

I am pleased to be working with Chairman Lieberman once 

again to write legislation that will help our Nation, this time by 
78 

preventing excessive speculation in energy and agricultural commodity markets. And I commend the Chairman for his far-sighted 

leadership. 

I do have serious concerns about one major provision in the draft 

legislation, and that is the proposed ban on institutional investors 

using index funds to trade in the commodity futures markets. 

While I believe that the influx of money from pension funds, university endowments, and other institutional investors has had a 

detrimental impact on prices, prohibiting their investment risks 

harming current and future retirees. After all, pension fund managers are investing in commodities as a way to diversify their holdings, hedge against inflation, and improve returns, all in keeping 

with their fiduciary obligations. In my judgment, an outright ban 

would have unintended consequences for retirees relying on these 

pension funds. 

That does not mean, however, that I do not believe that reforms 

are called for. I do. Senator Lieberman has proposed other policy 

options to address the effects of excessive speculation that make a 

great deal of sense to me. These proposals would limit the percentage of total contract holdings that non-commercial investors could 

maintain in any one commodity market and would close the swaps 

loophole that currently allows financial institutions to evade position limits intended to prevent an investor from cornering a market. 

As we identify and evaluate these and other policy options, we 

obviously must take care not to cripple the usefulness of futures 

markets for the producers, handlers, and purchasers of commodities who need to lock in prices, hedge risks, and see clues for price 

trends. 

There are two other issues that are of critical importance and 

concern to me. The first is ‘‘dark markets,’’ and the second is resources for the U.S. Commodity Futures Trading Commission. 

There are still gaps in publicly available data to track the effect of 

speculation on prices—price manipulation that I fear could go undetected in certain markets because they lack regulation or because 

trades are not adequately disclosed to regulators. This is why I 

have called for increased regulation and transparency in futures 

markets to guard against excessive speculation and price manipulation. And it is why I, along with the Chairman—Senator Levin 

was a leader on this—supported closing the Enron loophole for 

electronic exchanges. 

A related concern is ensuring that the CFTC has the resources 

it needs to collect and analyze data, monitor trading, and police 

markets. The Commission’s Chairman recently testified that the 

trading volume of commodities futures contracts and options has 

soared from 27 million back in 1976 to more than 3 billion contracts last year. Yet today there are fewer employees at the Commission than there were in 1976, leaving much more work for far 

fewer staff. With Senator Lieberman’s support, I hope to include 

provisions in our comprehensive bill that will rectify this resource 

shortcoming. 

Beyond lacking sufficient resources, I believe the Commission 

has been less than aggressive in using its existing authorities. To 

be fair, the Commission deserves credit for its recent investigations 
79 

1The prepared statement of Mr. Lukken appears in the Appendix on page 222. 

into market activity, its stronger data-sharing agreement with 

British authorities, and its withdrawal of proposed rules to raise 

speculative position limits on agricultural commodities. But I 

would have felt better if the Commission had taken these actions 

more proactively rather than in response to prodding from lawmakers and public opinion. 

As usual, we must perform a careful balancing act, not simply for 

the abstract goal of market efficiency, but for the concrete goal of 

easing hardship for real people who are struggling with inflated 

food and energy costs. 

I welcome our panel of witnesses, and I thank them for helping 

us evaluate our policy options. Working together, I am confident 

that this Committee can develop effective measures to curb excessive speculation, guard against price manipulation, and protect 

consumers who are suffering from high food and energy prices. 

And, again, Mr. Chairman, thank you for your leadership on this 

vitally important issue. 

Chairman LIEBERMAN. Thanks very much, Senator Collins, for 

that thoughtful statement, even the part in which you disagreed 

with one of my proposals. This is probably good because it will 

prove, contrary to public belief, that you and I do not agree on everything. 

Senator COLLINS. That is true. 

Chairman LIEBERMAN. And we will reason together, as we always do, on that. I thank the Members of the Committee who are 

here. I particularly want to, as I did last time, thank Senator 

Levin, who really was way ahead of the rest of us in focusing on, 

this problem that we are focused on now. I think Senator Coleman 

worked with him at some point along the way as well, and so their 

work is a preface to what we have done. 

I also want to welcome Senator Isakson, not a member of the 

Committee but who asked if he could sit in on the hearing, and we 

are delighted to have him here. 

We will go right to the witnesses now. I thank you for being here. 

I believe that there is a vote tentatively scheduled for 11:15 a.m., 

so we will try to move as quickly as we can and maybe rotate our 

departures to vote so we can keep the hearing going. 

The first witness is Walter Lukken, Acting Chairman of the U.S. 

Commodity Futures Trading Commission. Mr. Lukken was appointed Acting Chairman in June of last year, but has served as 

a CFTC Commissioner since 2002 and currently chairs the Commission’s Energy Markets Advisory Committee. 

Thank you for being here, Mr. Lukken. We welcome your testimony. 

TESTIMONY OF HON. WALTER L. LUKKEN,1 ACTING CHAIRMAN, U.S. COMMODITY FUTURES TRADING COMMISSION 

Mr. LUKKEN. Thank you, Mr. Chairman, other distinguished 

Members. I appreciate being here today to testify on the role of excessive speculation in the futures markets. 

During the last few years, the futures markets have changed 

dramatically in both size and products and complexity, experi-
80 

encing 500-percent growth in both volume and products listed. Today’s exchanges are technology-driven corporations that trade electronically, 24 hours a day, all around the globe. Approximately $5 

trillion of notional transactions flow through these U.S. exchanges 

every day. This description alone would make the oversight of 

these markets a challenge for regulators. But add to it the 

subprime crisis, record energy and commodity prices, the influx of 

financial funds into the futures markets, and historic low staffing 

levels at the CFTC, and it is clear that these are challenging times 

for this agency. 

Recent substantial increases in the price of crude oil have put 

considerable strain on U.S. households. These issues are a matter 

of intense focus at the Commission due to the key role that futures 

markets play in the price discovery of these products. 

The CFTC recognizes that these markets and their participants 

have evolved significantly in the last several years. Concerns have 

been raised about the role of speculators and index traders in these 

markets. As prices have escalated, the CFTC has pursued an active 

agenda to ensure that the commodity futures markets are operating free of distortion. 

These initiatives fall into five broad categories: one, increasing 

information and transparency; two, ensuring proper market controls; three, continuing aggressive enforcement efforts; four, improving oversight coordination; and five, seeking increased funding. 

The proper oversight of markets requires transparency. Market 

regulators must receive the necessary information to surveil the 

markets, study long-term financial trends, and evaluate policy 

changes as circumstances evolve. The backbone of the CFTC’s market surveillance program is its large trader reporting system. All 

large traders must file daily with the CFTC their futures and options positions in the markets. This information enables the 

CFTC’s surveillance economists to oversee all traders of size to ensure that no one is attempting to manipulate these markets. 

As markets have become electronic and global, the CFTC has 

been working to expand its trade data collection to accommodate 

these trends. On May 29, 2008, the CFTC announced an agreement 

with the U.K. Financial Services Authority to greatly expand the 

trader data already received from IntercontinentalExchance Futures Europe on its linked crude oil contract that settles off the 

NYMEX crude oil benchmark, including receiving equivalent daily 

large traders reports on all months traded. This cross-border information sharing is unprecedented among global regulators. 

The CFTC has also taken action to improve the transparency of 

index traders and swap dealers in the energy markets. In late May, 

the CFTC announced that it would use its special call authorities 

to gather more detailed data from swap dealers on the amount of 

index trading in the markets, and to examine whether index traders are being properly classified for regulatory and reporting purposes. These information requests have been sent, and the CFTC 

expects in the coming weeks to begin receiving more detailed information on index traders in the markets that are being conducted 

through swap dealers. 

After analyzing this data, the CFTC will provide a report to Congress by September 15 regarding the scope of index trading coming 
81 

into the markets and recommendations for improved practices and 

controls, should they be required. 

Beginning last fall and finalized last month, the Commission 

worked with Congress to enact legislation as part of the Food, Conservation, and Energy Act of 2008 (farm bill) requiring exempt 

commercial markets that trade linked energy contracts to provide 

the CFTC with large trader reports and impose position accountability and position limits on these products. Congress and this 

agency believed that these authorities were necessary to protect 

the regulated energy marketplace. 

As noted earlier, linkages between contracts are not purely a domestic occurrence but happen across borders. Most energy and agricultural commodities are global commodities operating in a global 

marketplace, and the U.S. futures markets have been facing the 

challenges of cross-border trading and regulation for many years. 

For more than a decade, the CFTC has utilized its mutual recognition process for foreign exchanges that allows U.S. institutions 

access to those markets by striking a balance between protecting 

the U.S. regulated marketplace and the acknowledgment that increased globalization of commodity markets requires international 

cooperation and coordination between governments. 

With this balance in mind, last week the CFTC announced modifications to its Foreign Board of Trade process. After consultation 

with the British Financial Services Authority, the CFTC revised 

the access letter of IntercontinentalExchange (ICE) Futures Europe 

to require the implementation of position limits and accountability 

levels on its linked crude oil contracts. The CFTC will also require 

other foreign exchanges that seek such direct access to provide the 

CFTC with large trader reports and to impose position and speculative limits on those products. This combination of enhanced information data and additional market controls will help the CFTC in 

its surveillance of its regulated domestic exchanges while preserving the benefits of its mutual recognition program. 

During these turbulent economic times, the environment is ripe 

for those who want to illegally manipulate the markets. In late 

May, the Commission took the extraordinary step of disclosing 

that, since December 2007, its Division of Enforcement has 

launched a nationwide crude oil investigation into practices surrounding the purchase, storage, trading, and transportation of 

crude oil products and their related derivatives contracts. Strong 

enforcement is imperative during this time. 

Given the CFTC’s size and the enormity of the global marketplace, the CFTC must also engage others in government as we seek 

to meet our important mission. Two weeks ago, the CFTC announced the formation of an interagency task force to evaluate developments in the commodity markets, which includes staff from 

the CFTC, the Federal Reserve, the Department of the Treasury, 

the Securities and Exchange Commission (SEC), Department of 

Energy, and the Department of Agriculture. I have also invited the 

Federal Trade Commission (FTC) and the Federal Energy Regulatory Commission (FERC) to participate as well, given their expertise in these related energy matters. The task force is intended to 

bring the best and brightest minds in government together to study 

these issues so we understand how the markets are functioning. 
82 

If it sounds busy, it is—especially given that the agency’s staffing 

levels are near record-low numbers. Since the CFTC opened its 

doors 33 years ago, the volume on futures exchanges, as Senator 

Collins mentioned, has grown 8,000 percent while our staffing levels have decreased 12 percent. 

As the agency embarks on new authorities and initiatives in 

order to respond to changing market conditions, it is imperative 

that these be met with adequate resources. The CFTC is in the 

midst of implementing the new farm bill authorities that were led 

by Senator Levin and others on this Committee, which require 

many programmatic changes in our legislation and just plain old 

hard work from a staff that is already under considerable strain. 

Additionally, the agency’s staff is racing to implement the measures that I have outlined earlier in my testimony. Recall as well 

that our employees are full-time regulators, charged with overseeing these markets each and every day. Without proper funding, 

the agency will not be able to sustain this pace for much longer. 

In summary, the Commission shares this Committee’s concern 

for the current market conditions in the energy markets and for 

the high prices of crude oil and gas on consumers, workers, and 

businesses. These are difficult economic times, and the Commission 

recognizes the need to respond accordingly to ensure that futures 

markets are working properly for all Americans. 

Thank you very much, and I welcome any questions you may 

have. 

Chairman LIEBERMAN. Chairman Lukken, thanks for your testimony. I must tell you that I am disappointed that nowhere in your 

opening statement have you responded to the request that Senator 

Collins and I made in our letter of invitation to the witnesses, 

which is to offer comment on the three draft proposals. I am going 

to ask you about that in the question period. 

I also must say that I hear that you have acted against manipulation, but I do not hear any recognition from you that speculation 

is a problem. And I understand you are busy, but most of the business that you have described sounds to me like study instead of action that will bring relief because this is a crisis in the real lives 

of people in this country every day. Senator Collins and I happen 

to both be from New England. We are thinking a lot about the cost 

of home heating oil this winter, and I just think the Administration 

and Congress have to get together and decide where the problem 

is and act quickly because the problem is urgent. And I believe that 

we have the power to offer relief, and shame on us if we do not. 

So I will come back to that in the question period. 

The next witness is James E. Newsome, President, CEO, and 

member of the board of NYMEX Holdings, parent of the New York 

Mercantile Exchange, which is the main American exchange for 

trading in oil futures. He has been at NYMEX since August 2004. 

Prior to that, Mr. Newsome served as Chairman of the CFTC, beginning in December 2001, and before that was a CFTC Commissioner. In addition, Mr. Newsome serves on the board of the Dubai 

Mercantile Exchange, the Canadian Resource Exchange, the National Futures Association, and the Institute for Financial Markets. 

Thanks for being here, Mr. Newsome. We welcome your testimony now. 
83 

1The prepared statement of Mr. Newsome appears in the Appendix on page 232. 

TESTIMONY OF HON. JAMES E. NEWSOME,1 PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, NYMEX HOLDINGS, INC. 

Mr. NEWSOME. Thank you very much, Mr. Chairman. 

NYMEX is fully regulated as a derivatives clearing organization 

and a designated contract market, which is the highest and most 

comprehensive level of regulatory oversight for a trading facility. 

My comments today in this oral testimony are only as it relates to 

NYMEX markets and not to foreign boards of trade or over-thecounter markets. 

The ever increasing cost of energy touches all aspects of our daily 

lives, and today it is quite possibly the most important issue facing 

both global and domestic economies. 

The Commodity Futures Modernization Act of 2000 (CFMA) ushered in a period of phenomenal growth in derivatives markets. The 

CFMA has proven to be the gold standard of U.S. financial policy. 

For the most part, the value and success of the CFMA holds true 

today. However, neither the Congress nor the conference possessed 

a crystal ball, and it was impossible at that time to determine how 

some markets would develop. In at least two instances, markets 

have developed differently than anyone could have anticipated at 

the time. 

First, an over-the-counter natural gas contract trading on an unregulated exempt commercial market could mirror an exchangetraded natural gas contract, and the two contracts could become 

very closely linked. Ultimately, the over-the-counter contract began 

to serve a price discovery function. Market participants could and 

did easily move positions from the regulated exchange to the exempt commercial market to avoid regulatory requirements such as 

position limits. This scenario was investigated by the Senate Permanent Subcommittee on Investigations chaired by Senator Levin 

and was addressed effectively in an amendment to the recently 

adopted farm bill. 

Second, foreign boards of trade began offering futures contracts 

with U.S. delivery points to U.S. customers pursuant to CFTC noaction letters. Historically, foreign exchanges were permitted to 

offer direct access to their markets to U.S. customers based on a 

determination by CFTC staff that the foreign regulatory regime 

governing foreign boards of trade was comparable to that of the 

CFTC. 

This approach worked very effectively until a foreign board of 

trade listed the look-alike of the NYMEX West Texas Intermediate 

(WTI) Crude Oil Futures contract without the level of transparency 

and market surveillance controls such as positions limits that are 

require on U.S.-regulated markets. It was never anticipated that 

the no-action process would be used in this manner. 

NYMEX has suggested for 2 years that foreign boards of trade 

offering linked products should be required by the CFTC to provide 

the same level and quality of data and at the same frequency that 

U.S. exchanges provide to the CFTC. 

In addition, we believe that no-action letters for foreign boards 

of trade offering contracts with U.S. delivery points should be conditioned to impose position limits and/or accountability levels. And 
84 

we appreciate the fact that the CFTC announced last week to do 

just that. 

Much has been said recently regarding the role of speculators in 

energy markets. Speculative activity on U.S.-regulated futures exchanges is managed effectively by position limits. For the NYMEX 

WTI crude contract, the position limit during the last 3 days of the 

expiring delivery month is 3,000 contracts. Breaching that position 

limit can result in disciplinary action being taken by the exchange. 

Many believe that speculators, particularly index funds and 

other large institutional investors in our markets, are responsible 

for the high price of crude oil. Data from NYMEX confirms noncommercials are relatively balanced between long and short open 

positions for NYMEX crude oil futures. Thus, non-commercials are 

simply not providing disproportionate pressure on either the buy 

side or the sell side of the crude oil market. In fact, since October 

2007, swaps dealers in the NYMEX crude oil markets had been 

holding overall net short positions. Thus, any price impact attributable to swaps dealers would be to lower prices, not to raise them. 

Questions are being raised as to whether hedge exemptions for 

swap dealers are being used by index funds and other institutional 

investors as a means of circumventing speculative position limits. 

The full extent of participation by swaps dealers as well as what, 

if any, influence they are having on current market prices and volatility cannot be determined without accurate data. NYMEX believes that more precise data are needed to better assess the 

amount and impact of this type of trading, and NYMEX fully supports the further delineation of this data in the CFTC large trader 

report. 

In addition, we continue to believe that market fundamentals are 

the most important factor in the current market. Uncertainty in 

this jittery, very tight global crude market regarding geopolitical 

uncertainty, refinery and deepwater well sabotage and shutdowns, 

decreasing production by non-OPEC producers and increasing global demand, as well as devaluation of the U.S. dollar, are clearly 

having an impact on the assessment of market fundamentals. 

In futures markets, margins function as financial performance 

bonds and are used to manage financial risk and to ensure financial integrity, not to control volume flow. Adjusting margin levels 

significantly upward will not change the underlying market fundamentals, but instead will force trading volume away from the 

regulated and transparent U.S. exchanges into less regulated or 

even unregulated opaque markets. 

A number of legislative initiatives have been proposed that are 

intended to respond to perceived problems of excessive speculation 

in the markets. NYMEX reiterates that it is important to collect 

the data in order to accurately assess the activity and influence of 

speculative activity before adopting a legislative solution. Futures 

markets, like NYMEX, are messengers carrying price information 

from the energy industry to the public. It would be contrary to the 

public interest to adopt legislation that impairs the important price 

discovery function of these markets. 

Another legislative proposal would prohibit certain institutional 

investors such as pension funds from investing in agricultural and 

energy commodities on U.S. futures exchanges, foreign exchanges, 
85 

1The prepared statement of Mr. Masters appears in the Appendix on page 246. 

or over-the-counter markets. NYMEX believes that prohibiting investment opportunities of institutional market participants effectively substitutes the judgment of Congress for the judgment of 

trained financial investment professionals. Moreover, we believe 

that the case has not yet been made to support a finding that institutional investors are contributing to the high price of crude oil. It 

would be premature to adopt a legislative solution for an unproven 

and unsubstantiated problem. 

Mr. Chairman, while we may not be in agreement on all the 

issues before this Committee, we are in complete agreement that 

there is a need for full transparency in a competitive marketplace, 

and we are also firm believers that position limits should be used 

across the marketplace in order to control speculative activity. 

Chairman LIEBERMAN. Thanks, Mr. Newsome. 

Incidentally, Senator Collins and I invited witnesses who we assumed would be against some of the proposals because we want to 

air them out as we have a sense of urgency about actually introducing these as legislation sometime after the recess for the 4th of 

July next week. So this is really your opportunity, positively or 

negatively, to influence what we want to do. 

Our next witness is Michael Masters, here for his second command performance before this Committee. Mr. Masters is an accomplished hedge fund founder and manager who has researched 

the effect of speculators, particularly those operating in over-thecounter markets outside the scope of the CFTC’s jurisdiction. And 

I will just say that I did not know Mr. Masters before we asked 

him to testify. I have a friend who sent me an e-mail and said, ‘‘I 

met this guy Masters, Michael Masters, and he is smart. He understands financial markets, and he really feels strongly that speculation in the commodity markets is a big part of the reason for the 

increase in the price of fuel and food. You ought to meet him.’’ That 

is how it started, and I appreciate what you have brought forth, 

and we look forward to your testimony now. 

Mr. Masters, go ahead. 

TESTIMONY OF MICHAEL W. MASTERS,1 MANAGING MEMBER 

AND PORTFOLIO MANAGER, MASTERS CAPITAL MANAGEMENT, LLC 

Mr. MASTERS. Thank you, Senator. Thank you, Chairman 

Lieberman, Ranking Member Collins, and Members of this Committee, distinguished guests, for the opportunity to testify today. I 

especially want to thank the two of you for your exemplary bipartisan leadership on this issue. I very much appreciate your balanced approach of taking the time to thoroughly understand these 

issues and then acting in a decisive manner to solve them. 

Commodities futures exist solely for the benefit of bona fide 

physical hedgers, not for speculators. The futures markets provide 

physical hedgers with two vital functions: Price discovery and risk 

hedging. If we lose one or both of these vital functions, then physical hedgers will abandon the futures markets, and they will become little more than high-stakes casinos. In my written testimony, 

I discuss at length the mechanics of the price discovery function 
86 

and the threat that excessive speculation poses to the commodity 

futures markets. 

Turning now to solutions, the time for studies is well past. Studies should be attempted prior to the adoption of new financial techniques, like the FDA does with new medicines, not after approval 

has been granted. ‘‘First, do no harm,’’ part of the Hippocratic 

Oath, is a concept that market regulators should take to heart. 

I have read the discussion drafts introduced by Senators 

Lieberman and Collins on June 18, and I believe they represent a 

substantial step in the right direction. I note that your three proposed pieces of legislation correspond generally to the first three 

steps that I am outlining here today. To the extent that they differ, 

please accept these differences as my suggestions on how to improve on these proposals. 

As a first step, I recommend that Congress convene a panel composed exclusively of physical commodity producers and consumers 

for every commodity. This panel will set reasonable speculative position limits in the spot month as well as in all other individual 

months, and as an aggregate across all months. For commodities 

such as crude oil where real limits, except for the last 3 days in 

an expiring contract have been replaced by accountability limits, effective real limits must be re-established. 

The commodities futures markets exist solely for the benefit of 

bona fide physical hedgers, so they are best qualified to set the limits. These physical market participants understand the benefits of 

liquidity and will do nothing to jeopardize their ability to hedge. 

The key here is that reasonable speculative limits allow the commodities futures markets to function properly. 

As part of this first step, speculative position limits must apply 

to every market participant whether they access the futures markets directly or trade in the over-the-counter markets through 

swaps and other derivatives. This means effectively closing the 

swaps loophole and ensuring that position limits look through the 

swap transaction to the ultimate counterparty. It is essential that 

swaps dealers report all their positions to the CFTC so that positions can be aggregated at the control entity level for purposes of 

applying position limits. 

It potentially makes sense to require that all over-the-counter 

transactions clear through the appropriate futures exchange. This 

makes monitoring and enforcement of limits much easier and 

would have the added benefit of strengthening the current system 

and making it more transparent. 

As a second step, Congress should instruct the same panel to define numerically exactly what constitutes excessive speculation 

based on a percentage of open interest. As an example, physical 

crude oil producers and consumers may decide that the crude oil 

futures markets should never be more than 35 percent speculative 

on a percentage of open interest basis. 

Next, the CFTC should be instructed to establish circuit breakers 

that adjust individual speculative position limits downward in 

order to prevent any commodity futures markets from reaching the 

overall limit established by the panel. These adjustments to individual limits should happen in a gradual fashion to minimize the 

impact on markets. 
87 

The third step is to eliminate the practice of investing through 

passive commodity index replication. Because of the nature of passive indexing, index speculators have no sensitivity to supply and 

demand in the individual commodities. The practice should be prohibited because of the damage that it does to the price discovery 

function. Congress should use any and all available means to do so. 

One potential avenue may be ERISA. Another avenue may be 

found in the Commodities Exchange Act which states, ‘‘two or more 

persons acting pursuant to an expressed or implied agreement or 

understanding’’ should be subject to the speculative position limits 

of a single person. Since index speculators are all acting in express 

agreement by following the exact same index trading methodology, 

they should all be collectively subject to the speculative position 

limits of a single speculator. The CFTC could enforce this law tomorrow, and if they did, the amount of money allocated to index 

replication strategies would have to drop from roughly $260 billion 

to approximately $4 billion. 

Finally, Congress should actively investigate the practice of investors buying physical commodity inventories. It has come to my 

attention that some Wall Street banks are offering commodity 

swaps based on actual physical commodities. This is a distressing 

development because it means that investors are directly competing with American corporations and American consumers for 

limited natural resources. 

Before I conclude, let me say that many of the people who are 

profiting from the practices outlined in my testimony will try to 

scare you into believing that futures trading in U.S. commodities 

will simply move offshore. This is an empty threat. The United 

States is the largest consumer of energy in the world and the largest producer of food in the world. U.S. corporations and their nonU.S. trading partners are going to prefer U.S.-regulated contracts 

with physical delivery points inside the United States. Today, without the critical mass of volume that the United States provides, it 

is very unlikely that any of the existing U.S. contracts would be 

able to successfully migrate overseas. 

The implementation of the solutions outlined in this testimony 

will greatly increase the confidence of market participants around 

the world that our futures contracts’ are an accurate reflection of 

true supply and demand fundamentals. This will lead to greater 

participation and, ultimately, further volume. 

This concludes my testimony. 

Chairman LIEBERMAN. Thanks again, Mr. Masters. Very helpful. 

Next is William F. Quinn, Chairman of American Beacon Advisors, which manages approximately $60 billion in pension assets 

and short-term cash assets on behalf of American Airlines and others. Previously, he served as President of Beacon Advisors since its 

founding in 1986. 

Mr. Quinn, thanks for being here and bringing your unique perspective to this important question. 
88 

1The prepared statement of Mr. Quinn appears in the Appendix on page 264. 

TESTIMONY OF WILLIAM F. QUINN,1 CHAIRMAN, COMMITTEE 

ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS 

Mr. QUINN. Thank you, Mr. Chairman, Ranking Member Collins, 

and other Members of the Committee. I am here today as the 

chairman of the Committee on Investment of Employee Benefits 

Assets (CIEBA), and I thank you for providing us an opportunity 

to testify. We have submitted written testimony for the record, but 

in the interest of time, I will summarize the key points of that testimony. 

Chairman LIEBERMAN. Mr. Quinn, excuse me. Why don’t you just 

indicate—I failed to do it—what CIEBA is. 

Mr. QUINN. Yes. The Committee on Investment of Employee Benefit Assets is the voice of the Association for Financial Professionals on employee benefit plan asset management and investment issues for ERISA-governed plans. As the chief investment officers of most of the country’s largest corporate pension plans, 

CIEBA members manage more than $1.5 trillion of defined benefit 

and defined contribution plan assets on behalf of 17 million plan 

participants and beneficiaries. According to Federal Reserve data, 

the $966 million managed by CIEBA members in defined benefit 

plans represents 50 percent of all private defined benefit plan assets. 

The pension system has served millions of Americans for over 

half a century. We owe it to working Americans and their families 

to ensure that any contemplated policy changes, no matter how 

well intentioned, do not undermine retirement security. 

The record prices for food and energy in the United States and 

abroad are of great concern to all of us. We are sensitive to the 

need to investigate this critical problem. We need to understand 

the supply-demand imbalances, concerns over supply, the impact of 

the weaker dollar, and the impact of speculative investors. Nonetheless, we are deeply concerned about the prospect of any legislation that would bar pension plans from investing in certain types 

of assets. 

Congress has long recognized that direct government regulation 

of pension plan investments is ill-conceived. ERISA, the primary 

law that regulates the investment of pension assets, takes a very 

different track. Rather than requiring or prohibiting specific investments, ERISA imposes rigorous fiduciary responsibilities on the 

persons that manage pension plan assets. These rules require a 

plan’s fiduciary to act prudently and to diversify plan investments 

so as to minimize the risk of large losses. In addition, ERISA requires that a fiduciary act solely in the interest of plan participants 

and beneficiaries and for the exclusive purpose of providing benefits to plan participants. 

Today, private pension plans invest in a wide range of different 

asset classes, equities, fixed income, emerging markets, real estate, 

private equity, and natural resources. Plan fiduciaries use a variety 

of investment techniques and tools, including derivative instruments, to mitigate risk and enhance returns. 

Other countries have taken different approaches to the investment of pension plan assets. Historically, some U.S. public funds 
89 

and some European defined benefit plans had rigid investment 

guidelines, prohibiting certain types of investments while requiring 

others. Many of these rigid investment rules were eventually discarded because of the negative impact such guidelines had on investment returns and thus on employees’ retirement security. Put 

simply, mechanical approaches do not work as well as the American approach of investment flexibility paired with strict fiduciary 

responsibilities. 

It is critical that pension plans have the ability to invest in accordance with modern portfolio theory and pursue the best investment strategies available. The investment marketplace is constantly changing, and pension plans need to adapt and evolve accordingly without having to comply with a list of permitted and impermissible investments. 

Our concern is both with specific restrictions on pension plan investments in commodities but also with the precedent that action 

will set for allowing the Government to intrude on pension investments. Today, commodities investments are not a significant part 

of most private sector pension plans. Our preliminary results of 

three 2007 surveys of CIEBA members shows that less than 1 percent of assets are invested directly in commodities and a similar 

amount in natural resources. Based on numbers that were given in 

testimony of commodity indexes of $260 billion, our members’ investments represent about 1 percent of that total. So it is a very 

small amount. 

We firmly believe that commodities may be part of a prudent, 

well-diversified investment portfolio by providing a hedge against 

inflation and minimizing volatility, but our primary concern is with 

the principle that the government should not micromanage pension 

plan investments. 

Pension plans are long-term investors, not speculators. The most 

successful plans do not chase returns; rather, they have disciplined 

strategies for minimizing risk and enhancing returns so that the 

plan sponsor can fulfill the promises they make to their employees. 

In fact, most plans will rebalance their investments periodically to 

assure they stay within their guidelines and not inadvertently get 

overexposed to a single asset class. Thus, we sell when prices are 

high and buy when they are low. 

Political temptation to intervene in pension fund investments is 

not unprecedented. Congress in the past has considered legislation 

that would bar plans from investing in particular investments or, 

conversely, would mandate particular investments. There are numerous instances where there has been a first instinct to require 

pension plans to make investment decisions with a view of promoting a particularly social or political goal. 

Congress, however, has consistently rejected legislation that 

would subjugate the retirement security of millions of Americans 

and their families to other social or political concerns, no matter 

how worthy. In fact, when asked about the economically targeted 

investments, the Department of Labor interpretation said that a fiduciary must not subordinate the interests of participants and 

beneficiaries to unrelated objectives. 

Moreover, the case for limiting pension investments in commodities has simply not been made. As others, including the U.S. Com-
90 

1The prepared statement of Mr. Angel appears in the Appendix on page 268. 

modity Futures Trading Commission, have testified, it is far from 

clear that institutional investors in the commodity markets are 

driving the surge in prices. Before acting, it is imperative that Congress step carefully and allow the CFTC to analyze the commodities markets and gather data. 

Regulating pension fund investments would make it difficult to 

adequately diversify investments to hedge against market volatility 

and inflation and, consequently, would put at risk the retirement 

funds of the very workers the proposal is intended to help. In effect, such a proposal would be a case of robbing Peter to pay Paul. 

Again, thank you for this opportunity to testify, and please let 

us know if there is any additional information you would need. 

Chairman LIEBERMAN. Thanks, Mr. Quinn. 

Our next witness is James J. Angel, Associate Professor of Finance at the McDonough School of Business at Georgetown University. Dr. Angel’s area of research focuses on the structure of financial markets, including the micro structure of trading, so he is well 

prepared to assist us in our deliberations today. 

Thanks for being here. 

TESTIMONY OF JAMES J. ANGEL, PH.D., CFA,1 ASSOCIATE PROFESSOR OF FINANCE, MCDONOUGH SCHOOL OF BUSINESS, 

GEORGETOWN UNIVERSITY 

Mr. ANGEL. Good morning, Mr. Chairman. It is a great honor to 

be here. We are in the midst of an economic crisis brought on by 

high energy and food prices. The potential for economic and social 

disruption is major, and it is very important that we deal with the 

problem. And I am pleased that this Committee is looking at several of these proposals. 

We can tell a couple of stories about the currently high energy 

prices now. One story is that we are in the midst of a speculative 

bubble, that the same forces that brought us the dot-com and housing bubbles have turned on to commodities, and now we see a food, 

energy, and metal price bubble. 

On the other hand, maybe the markets are right. Maybe we have 

reached a point of peak oil and maybe the markets are telling us 

that the value of another barrel of oil to our society really is $135 

per barrel. Maybe. Maybe not. The point is markets have an incentive sooner or later to get to the right number. But if we are in the 

midst of a bubble, we have to ask ourselves, is there something in 

the design of our financial markets or in our Government policies 

that is making the bubble worse? And what, if anything, should we 

do about it? 

I have been asked to look at the three proposals that have been 

put forth. 

The first two proposals basically extend the authority of the U.S. 

Commodity Futures Trading Commission into the over-the-counter 

market. Now, there exist a lot of close substitutes for the regulated 

contracts that trade on our regulated markets, and I think it 

makes good common sense to extend CFTC authority into this area 

because these ‘‘substitutes’’ for the exchange-traded contracts do 

spill over into the regulated market. 
91 

However, we have to be careful in how we do this because the 

devil is in the details. Fortunately, I have a lot of respect for the 

CFTC and their capacities, and if we give them the resources they 

need, I think they will be able to exercise this new authority in a 

judicious manner. 

The third proposal is to ban institutional investment. Now, I 

would like to point out that there are some good, legitimate economic reasons why institutions may wish to invest in commodities. 

Quite simply put, there is a historical tendency that when stocks 

go up, commodities go down, and when commodities go up, stocks 

go down. So by putting some commodities into your portfolio, you 

can smooth out returns. This is very good for the pension plans and 

other investors who are trying to reduce the volatility for the workers who depend on their pensions. And, indeed, if you use a standard asset allocation model with some plausible assumptions, you 

can come up with numbers of maybe 3 to 5 percent easily as a reasonable investment in commodities. 

Now, however, we need to be careful with the regulation because 

these are global markets, and the threat of foreign substitutes is 

real. I have visited over 50 stock and derivative exchanges around 

the world, and the foreign markets have, as you know, invested 

heavily in technology. They are looking for new products, and they 

would just love the opportunity to snare business away from us. So 

if we do not impose new regulations in a judicious manner, if we 

do something crude and clumsy, all we will do is reduce the effectiveness of our markets and push the bad activity offshore into 

places that are less transparent and less easy to regulate. So we 

need to be very careful in how we do this. 

However, let’s not get our hopes up. These proposals alone will 

not fix the problem. Energy markets have always gone from supply 

to glut with highly volatile prices. This has happened for over a 

century in the energy markets. And these proposals will not stop 

a global frenzy in commodity prices. What will bring prices down 

is a credible action by the United States that signals to the rest 

of the world that we are serious about transitioning away from imported petroleum. If we can send a message to the rest of the world 

that we are going to move away from insecure polluting fuels and 

become energy independent, then the producers of oil will have a 

going-out-of-business sale and the prices will drop. However, we 

have to adopt credible energy policies that demonstrate to the rest 

of the world we are serious about moving away from petroleum. 

Those are my basic comments. I have more technical comments 

about the proposals in my prepared statement, and with that, once 

again I would like to thank you for asking me to testify today. 

Chairman LIEBERMAN. Thanks very much, Dr. Angel. I will state 

for the record that the prepared statements of all the witnesses will 

be printed in the record as if they were read in full. And thanks 

to you for using a minute and 37 seconds less than you were allotted. 

Our final witness is Michael Greenberger, Professor of Law at 

the University of Maryland, who was Principal Deputy Associate 

Attorney General at the Justice Department during the Clinton Administration. Before that, he was Director of the Division of Trad-
92 

1The prepared statement of Mr. Greenberger appears in the Appendix on page 278. 

ing and Markets at the CFTC, where he was responsible for supervising exchange-traded futures and derivatives. 

Thanks for being here, Mr. Greenberger. 

STATEMENT OF MICHAEL GREENBERGER,1 PROFESSOR, 

SCHOOL OF LAW, UNIVERSITY OF MARYLAND 

Mr. GREENBERGER. Thank you very much, Chairman Lieberman. 

This is a market that I study a lot, and I think there have been 

three seminal events that have taught me an awful lot about it. 

Two of those events were the reports issued from the Senate Permanent Investigations Subcommittee, one in June 2006 when Senator Coleman was Chairman and Senator Levin was Ranking 

Member, and then one in June 2007 when the positions were reversed. I said at the time when I testified on the June 2007 report 

that if you want to understand these markets, you must read that 

report. 

The third was the hearing Chairman Lieberman held on May 20, 

2008, which I think has become a turning point in convincing people that speculation in these markets is a problem and that we 

need to address it. I will tell you I thought I knew a lot about these 

markets, but Mr. Masters’ testimony on May 20 educated me and, 

I think, a lot of people with his analysis of the treatment of commodity index funds. 

I would say from the outset—and I mention this in my testimony—I am perfectly prepared to discuss this, and I am not going 

to assert it as a conclusion, but my view is that agricultural index 

funds are barred by the Commodity Futures Modernization Act. 

That statute clearly said we are going to deregulate everything, but 

not agricultural futures. I do not see how you can have agricultural 

index funds. There may be an argument that they are swaps, but 

my reading of that statute—and I am perfectly prepared to have 

a discussion about it—is swaps can not be agricultural instruments. You can have energy swaps because energy was deregulated 

by the Enron loophole. And I believe that there are many State Attorneys General and people who can bring private right of actions 

who are looking at that very question as to whether these agricultural index funds are proper. 

Second, there are many legislative proposals, and I want to congratulate you and the Ranking Member for your three options. I 

want to address the issue about fiduciaries. Before the passage of 

the Commodity Futures Modernization Act, all energy futures had 

to be traded on a regulated exchange unless expressly exempt by 

the CFTC. That meant when an endowment or a pension fund, or 

anybody else for that matter, traded energy futures, whatever their 

fiduciary obligations, they had to meet the speculation limits of 

that exchange. Speculation limits were not a substitute for fiduciary responsibility. Fiduciaries had to satisfy speculation limits. 

Why is that? As Mr. Masters said, these exchanges are not betting 

casinos. They were designed for commercial hedgers. The commercial hedgers cannot use these markets anymore. But they were intended for commercial use. Your heating oil dealers cannot use 
93 

these exchanges. I am sure they have told you that. They cannot 

hedge. Exxon cannot hedge anymore on these exchanges. 

Now, the reason that endowments or anybody else has speculative limits was to avoid unhinging these commercial exchanges 

from supply-demand principles. In fact, there has been little discussion about the fact that the Commodity Exchange Act provides 

CFTC with emergency powers to intervene when the markets do 

not reflect supply-demand principles to set speculation limits and 

take other corrective measures. 

One of the problems we have is because we have freed up so 

much of this market from the CFTC’s jurisdiction, CFTC cannot 

protect the entirety of the market meaningfully because they only 

control NYMEX. My view is that I think there are a lot of important tools that can be used to reregulate excessive speculation. I 

think speculation limits are probably, if you had to pick one, the 

most important tool. And I think the beauty of your option, No. 1 

is that you do not look to see whether the trading is done on a regulated exchange or on an over-the-counter market or an unregulated index fund. As I understand that legislation, someone who is 

not a true commercial hedger has an aggregate speculation limit 

for both regulated and unregulated markets. Speculators can use 

it any way they want. They can use it all in an index fund. They 

can use it all in over-the-counter markets. Or they can use it all 

in NYMEX in the case of energy or the Chicago Board of Trade in 

the case of food. But just like we have a Federal taxpayer identification number, people who want to speculate in these markets, 

which are supposed to be principally for commercial use, will have 

limits across the board. 

So your option one does not require people to worry about what 

is over the counter, what is regulated, what is in London. As I understand it, if you are a U.S. citizen or trading in the United 

States, you would have an aggregate speculation limit for trading 

in any and all markets. 

Option two has each market impose speculation limits on each 

contract, as I understand it, setting the amount on each contract 

that would be open to speculation. And I think that would be a 

very therapeutic approach, but this is the question you have to ask 

yourself: Is Goldman Sachs going to create a speculation limit on 

energy index funds? Those funds have many speculators. So I am 

worried that when you say a contract market, are the index funds 

a contract market? Will Goldman Sachs or the CFTC be assigning 

to Goldman Sachs for their agricultural index funds a speculation 

limit? If you do, I mean, you are essentially undercutting the very 

purpose of the index fund markets. Revert back to option one. If 

everybody wants to use their speculation limits to go with an index 

fund, great. You then preserve the concept of index funds. 

So as I see option one and option two, option one gives the trader 

an aggregated speculation limit across all markets; option two requires the market to say how much of the market will be speculative. Option three is the absolute flat bar on pension funds in terms 

of what they can do in the futures markets. Also, if you have over 

$1 billion in net worth, you cannot invest in an index fund. I am 

slightly troubled by that. I think that is going to be a very arbitrary thing to impose. 
94 

In that vein, I am quite sympathetic to what the endowments are 

saying. You might have $1 billion and need a certain amount to 

hedge, and then you have got a market closed off to you. But I 

think these are all very interesting proposals. They cause me to 

think very hard. I would look to option one as the way to go. I 

would also encourage you possibly to require the CFTC, while option one is being taken care of—because everybody agrees we are 

in an emergency—to use their emergency powers wherever they 

can on regulated exchange and over-the-counter markets pertaining to energy and food. The principal over-the-counter market 

here is the ICE, which is all over the United States. The CFTC has 

jurisdiction over it. The CFTC could go in with its emergency powers and set speculative limits temporarily to deflate the speculation, assuming they agree that there is speculation. Thank you. 

Chairman LIEBERMAN. Thanks very much. Very interesting, 

helpful testimony. I think in light of the wide interest in this subject on the Committee, I am going to ask that we take a recess— 

Senator Collins and I agree—and ask the witnesses not to go far. 

We will try to get over to the floor, vote, and come back real quickly. And then we will begin the questioning. 

Thank you. The hearing stands in recess. 

[Recess.] 

Chairman LIEBERMAN. The hearing will reconvene. 

We will do a 7-minute round of questions for each of the Senators. I want to thank you again for being here, and I thought the 

opening panel was very helpful. 

Chairman Lukken, as I said before, we specifically want to invite 

your reaction to these three proposals, or any others you would 

make legislatively, and I will give you that chance now, unless you 

do not think we should do anything until, as Mr. Newsome said, 

there is further study. But we have proposed extending transparency to unregulated commodity markets, essentially by closing 

the so-called swaps loophole; creating a seamless system of speculative position limits, that apply to all commodity trading; and the 

third is the restriction on the investments of large institutional investors through index funds. 

Do you have an opinion you want to offer us about any or all of 

those three at this point? 

Mr. LUKKEN. Well, I think everybody can agree that there has 

been a large influx of index money coming into the markets. There 

is a wide range of what that might be, anywhere from estimates 

of $140 to $260 billion coming into the markets. So we are trying 

to get our arms around that, but, unfortunately, this comes 

through swap dealers, which are not directly bringing this money 

onto the market. They are offering swap contracts to these participants, netting these instruments, and bringing the residual risks 

to the market. So for us to understand exactly how much is coming 

into the market is very difficult. We are reaching beyond the futures markets to get this information, which traditionally we have 

not done. 

And so we are using our ‘‘special calls’’ to get this information. 

We are trying to unwind what these positions might be in terms 

of futures contracts. But I can tell you right now that swap dealers 

as a class are actually ‘‘flat the market’’ or virtually flat the mar-
95 

ket. They have as many positions betting the markets will go down 

as would benefit from the markets going up. So we are trying to 

better understand this before we make hard and fast conclusions. 

I would say, though, conceptually on your proposals, you have 

tried to address information needs and position limits where points 

of entry may come into the market, which is helpful. We have done 

this with exempt commercial markets, with the farm bill provisions, and recently took steps to do this with foreign boards of 

trade markets. And we are looking into the swap dealer exemption 

to see whether we need to do this and position limits into these 

traders as well. 

Chairman LIEBERMAN. Since the law has established speculative 

position limits per entity, wouldn’t you agree that these so-called 

swaps effectively end-run that limit and, therefore, that they are 

frustrating the intention of a previous Congress to try to limit the 

speculative positions of anybody speculating in the commodities 

markets? 

Mr. LUKKEN. Well, this has been a policy of the CFTC to give exemptions to swap dealers since 1991. There was something in our 

reauthorization of 1986 that Congress urged us strongly, I think 

was the term, to look at exempting these types of risk management 

from speculative limits. 

Chairman LIEBERMAN. I understand the history here, but isn’t it 

true that the sheer size of the trading and investing through this 

loophole has grown enormously in recent years? I mean, all the evidence we have seen says that. Doesn’t that cry out for some kind 

of remedy? I am focusing on this first recommendation of ours because to me it just looks like people are seeing their opportunities 

and taking advantage of them. There is nothing illegal that I can 

see about it, but it is frustrating what was clearly the intention of 

Congress. 

Mr. LUKKEN. Well, certainly we are looking into it to see what 

is coming through swap dealers, and I think we are going to find 

a lot of commercial business. Legitimate hedgers are also coming 

through swap dealers. So we do not want to punish those people 

who are looking to manage risk in the markets. But if people are 

purposely evading speculative limits—if they could have gone directly to the markets and would have hit these limits and they are 

purposely going through swap dealers, this is something we will 

have concern about and will take action against. 

Chairman LIEBERMAN. Let me ask you for a quick response to 

questions two and three, that is, the coverage of all the speculative 

position limits, a kind of aggregative position limit that we would 

give you the opportunity to set. 

Mr. LUKKEN. Well, I think it would be difficult, just talking to 

staff, of how we would police that. I mean, I understand the intent 

of trying to find optimal levels of speculation in the market. 

Chairman LIEBERMAN. The intent is to try to protect the socalled commercial traders, the physical traders, the farmers, the 

fuel oil dealers, for whom these markets were created so they are 

not crowded out as they are now down to about a quarter of the 

volume on the markets. 

Mr. LUKKEN. Well, certainly I understand the intent. For us, I 

am not sure how we would police that, whether we would force peo-
96 

ple out of the markets every day that exceeded certain limits. So 

I think it is difficult to determine what the optimal level would be; 

and, how would you police these without government really putting 

a footprint on these markets. And so I think this would be difficult. 

I think the current authority of allowing position limits and accountability levels has been effective and would probably be a preferable method, in my view. 

Chairman LIEBERMAN. Let me ask you a final question, and if I 

have time, I will ask Mr. Masters something. Do you think there 

is such a thing as excessive speculation? Because in your testimony 

you focus on the power of the CFTC to deal with manipulation, but 

we are not really alleging that here. We are saying that speculation 

has become so dominant in the markets that it is having an artificial effect that is disastrous and raising consumer prices. So is 

there such a thing as excessive speculation? 

Mr. LUKKEN. I think you have put your finger on it. Our mission 

has primarily been in the past to prevent illegal manipulation. This 

is a relatively new market structural issue that has developed over 

the last couple years that we are trying to get our arms around. 

But I think theoretically, certainly if markets are being artificially 

driven higher, sure, excessive speculation can lead to that. I am not 

sure that case has been proven, but it is certainly possible. 

Chairman LIEBERMAN. OK. I am glad you acknowledge that. I 

am surprised at your answer that you are not sure there is excessive speculation. 

Let me ask Mr. Masters in the minute I have left, yesterday before the House Energy and Commerce Committee you and two 

other witnesses—Fadel Gheit, Managing Director and Senior Oil 

Analyst at Oppenheimer and Company, and Edward Krapels, a 

special adviser at the consultant Energy Security Analysis—all 

said that if greater regulation over the speculation in energy prices 

actually was adopted by Congress, implemented by the CFTC, 

there would be significant drops in crude oil prices, and the retail 

price of gasoline that is now obviously over $4 a gallon would follow suit. You indicated, ‘‘prices would probably drop over a reasonably short period of time, back to somewhere closer to the marginal 

production cost of oil, $65 to $70, as compared to the $130-plus 

now. And I think gas prices would reflect that in a relatively short 

order.’’ 

Mr. Gheit said prices could come down to a range of $45 to $60 

a barrel, and Mr. Krapels said, ‘‘I don’t think it would take 30 days 

after the President signed such a bill. It would happen more quickly than that. As soon as Congress passed it, commodity funds 

would withdraw their positions.’’ 

Now, of course, that sounds great to not only us but people who 

are suffering the consequences of the unbelievable, unprecedented 

run-up in prices. Why do you assert that with confidence, Mr. Masters, that there would be that significant a drop in retail prices if 

we regulated the speculative behavior in the commodity markets? 

Mr. MASTERS. Thank you, Senator. I was referring, when I was 

testifying yesterday, to implementing the solutions that I described. If you take away one thing from the testimony today, I 

would take away the following suggestion, and that is, money 
97 

moves prices, money moves markets. And so if you want to understand why markets are moving, follow the money. 

The key here is that there is no question that institutional investors in the capital markets have infiltrated the commodity futures 

markets through long-only strategies to the tune of new inflows of 

almost $170 billion, as of my testimony May 20, when I testified 

about the $260 billion, that also included some price participation. 

But, effectively, those new inflows of actual dollars have impacted 

the price, especially when you think about the fact that in 2003, 

the total open interest of all commodity futures was $180 billion. 

So you have had approximately the same amount of money that 

has come into the commodity futures markets than you had total 

open interest in 2003. So we are not arguing that index speculators 

are the only reason that prices have gone up, but we are suggesting 

that they have greatly amplified a positive price trend, and they 

have contributed to greatly higher prices. And so what you have 

got here is supply and demand, and also financial investor demand. 

So it makes a lot of sense to us if you take away that financial demand that you are going to bring down prices because you are 

going to bring down total demand. And that is why we made the 

statement we did yesterday. 

Chairman LIEBERMAN. Thank you very much. I am over my time. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Newsome, you indicated that the development of an overseas 

look-alike to the NYMEX West Texas Intermediate Crude Oil contract had made about a third of that market non-transparent to the 

CFTC and ‘‘permitted an easy avenue to circumvent position limits 

designed to prevent excessive speculation.’’ 

Two questions for you. First, do you think that the changes that 

the CFTC recently announced addressed that problem adequately 

of the lack of transparency? And, second, do you believe that excessive speculation did, in fact, occur because of the lack of transparency in those markets? 

Mr. NEWSOME. Senator, the answer to the first question is yes, 

we do believe that the actions the CFTC has taken adequately address our concerns. At the same time, we are certainly not opposed 

to the Congress codifying those actions. 

Second, with regard to whether or not that activity did lead to 

price increases through speculation, I do not know the answer to 

that, and that is why we wanted those markets made transparent 

so those positions could be seen and that determination made. 

Senator COLLINS. Professor Greenberger, some experts have estimated that excessive speculation in the futures market has driven 

up the price of oil by as much as a third. Do you have an estimate 

of what you think the impact has been? 

Mr. GREENBERGER. Well, I do have an estimate, but I am not an 

economist, and I was a regulator. In my bones, I know that these 

things are happening in the ICE, which you have referred to, is 

overseas, and I believe in the U.S. exchange. They have all their 

indicia in the United States, and I think we make a terrible mistake to keep calling it a British exchange when it is run in Atlanta, 

has trading engines in Chicago, and 30 percent of the competitive 

contract that NYMEX has. So in my bones I know not only there 
98 

1The chart referenced by Senator Collins appears in the Appendix on page 256. 

is excessive speculation—and I know you said you are not addressing manipulation. But I can tell you even in the regulated markets, 

we worry about manipulation. 

I would guess that is 25 to 50 percent, but the people I would 

look to are the people who testified in the first panel in the House 

yesterday who are mostly trained economists or experts in these oil 

markets. And if I remember, the thesis there is at a minimum it 

would go back down to $80 a barrel. That is what OPEC estimates 

it should be at. It is $135 now. Saudi just announced they are 

going to put more in. Oil went up yesterday. 

Senator COLLINS. Thank you. 

Just so I am clear, I can assure you that we are all concerned 

about price manipulation as well as excessive speculation. One 

thing that I would hope that everyone ought to be able to agree on 

is that there should be transparency on all the markets. I agree 

with you that if anyone is going to have access through our commodities and our markets, the same rules should apply that should 

be effective and even oversight by the Commission. 

Mr. Lukken, I want to ask you about the thesis that Mr. Masters 

has put forth that speculators are creating a virtual demand for 

the product that drives up prices. I was struck in looking at Mr. 

Masters’ testimony by a table that he has that has a 1998 versus 

2008 comparison of speculative long positions in heating oil, and 

the chart shows that index speculators held only 10 percent of 

those positions back in 1998, but today hold 47 percent.1

What is your reaction to that data? 

Mr. LUKKEN. Well, I am not sure how Mr. Masters got the information on the energy markets because we currently do not report 

that, and that is why we are trying to get better data from the 

swap dealers on how much of that money is flowing in. We certainly get it for agricultural markets—we have very good data on 

index traders. Where we see large positions, large index trading 

flowing into certain commodities, where some of the highest levels—in fact, cattle and hogs have some of the highest levels of 

index participation, and they have some of the weakest prices currently in commodities. There are other markets in wheat, Minneapolis wheat, that have no index money at all, but some of the 

highest run-ups in prices. 

So certainly we are trying to find the causations that you are 

after, that Mr. Masters is trying to find, and we are looking to do 

that. We are trying to get better data on the energy commodities 

in order to make those determinations. But currently it is difficult 

to find a smoking gun saying that index trading is leading to higher prices across the board because we certainly have instances 

where that has not been the case. And, in fact, we have been tracking this very closely on agricultural products over the last 3 

months. We are seeing a slight decrease in index funds coming into 

those markets over the last 3 months during this price run-up in 

a lot of other agricultural commodities. 

So, again, we are looking for the smoking gun. We are going to 

get better data on the energy side and hopefully can give hard, fast 

conclusions. 
99 

1The chart referenced by Senator Collins appears in the Appendix on page 256. 

Senator COLLINS. Mr. Masters, could you tell us the derivation 

of your data for that chart where you show the holdings of the 

index speculators going from 10 percent 10 years ago to 47 percent 

today?1

Mr. MASTERS. Sure. I will answer that, Senator, and just before 

I answer it, if you will indulge me, I will just respond to Mr. 

Lukken’s suggestions. 

One of the reasons why lean hogs and a couple of other commodities in the indexes have not moved due to the effects of index speculators is their settlement procedures are much different. So I 

think in actuality he is making our point for us here. 

Lean hogs are cash-settled based on a nationwide index of spot 

prices, and so the effect of index speculators is greatly muted by 

having this particular settlement procedure because it brings prices 

back down to an actual fundamental spot index. 

With regard to the Minneapolis wheat issue, that can be explained pretty easily by something that economists call the crosselasticity of demand or the substitution effect, in which prices of 

one commodity go up when another commodity that is a close substitute goes up. So, for instance, to use a car example, if I wanted 

to buy a Ford and the price went up too much, maybe I would buy 

a Chevy instead. And so that is the basic tenet. 

But to answer your question, we derive our numbers directly 

from the CFTC Commodity Index Traders Reports. We then extrapolated out our numbers for energy because they are not currently 

provided. But the math is relatively easy. For instance, if wheat is 

2 percent of the index and you know the position of wheat is $2 

billion, then you can just do the math and figure out that if it is 

2 percent of the index and that is $2 billion, then 100 percent of 

the index is $100 billion. And since these index replicators are all 

doing something exactly specific to the index, if you know that the 

index in heating oil is 5 percent, say—I am just making that number up—then you can easily figure out that the input into heating 

oil is $5 billion. So that is effectively the way the numbers work 

out. 

Senator COLLINS. Thank you. 

Chairman LIEBERMAN. Thanks. Very interesting. Senator Levin. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Thank you, Mr. Chairman. Thanks to the panel. 

One of the legislative options that has been discussed is to impose position limits in the over-the-counter market, and I believe, 

Mr. Masters, you have supported that option. I am interested as to, 

first of all, what your position is on that, Mr. Newsome. Second, 

I would like to know how it will work. How do you get to the overthe-counter market as a practical matter? 

So, first, Mr. Newsome, do you support that particular recommendation or option? 

Mr. NEWSOME. Well, in theory, coming from the regulated exchange component where we have position limits, we would love for 

all the market participants that we compete with to have position 
100 

limits. But I think with the second component, you get to the heart 

of it. I have no idea how you would do it and make it work. 

Senator LEVIN. All right. But you would like, if we could make 

it work, to get it done. 

Mr. NEWSOME. Yes. 

Senator LEVIN. Yes. OK. Mr. Masters, as a practical matter, it 

seems to me there are a lot of pluses in this. There is no doubt in 

my mind—and we have put out this material before in our Permanent Subcommittee on Investigations as showing the 1,200-percent 

increase in the number of crude oil futures contracts held by speculators over the last 5 or 6 years, whereas the number of crude oil 

futures contracts held by commercial traders have only gone up 

200 percent. There is not much doubt in my mind that speculation 

has played a critical role, and in our earlier report at the Permanent Subcommittee on Investigations, we showed that when oil was 

$70 a barrel, we estimated that $20 of that $70 was from speculation at that time, which is about 30 percent of that barrel’s cost. 

So, in my mind, there is very little doubt that speculation has 

a significant role in the drive of the price increases of oil. But if 

we want to close some of these other loopholes—we think we closed 

the Enron loophole, and I want to ask you, Mr. Lukken, as to 

whether we did that effectively. But to get to the other ‘‘loopholes,’’ 

including the over-the-counter problem and including the London 

problem, how do we practically get to over-the-counter transactions? 

Mr. MASTERS. Well, thank you, Senator. I think the way we are 

suggesting is that you do this at the control entity level. For instance, you set up position limits so that a particular participant, 

even though they may trade under five different names or five different corporations or whatever, that all goes back to the one 

source. So that is the first thing. 

Senator LEVIN. But what if it is not on an exchange, if it is just 

literally a telephone conversation between two people? 

Mr. MASTERS. Well, effectively, if they are U.S. citizens, the 

CFTC is going to have jurisdiction over them. 

Senator LEVIN. So they have an obligation of notifying the 

CFTC—— 

Mr. MASTERS. So they have to report—— 

Senator LEVIN [continuing]. Even it they do not use the exchange, the burden would be on them by law to notify somebody 

that they have had this over-the-counter one-on-one transaction. 

Mr. MASTERS. That is my understanding. 

Senator LEVIN. Do you think that is a practical way to put a position limit on these over-the-counter trades? 

Mr. MASTERS. We actually do that in a lot of areas. We certainly 

do that—if you are a U.S. citizen—I mean, it comes back to a lot 

of money-laundering regulations. But effectively you can figure out 

if they are U.S. citizens, you can make sure that they have to comply with laws where there are over-the-counter swaps and whatnot. 

Senator LEVIN. Now, if there is not an exchange involved, how 

do you set the position? Would that be by law, the position limit? 

Mr. MASTERS. The way we suggested to set the position limits is 

to convene a panel of physical players only, exclusively physical 

players. So, for instance, in crude oil that would be, for instance, 
101 

the airlines, perhaps Exxon, or some of the refiners. Those are just 

physical players. 

Senator LEVIN. All right. They would make a recommendation. 

Would that be incorporated by law or would that be the law? 

Mr. MASTERS. That would be—I think you could do either one, 

but I think the point of the matter is they are the best qualified 

to determine what those position limits are because they are never 

going to sabotage their ability to transact in those markets. They 

want sufficient liquidity, that they need to be able to transact. But 

they do not need so much liquidity that they cannot transact. 

Senator LEVIN. And would that be a recommendation to a regulator to then adopt that position limit? 

Mr. MASTERS. I think you certainly could do that. 

Senator LEVIN. I do not think you could delegate that to a private group, that decision, could you? 

Mr. MASTERS. I think you could delegate it to a private group 

and then have the regulator, follow the—— 

Senator LEVIN. Adopt it. 

Mr. MASTERS. Adopt it. 

Senator LEVIN. Or not. 

Mr. MASTERS. Right. Again, the reason for that is you have the 

exchanges which are paid on a per contract basis, and you have investment banks that also have an incentive to see more transactions. So really you have some conflicts of interest there you need 

to address. 

Senator LEVIN. All right. Now, you have indicated, Mr. Masters, 

in your testimony that if you follow the money, you can see how 

the demand has increased the ultimate price for oil. And here, Mr. 

Newsome, I want to ask you a question. Even though you have not 

concluded yet that this is accurate, you are not sure in the chickenegg problem, which is the chicken, which is the egg. Would you not 

agree that the demand—put aside the ultimate product, oil, but the 

demand for futures contracts, if it has a huge increase, that the increased demand for the contracts would drive up the price of the 

future contract? Would you at least go with me that far—before I 

trap you? [Laughter.] 

Mr. NEWSOME. And I know you are very good at that. 

If it was increased demand from commercial participants who 

had the ability to trade through expiration when the price is determined, then they would have the ability, and that is how a market 

works. 

Senator LEVIN. No, try the non-commercial participants. If you 

really believe that supply and demand works, if suddenly you have 

a huge influx of money for the contracts—put aside the product. 

The contracts. Wouldn’t that under the normal rules of supply and 

demand drive up the price for the contract? 

Mr. NEWSOME. Yes, it certainly could be the case. 

Senator LEVIN. If that is true, then the question is: What is the 

relationship between the price in the contract and the price for the 

ultimate product? That then becomes the question. And if the price 

for that contract, the delivery of that oil, say a week before it is 

supposed to be delivered is $130 a barrel, would you not then take 

the second step with me then that clearly would have a price on 
102 

the actual product itself? Do not do the 3 months out and 4 months 

out. Just do the week out or 2 weeks out. 

Mr. NEWSOME. Well, the WTI contract at NYMEX works very efficiently, and you can determine that by the fact that the prices do 

converge. The futures price and the cash price converge into one 

price at the end. But at the end, you have no speculative interest 

trading. You only have the commercial entities that are trading on 

both sides. 

Senator LEVIN. But if there is that relationship—and I think logically there is. If you are a week out or 2 weeks out and something 

is $130 a barrel, they are going to converge. They are not going to 

go down to $70 in a week. If that futures price has an impact on 

the price of the commodity a week later or a month later, then if 

you believe that supply and demand rules generally work, it seems 

to me it takes two steps, but you get to the point where the demand for futures contracts has driven up the price of the futures 

contracts, which I think is clear under rules of supply and demand, 

and then that price has an effect on the product itself, particularly 

when they are fairly close a week out or 2 weeks out before delivery. 

Would you agree? 

Mr. NEWSOME. No, the key price discovery is the spot contract 

at which the price converges. Certainly they will trade in the outer 

months, but the prices of those outer months have virtually no impact on the price of the spot market. 

Senator LEVIN. But the week before or the 2 weeks before, would 

you say that does have an effect? 

Mr. NEWSOME. It converges in the last 3 days. 

Senator LEVIN. I am over my time. Could I ask a quick question 

of Mr. Lukken? Have we effectively closed the Enron loophole, in 

your judgment? 

Mr. LUKKEN. Absolutely. 

Senator LEVIN. Thank you. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks, Senator Levin. 

We have the leadership of the Permanent Subcommittee which 

led the way for this Committee into the investigation, which really 

has produced results. As the last answer said, we have absolutely 

closed the Enron loophole. Senator Coleman. 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. Thank you, Mr. Chairman, and I compliment 

my Subcommittee Chairman that he has been focused on this, and 

I have been focused on it. But a couple of things still hang out 

there. You have smart people on all sides of this. 

Mr. Angel, you made it very clear. You said that the threat of 

a foreign substitute is real, that if, in fact, we regulate in a certain 

way, that we require certain margin requirements, etc., that, in effect, we can drive this trading somewhere else. And yet it seems 

to me that if you have American citizens and American operations 

involved here and they want to trade or do things in this country, 

we should have the ability, regardless of the market they are trading on, to require some kind of transparency. Is that a fair assessment? 
103 

Mr. ANGEL. Yes, I am a big proponent of transparency in the 

markets, and I think that giving the CFTC the authority to investigate and regulate, where appropriate, the over-the-counter markets makes sense. I think the CFTC has shown that they can regulate intelligently most of the time and that they would not go so 

overboard as to drive the business offshore. 

Senator COLEMAN. Professor Greenberger, how real from your 

perspective is the sense that if we push too far, we are really going 

to be driving folks offshore to less transparent markets? 

Mr. GREENBERGER. I do not believe that is the case. I would urge 

you to look at the C–SPAN proceedings yesterday where virtually 

every independent observer and academic observer said that would 

not happen. The reason it will not happen is basically the West 

Texas Intermediate market is in the United States. We have 

NYMEX, and we have ICE. Now, ICE flies the Union Jack, but 

they are in Atlanta; they have Chicago trading engines and 30 percent of our market. That is the United States. 

When I was at the CFTC, I was besieged by all of these foreign 

exchanges wanting terminals in the United States. Mr. Lukken, if 

I remember correctly, said yesterday, 20 foreign exchanges have 

United States terminals. They cannot build liquidity, certainly in 

U.S.-delivered products, without having a presence in the United 

States. 

Yesterday, the experts testified that the real threat in oil is London, but on the U.S. West Texas Intermediate, it is delivered in the 

United States. It is an economic reality that the hedgers and the 

speculators want to be in the country where the delivery is taking 

place. 

Dubai Gold has started a West Texas Intermediate and is not 

asking to come into the United States. My understanding is that 

the contract is not doing well. Dubai Metal has gotten permission 

to come into the United States. The Guardian just ran a story. 

They have not started yet. It is not doing well. If they get terminals here, which they have permission to do, and trade WTI— 

which, by the way, will be regulated by Dubai—they will probably 

be able to pick up liquidity. You have to be here, and, frankly, I 

think it is a hard thing to tell your constituents that we are not 

going to provide relief because we are worried that speculators will 

go elsewhere. And if you are going to weigh out those balances, you 

have the speculation that it will go elsewhere against the reality 

of $4 gas and $135 oil. 

Senator COLEMAN. Mr. Newsome, do you want to respond? Just 

listening to the exchange with Senator Levin, and Mr. Masters’ 

comment about following the money, money moves markets, follow 

the money, on the non-physical side, the pension funds and others, 

looking at the testimony, there is discussion that the speculators 

are buying long, but some are buying short. And so I am trying to 

understand. Is it the volume of the money that, in effect, drives it? 

But if some of that money is betting short, does that somehow 

change the conclusion that this massive influx of money is contributing directly to higher prices? 

Mr. NEWSOME. Well, I think we are having somewhat of an apples-oranges discussion when we are talking about these markets. 

With regard to the NYMEX markets, the positions of swaps dealers 
104 

since October 2007 have been net short, putting downward pressure on prices. 

Now, the scenario that Mr. Masters is talking about with the 

long-only funds, they are buying those funds, and the swaps dealers, the banks, are laying off that risk. But the banks themselves, 

at the CFTC hearing 2 weeks ago, admitted that they were laying 

off 90 percent of that risk over the counter. That is not coming to 

NYMEX. That is not reflected in the NYMEX numbers. And so I 

think when you say that it is having this long-only effect on the 

futures market, it is impossible to have that effect because you 

have to trade out of that position every months before you can buy 

the next. 

Now, if you will allow me to go back to Mr. Greenberger’s comments—and Michael and I have known each other for a long time— 

I respectfully disagree with his comment about driving these markets offshore because it has already happened. London has 30 percent of the WTI market today. London has 50 percent of the HenryHub natural gas market today. The over-the-counter markets are 

nine times larger than the NYMEX market today. Not only can it 

happen, it is happening. 

Senator COLEMAN. Mr. Masters, just to follow up then on Mr. 

Newsome’s comments, if, in fact, that $170 billion, whatever it is, 

if it is being laid off short, where is the upward pressure? 

Mr. MASTERS. Thank you, Senator. This is something that is 

thrown around by folks. People say, well, you see, there is a buyer 

for every seller, and so the implication is that prices will not move. 

Let’s understand something clearly. There has been a buyer for 

every seller for every transaction ever in history. When Yahoo! 

traded at $120 in 2000, there was a buyer for every seller. When 

it traded in 2001, 1 year later, it traded below $10. At that point 

there was a buyer for every seller. So having a buyer for every seller does not mean transactions do not occur and markets do not 

move. Otherwise, markets would never move. 

So to what he is saying, the answer is the swaps that the index 

speculators are buying, the dealers may be selling, but it does not 

mean it is not going to have any effect on price. Because if you had 

a neighborhood and five people decided to try to buy your house, 

you are not going to keep the price the same. You are going to 

move up your price. And that is the way things work. 

If there is not enough supply at a certain price, the price goes 

higher. And that is what has happened here. The swaps dealers 

are just trying to lay off their risk. What they do is an index speculator comes in to them, the index speculator buys, the dealer sells, 

and then they turn around and buy a later contract, especially in 

a market with backwardation because they can make that spread. 

So there is still an impact. But the idea that just having a buyer 

for every seller means that prices do not move is, quite frankly, ridiculous. 

Senator COLEMAN. If I may, Mr. Masters, I think you are the 

only trader sitting up here. You are active in the market. What are 

you telling your clients? Are you buying short or are you buying 

long today? 
105 

Mr. MASTERS. I do not trade commodity futures. I am a longshort equity manager, and we have a variety of positions in equities. 

Senator COLEMAN. I mean, where do you see this going? 

Mr. MASTERS. In terms of? 

Senator COLEMAN. Long, short? I mean, where do you—— 

Mr. MASTERS. In terms of the price of crude? 

Senator COLEMAN. Yes. 

Mr. MASTERS. I really think that if you can pass some really good 

legislation along the lines of our suggestions, that will have the effect of, short term, greatly bringing down prices. The issue here is 

what we have is an acute problem versus a chronic problem. We 

have an energy infrastructure issue that we have to deal with long 

term. But on the acute side, in the very short term, we have something that we can solve through regulation that will restrict institutional investors’ ability to impact price discovery in the futures 

markets. And so there are differing time horizons. But I think over 

the short term, if you did this, I think that it is very likely that 

prices for food, energy, and commodities would come down hard. 

Senator COLEMAN. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. That is encouraging. I thought for a moment there, Senator Coleman, you were asking for a stock tip. 

[Laughter.] 

But this would have been in total compliance with the Securities 

and Exchange Commission Act because it was totally open. [Laughter.] 

No insider trading. Senator McCaskill. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you, Mr. Chairman. 

This is a really dangerous time. It is a dangerous time because 

there are millions of businesses out there that are on the brink of 

collapse, and there are millions of families out there that are waking up every morning afraid. And what makes it even more dangerous is those of us who run for office feel incredible pressure to 

do something. And it is with a great deal of trepidation that we 

should wade into these waters in terms of beginning to play with 

a very heavy hand in the market. 

And I got to tell you, Mr. Masters, I think you speak plainly and 

you are very easily understood, and you may be the most powerful 

guy in Washington right now because what you are saying is what 

we all want to hear. What you are saying is that if you all will just 

do this, you are going to be able to, short term, move this price. 

And, frankly, most of the people around Washington right now, 

that is all they want to hear. What do we do to get the price down? 

And, unfortunately, I think that there are many of us who have 

not grasped some of the unintended consequences that we have to 

be careful of if we begin doing too much too quickly without really 

thinking this through. And so it is one of these really scary times 

to have a vote, because I am not sure what you will be doing a few 

years from now. I am not sure what oil prices will be doing a few 

years from now. But all of us will still be answerable to the same 

people that are going to be very angry if we cannot figure out 

something to do with oil prices or if we make it worse. 
106 

We stopped contributing to the Strategic Petroleum Reserve. 

Prices continued to go up. We closed the Enron loophole. Prices 

continued to go up. China announced no more subsidies. That is 

huge, China announcing no more subsidies, because all the talk 

has been, well, this is Chinese demand, that is what is doing this. 

The prices continued to go up. Saudi Arabia said this weekend they 

are going to produce more. Prices opened up on Monday. 

So I am looking at four events that I think if we were in a bubble 

somewhere and it was not really in the news and I asked all of you 

smart people wouldn’t all of these things have some impact on the 

price, and clearly they have had no impact on the price. You just 

said, Mr. Masters, that you believe that if we do these regulatory 

issues in terms of limiting institutional investors, limiting positions, trying to get back to the commercial players as opposed to 

the index funds and the hedge funds, you believe it will have a 

short-term positive impact on the price of crude oil. I want to ask 

the rest of you, yes or no, do you believe the price of crude oil will 

go down if we do this? Beginning with the CFTC, yes or no. 

Mr. LUKKEN. Not significantly, no. 

Senator MCCASKILL. NYMEX? 

Mr. NEWSOME. No, and I have a perfect example. The uncertainty that has been created among institutional investors over the 

hearings the last several weeks have forced liquidity and open interest out of the NYMEX WTI contract. And while that liquidity 

has been leaving, prices have not gone down. 

Senator MCCASKILL. Mr. Quinn. 

Mr. QUINN. No. We believe it is more supply-demand imbalance. 

We also think the falling dollar has had a big impact because our 

price increases are much greater than we are experiencing in Europe where the dollar has depreciated. 

Senator MCCASKILL. Dr. Angel. 

Mr. ANGEL. No. These are technical changes to the edges of the 

market. It really will not break the psychology of the market right 

now. 

Senator MCCASKILL. Mr. Greenberger. 

Mr. GREENBERGER. Yes, and I think in 4 years, if you do not do 

what is being suggested today, you are going to be criticized. Both 

Presidential candidates are calling for the end of speculation. Senator Obama came out with a very strong plan. 

Senator MCCASKILL. Well, we cannot end speculation. 

Mr. GREENBERGER. No, I mean—— 

Senator MCCASKILL. That would be a terrible thing to do because 

if we end speculation, my farmers are in big trouble, to say nothing 

of Anheuser Busch and American Airlines that need to buy all 

kinds of commodities in terms of liquidity. 

Mr. GREENBERGER. One of your premises is we closed the Enron 

loophole. We are still talking about agricultural index funds. Why 

aren’t they closed? 

Senator MCCASKILL. That is a good question. 

Mr. GREENBERGER. I have the greatest respect for those who 

worked on closing the Enron loophole, but I have testified it was 

not fully closed. And I can elaborate on that, but if it is closed, why 

are we talking about all these pension index funds. 
107 

Now, Mr. Newsome said, if you close it, people will run to the 

ICE because it is British. The ICE is here, in Atlanta. It is 

headquartered in Atlanta, trading engines in Chicago, trading 

West Texas Intermediate, delivered in Cushing, Oklahoma, in U.S.- 

denominated dollars. 

Now, Mr. Newsome tells you, the unintended consequences will 

be that you will drive more to that market. That market is unregulated in the United States. Senator Levin is the principal author 

of pending legislation to re-regulate those exchanges. So when you 

say Saudis put more oil in, China has reduced its subsidies. George 

Soros testified in front of the Senate Commerce Committee. You 

could empty the Strategic Petroleum Reserve and not affect the 

price of crude oil unless you get a regulatory handle on what has 

not been closed by the Enron and London loopholes. 

Senator Lieberman and Senator Collins have a suggestion, that 

is option one, that I think is very credible. The Saudis are playing 

chicken with us. They know they can announce 12 million barrels 

in 3 years, and it is not going to have any impact because this has 

no commercial basis. Saudi Arabia announced this great program 

to increase oil, and yesterday oil goes up $1.36. They have no control over it. 

Senator McCaskill, I cited in my testimony yesterday a 1992 

House Agriculture Committee study quoting a wheat farmer in 

your State, or somewhere thereabouts, saying, ‘‘I look out at my 

field, and I do not own my field because some guy in Chicago is 

trading paper and taking my price power away from me.’’ That is 

why we passed the Commodity Exchange Act. In 2000, we deregulated energy, and now we are hearing, even though we did not deregulate agriculture, that there are agricultural index funds. 

Of the four premises you have, the one I would go back and look 

at is if you closed the Enron loophole. That was good, but today 

there is not one contract that has been affected by that closure. 

And Mr. Lukken has announced it will affect Henry-Hub. That is 

natural gas. That has nothing to do with oil, gasoline, or heating 

oil. 

Senator MCCASKILL. I noticed in your written testimony, Dr. 

Angel, that you talked about three things: Is it a bubble? Is this 

really the price? Is it being manipulated? And then you talked 

about your solutions. And I got to tell you that I believe that your 

solution is the solution. The problem is it is not quick enough. The 

problem is it does not help me with the literally thousands of 

phone calls I am getting every day and the letters I am getting 

every day: Why can’t you do something? And, what you said in 

your written testimony, I am not sure that you had time to emphasize it in your oral testimony, so I will do it for you. It is, in fact, 

our commitment to alternative energy that is going to, in fact, 

make the difference. It is, in fact, saying to the oil producers, we 

do not need you anymore, we do not want you anymore, we can do 

this differently. 

Do you believe that the single most important thing we can do 

for oil prices in this country is to, in fact, extend the tax credits 

for solar and wind and to do the kind of investment in these technologies and in this kind of alternative energy, not just ethanol but 

a whole lot of other things—cellulosic and all of the hydrogen tech-
108 

nology? Do you think that is the single most important thing that 

we must do? 

Mr. ANGEL. Yes. We must adopt credible policies to move away 

from petroleum, that is, policies that the rest of the world will see 

and say, yes, we are going to stop burning petroleum, and because 

of that the stuff we have in the ground is eventually going to be 

worthless. Once that happens, we can use the strength of the speculators, like a good martial artist, against them. Once the markets 

see that we are going to stop burning petroleum, then there will 

be a going-out-of-business sale. The speculators will rush to the 

exits and start shorting petroleum. 

Senator MCCASKILL. All right. I will tell you that the only thing 

in your testimony—you said we have to make sure that oil does not 

get below $100 a barrel? I hope we have that problem. 

Mr. ANGEL. And we will. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thank you, Senator McCaskill. Senator 

Warner, thanks for being here. 

OPENING STATEMENT OF SENATOR WARNER 

Senator WARNER. Thank you, Mr. Chairman. I thank you and 

the distinguished Ranking Member for convening this Committee 

for a very important hearing. And, gentlemen, you were challenged 

with one of the more extraordinary chapters of my contemporary 

life here in the Senate of some now 30 years. This is a very volatile 

issue, and we want to be extremely cautious not to, through testimony or otherwise, elevate the hopes and aspirations of a public 

that is grievously suffering that there is a quick fix for bringing 

down gas prices. 

I support the measures that my colleague from Missouri talked 

about. Certainly we can go to the alternatives and so forth. But 

that is going to take time. I am a sponsor of offshore drilling, and 

I think maybe there is a chance now that can be done, certainly 

for natural gas. But that is going to take time. So we are struggling 

with what we can do now to impact this situation, and I hope that 

we do so with the greatest of caution. 

Now, speaking for myself, I come out of the old school that this 

Nation, when the Founding Fathers put it together, was predicated 

on the principles of a free market system, and there is a fairly clear 

definition of what a ‘‘free market system’’ is. And it served this Nation quite well, except in times of war and other periods when we 

have had to take extraordinary measures. 

So my first question to you is that I am heavily inclined to support the Chairman and Ranking Member on their principles, but 

I would just like to ask each of you a simple question. If this were 

to become law, would this alter in any way the concept that we 

have had these many years about the free market system? And if 

so, does it strengthen the free market system or change it? So that 

is the question. We will just go down the line. 

Mr. LUKKEN. The devil is in the details of what this legislation—— 

Senator WARNER. That is a standard answer. 

Mr. LUKKEN. This would put controls on free market activity. So 

it would hinder it. And we already have controls in place in our law 
109 

that allows certain limitations on speculative activity. So depending how it is crafted, it could be effective. But we want to make 

sure that it is not driving business overseas, that the markets are 

working effectively to discover prices. And that is the key. Are they 

discovering the right prices? And that is what we would be looking 

for. 

Senator WARNER. So there is a potential that this could be interpreted or written or rewritten in such a way as to really impair the 

concept of a free market system? 

Mr. LUKKEN. It would put controls on free market—the movement of capital, certainly. 

Senator WARNER. All right. Mr. Newsome. 

Mr. NEWSOME. Free competitive markets operate best and most 

efficiently when they are completely transparent, and that is the 

focus of our—— 

Senator WARNER. Well, that would be my second question when 

I come around. We may as well incorporate it in this. I really believe in every step that we can take to make things more transparent, or in simple language, let the sunshine and the light come 

in so that each person that wishes to follow this can see it. So you 

think it achieves that. And what was your response to the free 

market system? 

Mr. NEWSOME. Well, I think certainly transparency is beneficial 

to the free market system. Position limits are something that we 

have in use today to control speculators in the regulated marketplace, and in our opinion, it works very effectively. 

Senator WARNER. All right. Mr. Masters. 

Mr. MASTERS. Thank you, Senator. I would just say that free 

markets, just like free society, require rules. In society, we do not 

allow assault and battery. Nobody argues that makes any of us less 

free. In this case, having some rules in our markets does not make 

our markets less free. In fact, I would argue that they actually 

make them more free. 

It is important to note that for bona fide physical hedgers, the 

actual prime constituency of the commodity futures markets, they 

presently have no restrictions, no position limits on their activities, 

and we are not promoting that they should. They will still be completely free without position limits to act as they would like to, and 

I mean bona fide physical hedgers. 

More importantly, speculators in the commodity futures markets, 

because they are not capital markets—they are commodities futures markets and, therefore, a different purpose—have always had 

limits, and that served everyone very well, because in this case 

what we want is we want some speculation—— 

Senator WARNER. Do you feel that this will strengthen the concept of the free market system? 

Senator WARNER. How about transparency? Do you feel it enhances transparency? 

Mr. MASTERS. I absolutely do. 

Senator WARNER. Good. Thank you. Mr. Quinn. 

Mr. QUINN. Three quick points. Transparency, we would be very 

favorable for. We think it would enhance the free market system. 

I think putting on specific limits, we would be concerned about how 

they allocate those limits to legitimate investors, and that would, 
110 

therefore, limit the free market principles that you refer to. And 

certainly proposal three, banning pension funds, would have totally 

the opposite affect on free markets. It would be taking active investments and decisions out of the free market system. 

Senator WARNER. Out of the free market system. 

Mr. QUINN. Yes. 

Senator WARNER. Thank you. Dr. Angel. 

Mr. ANGEL. Markets work well most of the time, but every once 

in a while they make mistakes. And because of that, we found that 

with some light regulation, markets work even better. And I think 

some of the ideas proposed here will help the markets work better. 

I do not think they are a panacea. They are not going to solve the 

crisis. But we definitely need better transparency, and we definitely need to understand what is going on in the over-the-counter 

market. 

Senator WARNER. And this, in your judgment, enhances the 

transparency. 

Mr. ANGEL. Yes. 

Senator WARNER. Thank you. Mr. Greenberger. 

Mr. GREENBERGER. I agree it enhances transparency, and it 

helps, does not hurt, the free market. Bear in mind as the discussion papers that accompany Senator Lieberman and Senator Collins’ legislation makes clear, this is premised on the 1936 Commodity Exchange Act. These speculation limits were imposed because farmers were being killed in what was then essentially an 

only-agricultural futures market. There were too many speculators, 

so they put speculation limits. From 1936 to 2000, nearly every energy and food futures contract had speculation limits. The energy 

futures markets were deregulated in 2000. The speculation limits 

went away for those deregulated markets. What Senator Collins 

and Senator Lieberman want to do is return to something that has 

been done since 1936 and is still done in the regulated exchanges: 

Limit the participation of speculators. 

Option three bars certain trading—let’s leave option three to the 

side. Option one and two limit so that the commercials who need 

these markets are not overwhelmed by speculators. We will have 

a better futures market. I am sure you are going to be hearing 

from your industrial users of energy and your farmers that for 

them to have a better competitive free market, they need these 

speculation limits on speculators, not to bar them from the markets, but to bring them under control. 

Senator WARNER. All right. Thank you. That concludes my time. 

Chairman LIEBERMAN. Thanks very much, Senator Warner. I appreciate the question, and it is a question that Senator Collins and 

I asked ourselves as well. 

My own view of this is—and I will say it very briefly, because 

I think it has been touched on—that the act adopted in the 1930s 

did set speculative position limits because the Congress then was 

worried about speculation creating a problem for the farmers and 

the fuel oil dealers who the market was created for. And the way 

we see certainly our first two proposals is as simply updating that 

reasonable exercise of congressional authority to protect public 

safety, make sure the markets operate freely because of things that 

have happened since then, some of which were just referred to by 
111 

Mr. Greenberger; but also so much business now occurs in commodity futures off the exchanges in these over-the-counter markets. 

And then we have this swaps loophole that people have taken advantage of that also is an end run around the speculative position 

limits. 

So I share your admiration for markets, but I personally see 

these two proposals as essentially an updating and response to real 

events to try to bring the law up to where the life out there is. 

Senator WARNER. We do not want to overregulate what we have 

got here in this country to the point it is all driven overseas. I 

mean, the rest of the world is going to sit back, look at our hearing, 

and say, well, that is fine if they want to do it in America, but we 

are going to do it our own way over here. We are at risk of seeing 

that happen. 

Chairman LIEBERMAN. Yes, I share that. You know what I think? 

There has been some testimony on this, and I want to get to Senator Carper. But, interestingly, I think if we take some action here, 

the foreign markets may follow us. In fact, the G–8, when it met 

in the last 2 weeks, adopted a resolution calling on each of their 

individual governments to take a look at regulating more actively 

in the commodities area because of their specific concern that this 

is a factor in the run-up in oil prices, which is obviously affecting 

them all, in some cases not as much as it is affecting us and poorer 

nations, but it is certainly affecting them. Thank you, sir, for that 

contribution. Senator Carper. 

Senator CARPER. Thank you, Mr. Chairman. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Gentlemen, welcome. I think we may be close 

to the end. I am not sure. But our caucus luncheon meeting starts 

in about 5 minutes, and so we will probably be out of your hair by 

then. 

I have been privileged to sit in on a couple of Committee hearings that deal with the issue of speculation, and I think in the 

Commerce Committee we have had some hearings as well. We discussed in a meeting over in the Capitol this morning legislation, I 

think, Senator Dorgan is introducing today to deal with this matter. And I think legislation that the House of Representatives 

might try to pass, I think as many as three pieces of legislation, 

as early as today. 

Are any of you aware of the content of any of the three pieces 

that the House expects to move? And can you comment on them 

favorably or not for us at this time? 

Mr. GREENBERGER. I was at a meeting last night where that 

issue was discussed among many of the House members who were 

concerned, and, I cannot swear to this, but I think there is a view 

that they need more time to digest what they are going to do, and 

they may not be moving as quickly as they thought they were moving yesterday afternoon. 

But there are different pieces of legislation that are being considered. Again, this idea that there is a London market that we do 

not have control over, we can debate whether it is London or the 

United States, and I have strong views about that, but, nevertheless, as Chairman Lieberman is saying, our actions may affect 
112 

other countries. Chairman Lukken has just gotten the major exchange, which operates under the Union Jack, I believe wrongly, 

to agree that they should apply position limits for purposes of ‘‘London.’’ 

I think Senator Levin and Senator Durbin have similar legislation on the Senate side. There is other legislation that wants to 

tighten the closure of the Enron loophole in the farm bill in the following way: The farm bill Enron loophole provision now puts the 

burden on Mr. Lukken to prove that a contract should be regulated. People want to go back to the status quo ante before the 

Commodity Futures Modernization Act and say every energy futures contract should be regulated the way it was on December 19, 

2000, and let those who are regulated prove the need for deregulation. And then I think there are others who are suggesting that 

they do not believe that this major British exchange, ICE, is, in 

fact, British. They have 30 percent of our crude oil market. They 

are not operating under the same rules Mr. Newsome is operating 

under, even if the adjustments are made, and Mr. Lukken has been 

trying to do that. So there is legislation pending that says if you 

have U.S. trading terminals trading U.S.-delivered commodities, 

you must register as a full U.S.-regulated entity, as Mr. Newsome 

is. And that legislation would avoid trying to regulate through the 

foreign countries. So those are the three pieces of legislation. 

I think there is a dialogue going on, on one part of that, and that 

is, whether we continue to principally defer to foreign regulators 

while ratcheting up our controls over them for these U.S. trading 

terminals, or whether we deem those U.S. trading terminals to be 

U.S. terminals and they have to be regulated in the United States. 

In other words, these people have come to our country. There are 

about 20 foreign exchanges here. They have their trading terminals 

here. The biggest problem right now for energy is the ICE, which 

is trading 30 percent of Mr. Newsome’s market. Mr. Newsome used 

to trade 100 percent of that market. People are debating whether 

to regulate ICE by going through the British or to say, no, these 

people are really in the United States, they should register as a 

U.S. exchange. And I am sure you will be part of that debate in 

the Senate. 

But those are the three different things that are going on. 

Senator CARPER. Good. Thanks very much. Dr. Angel. 

Mr. ANGEL. I respectfully disagree with Mr. Greenberger. It is so 

easy to trade anywhere in the world these days. I can go to any 

Internet-connected computer right now and trade futures contracts 

on a variety of exchanges that, for all I know, do not even have terminals in the United States. So the fact that an exchange has a 

terminal here means that they have at least some degree of oversight from the CFTC. But modern communications make it so easy 

for anybody to trade anywhere anytime that our ability to regulate 

the activities of foreign markets is rapidly slipping away. And it is 

not just London that we need to be concerned about. It is Shanghai, it is Singapore, it is Hong Kong, and it is Dubai. It is many 

other places on the planet. 

Senator CARPER. Let me go back to my original question and look 

to the others on the panel, and let me modify it just a little bit. 

In addition to asking for any reflections you have on the legislation 
113 

that may or may not move in the House this week, or if you have 

heard anything about the legislation that Senator Dorgan introduced today, any comments on it one way or the other, I would appreciate hearing that, too. Please, anyone? 

Mr. NEWSOME. Senator, I have not heard specifics about what he 

introduced today. I know the bill that he was on with Senator 

Levin, Senator Durbin, and others is being discussed by the House 

Agriculture Committee. And that bill supports the transparency 

that we have been speaking about, supports the position limits that 

we have been speaking about, additionally supports further delineation of the swaps dealer information, and we support all those 

components with regard to that legislation. 

Senator CARPER. All right. Thank you. Anyone else? Yes, Mr. 

Lukken? 

Mr. LUKKEN. I have not seen what Senator Dorgan introduced 

today, but in regards to the Durbin legislation, which he was a part 

of, that is promoting transparency, trying to codify some of the 

things the CFTC has been doing about getting more information 

from foreign boards of trade, which is extremely important, and imposing position limits on foreign boards of trade, that is imperative. 

I would respectfully disagree with Mr. Greenberger. We have to 

recognize that this is a global marketplace. New York Stock Exchange and Euronext have merged, those markets in London, 

Paris, and New York. And we have to engage foreign regulators to 

try to harmonize and write standards. This has allowed us to do 

that, and it has given us a transparent view into those markets to 

see the markets we would not normally see unless we had this 

process in place. And that is what we want to do, is bring these 

into the sunshine. 

Senator CARPER. All right. Thank you. Mr. Masters, do you want 

to add to that? 

Mr. MASTERS. Sure. I would respectfully disagree with the Chairman. I do not think the Durbin bill would be that effective. I think 

it is more of a Swiss cheese bill, if you will. There are too many 

ways to move around it. I think a much stronger bill is necessary. 

I just want to make one other point. One of the issues here, I 

think, is that people from the capital markets tend to impute their 

biases on the commodity futures markets. The commodity futures 

markets have a physical delivery functionality in the United 

States, and I just want to read what Senator Levin said earlier: 

Today, any futures contract that cash-settles against a U.S. contract with physical delivery provisions is also automatically subject 

to CFTC regulation unless specifically exempted. If not exempted, 

then no person inside the United States may lawfully trade that 

contract. 

So without that exemption granted to ICE, which 60 percent of 

their volume is U.S. participants, ICE would have never gotten off 

the ground. So, going back and looking at some of these exemptions, removing some of these exemptions, closing the swaps loophole, could be a great way of making sure that these transactions 

occur on U.S. shores. 

Senator CARPER. All right. Thank you. 

I have one more question. I am just going to ask it for the record 

and just ask you to respond in writing, if you would. But we have 
114 

1 CFTC’s response to Senator Carper’s question for the Record appears in the Appendix on 

page 360. 

gone through some of the short-term options of correcting the challenge that we face, and it occurs to me that there are some longterm issues here that are not likely to be resolved overnight. I 

think you would agree with that. 

What do we, as Members of the Senate, need to be looking at, 

not in the short term but over the long term, to help bring about 

some real and needed changes? So I will be asking that one for the 

record.1

Mr. Chairman, thank you all, and thank you very much. 

Chairman LIEBERMAN. Thanks, Senator Carper. 

We will do a second round of 5 minutes each for Senator Collins 

and myself. I cannot resist asking you, Mr. Masters, if you think 

that the other piece of legislation you referred to is like Swiss 

cheese, would you say that the proposals Senator Collins and I are 

making are more like solid New England cheddar? [Laughter.] 

You do not have to answer. You can give your answer for the 

record. 

Mr. MASTERS. I think your proposed bill is much better, and it 

does a lot more to solve the problem. 

Chairman LIEBERMAN. Thanks. 

Let me go back to a line of questioning that Senator McCaskill 

raised. Part of why we are focused on speculation in the markets 

as a source of the run-up in fuel and food prices is because we cannot see any other rational place where it is coming from. So, we 

know that the demand for oil—and food, but let me focus on oil for 

now—has risen over the last year, but by a small percentage of the 

increase in the price of oil futures contracts and in the price of gasoline at the pump. So it does not seem like the normal rules of supply and demand are working. 

But I want to come back—because it really perplexes me, and it 

is just this week. If the normal rules of supply and demand are 

working, why didn’t the announcement by Saudi Arabia that they 

are going to increase their output of oil daily—what, 700,000 barrels did they say? And then if that is not enough, that they are 

willing to go up 2 million above where they are now by the end of 

the year—I mean, that is really the futures market. Why has the 

price of the barrel of oil continued to rise after the Saudis did that 

if there were any normal laws of supply and demand going on 

here? Dr. Angel. 

Mr. ANGEL. Well, the media pundits put forth two proposals. 

One, on the same day as the Saudis made their announcement, 

there were also news reports of further turmoil in Nigeria of pipelines being blown up and supply disruptions there. 

At the same time, in the last year we have a number of political 

jitters with regard to Iran and their activities that are also causing 

fears in the oil market that there may be even more serious supply 

disruptions to come. 

Chairman LIEBERMAN. This is something that has bothered me 

about the futures markets from the 1990s when the Committee last 

did an investigation of the run-up in fuel prices, because I understand that there has to be some place for psychology here, but so 
115 

much of this is psychology, and here is the difference: The concern 

about Iran and the crisis there, that is still iffy. It is speculation. 

Whereas, the Saudi announcement to put this enormous increase 

in oil into world markets every day is real. So I do not understand 

why it is not bringing the price of gasoline down. Mr. Newsome. 

Mr. NEWSOME. I could give a couple of comments, Mr. Chairman. 

One, typically when we look to supply and demand in oil, it has 

been driven very hard by the supply function. Today, when we look 

at market fundamentals, it is being driven by the demand function. 

And the demand function information is much more difficult to put 

together, particularly when you are talking about China and India. 

With regard to the Saudi announcement, two things I would 

add—and I am not an oil market analyst, but as someone who is 

very involved in these markets—first of all, the production that 

they are talking about adding to the market right now is very sour. 

It is very costly to refine and is having little impact with regard 

to the kind of oil that refineries actually want. 

With regard to their longer-term projections—and I think it is 

OPEC in general—we have heard lots and lots and lots from OPEC 

in the past, and the market usually does not move until they actually see it put in place. 

Chairman LIEBERMAN. So you are hopeful by the end of that answer that once the Saudis really begin to pump more oil that we 

will see some reduction? 

Mr. ANGEL. Yes. The market will wait for them to actually do it 

before it moves. 

Chairman LIEBERMAN. Well, that is at least hopeful. 

Mr. Greenberger, do you want to add something? 

Mr. GREENBERGER. The materials I have read on this demonstrate that OPEC and the Saudis believe that increased production will not reduce the price in this market. I think they are saying we are going to show you that is the case. 

Chairman LIEBERMAN. Right. 

Mr. GREENBERGER. And the reason is either you accept or you do 

not accept that the speculation is driving this market away from 

supply-demand fundamentals. I was shocked yesterday when there 

was no price rise on uninsured interests of Saudi supply. I thought 

at least temporarily something would get done lowering prices. 

Chairman LIEBERMAN. Right. 

Mr. GREENBERGER. But the whole burden of the testimony that 

you had on May 20, and yesterday in the House, is the market is 

unhinged from supply-demand fundamentals. That is not to say we 

do not have a supply-demand problem. But the oil experts who testified yesterday are independent consultants. I do not think they 

have a political agenda. They are all saying, and OPEC is saying, 

and Exxon Mobil is saying, and Sunoco is saying, at the highest, 

oil should be $80 a barrel. 

Now, with regard to Dr. Angel, who says he could go anywhere 

to trade a futures contract, he could go anywhere to execute a 

trade. I hope he can get out of the trade. You have got to have liquidity. That is why people are not going to Oman to trade West 

Texas Intermediate. The whole concept and the reason we want 

speculators in the market is to create liquidity. Frankly, I get a lot 

of e-mails every day from somebody in Nigeria who wants to give 
116 

me $20 million. I would suggest, Dr. Angel, treat those offers with 

prudence. 

Chairman LIEBERMAN. All right. My time is up. I would say that 

I hope Mr. Newsome is right, that when the Saudis actually do 

raise their daily production, 500,000, 700,000 barrels of oil, that 

the price of gasoline and home heating oil will go down. If it does 

not, then watch out because I think this Congress is going to say 

there is only one explanation for this disastrous run-up in oil, gasoline, home heating fuel prices, and that is speculation. And there 

is going to be regulation. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Newsome, in my opening remarks I talked about the soaring 

cost of home heating oil, which is my constituents’ No. 1 concern, 

especially since the vast majority of them rely on home heating oil 

to stay warm. And they are truly frantic about what is going to 

occur this winter. 

A home heating oil dealer in Maine discussed with me a concern 

that he has with NYMEX’s heating oil contract. What he told me 

is that although home heating oil and diesel are similar products, 

they are not identical because of differing levels of sulphur. Yet on 

NYMEX, they are traded together, he says, under the HO symbol. 

His theory is that by combining those two products, the cost of 

home heating oil is being driven higher than it otherwise would be. 

He points out this is summertime, the time when demand is lowest, and yet the cost of home heating oil is very high. He believes 

it is being traded with diesel for which the demand is high. 

Could you comment on this issue? This is a major home heating 

oil dealer in Maine with a lot of experience, and he does believe 

this is another factor exacerbating the price of home heating oil. 

Mr. NEWSOME. I am more than happy to, Senator. Obviously, it 

is a derivative product from crude oil, as is gasoline. We list a heating oil contract, and it is listed and traded as heating oil. Other 

market participants, however, manage their risk through hedging 

our heating oil contract against their needs for diesel and against 

their needs for jet fuel, which are both relatively similar to heating 

oil. And then there is a basis difference between the cost of heating 

oil and whether it is diesel or jet fuel. 

So NYMEX lists it as a heating oil contract. We trade it as a 

heating oil contract, other market participants use to hedge diesel 

and jet fuel risk. 

Senator COLLINS. But if you separated it on your futures markets, would it be advantageous for the purchasers of home heating 

oil? 

Mr. NEWSOME. I do not believe so. It is a relatively small contract now, and we recognize that others trade it. It helps provide 

liquidity in that contract that is beneficial to all who need to hedge. 

If we separate it out, the participants who need it only to trade jet 

fuel or who need it only to trade diesel, then it would become a 

very small illiquid contract on its own. 

Senator COLLINS. Thank you. 

Professor Angel, I want to talk to you about the swaps loophole. 

I know that you are not enthusiastic about two of the three proposals that are being discussed for legislation, but it does seem to 
117 

me, based on my reading of your testimony, that you do believe the 

proposal to close the swaps loophole and give the CFTC more authority does have some merit. Is that accurate? And if so, could you 

elaborate on that? If I am not correct, then you do not need to 

elaborate on it. 

Mr. ANGEL. Certainly. Yes, that is accurate. The swaps loophole 

basically says that swap dealers are treated as hedgers, and, indeed, that is legitimate in that they have an exposure on one side 

in the over-the-counter market, and they hedge that position in the 

regulated futures market. 

Now, the problem is that provides a direct conduit between the 

unregulated over-the-counter market and the regulated markets so 

that the unregulated markets are providing substitutes that feed 

back into the regulated market. And I think it makes sense to give 

the CFTC some authority to regulate that. 

Senator COLLINS. Thank you. 

Mr. Quinn, do you have any objections to closing the swaps loophole? 

Mr. QUINN. We are not really technical experts on that, but I 

think we would be in favor of the transparency aspects as well. 

And that is exactly what I think the professor explained, being able 

to see what is happening on both sides. So we would be supportive 

of it. 

Senator COLLINS. Mr. Newsome. 

Mr. NEWSOME. Yes, we support the full transparency. 

Senator COLLINS. Is there anyone on the panel who does not support that provision? 

Mr. LUKKEN. Can I just mention one thing? 

Senator COLLINS. Mr. Lukken. 

Mr. LUKKEN. As we look at the information that we will be getting from swap dealers, we want to make sure, as the proposal, I 

think, talks about greater transparency in looking through to those 

markets. I just want people to be mindful, too, that we want to give 

these investment banks opportunities to manage their risk in the 

regulated marketplace, that as we think through proposals, that we 

are not cutting off a regulated avenue for them to come onto markets where there is transparency. Certainly Bear Stearns and other 

examples recently, we have seen where they—— 

Senator COLLINS. Not a great example. 

Mr. LUKKEN. They have been off from regulated marketplaces. So 

we want to make sure they have a transparent avenue onto those 

markets when we consider all these proposals. 

Senator COLLINS. Thank you, Mr. Chairman. I also recognize 

that we do not have investment banks represented at this panel, 

which might have a different view, although I think any observer 

of this hearing would commend the Chairman for having a panel 

with so many diverse views. So thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thank you, Senator Collins. I thank the 

witnesses. It has been a very constructive morning from my point 

of view and I think a healthy exchange of ideas. As we indicated 

last week, Senator Collins and I are now going to sit back and consider what has been said here and elsewhere. And our strong intention is to introduce legislation after the 4th of July recess, which 

would be the week of July 7, hopefully. And, again, I think this is 
118 

urgent enough—and I hope this is a case where the bipartisan interest in doing something about the run-up in fuel and food prices 

is not limited to this Committee—that we can get a bipartisan willingness to devote some floor time in the Senate and House to this 

before we break certainly this fall. So we are going to push forward 

with what we believe will be a reasonable and constructive package 

after the recess. 

I thank all of you very much. We are going to leave the record 

of the hearing open for 15 days so that you can add anything you 

would like to your testimony. And if Members of the Committee 

have additional questions they want to ask, we would ask you to 

respond to them in that time frame. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 1:16 p.m., the Committee was adjourned.] 
(119) 

A P P E N D I X 

OPENING PREPARED STATEMENT OF SENATOR LIEBERMAN FOR MAY 7, 

2008 

Good morning and welcome to our hearing today. This is the first of at least two 

hearings this Committee will hold to examine the rapid increase in the price of food 

occurring here in the United States and across the globe, and to consider actions 

the Federal Government should take or change to alleviate the pressure these high 

prices impose on American families. I want to thank Senator Collins for her suggestion that we hold these hearings on an issue of such real concern to so many Americans. 

The specific issue we will examine today is the effect of Federal Government subsidies for ethanol on the current food crisis. In a couple of weeks, we will ask whether speculators are driving up commodity prices. According to the USDA Economic 

Research Service, food prices in the United States will increase 4 to 5 percent this 

year, the largest annual increase since 1990, with the increase disproportionately 

affecting low-income consumers whose food expenditures make up a larger share of 

their total expenditures. Overall, U.S. households spend 12.6 percent of their income 

on food, while low-income households spend 17.1 percent on food. 

The World Bank reports that global food prices have increased by 83 percent in 

the last 3 years, a devastating rate of inflation when you understand that Nigerian 

families spend 73 percent of their budgets on food, the Vietnamese spend 65 percent, and Indonesians spend half their incomes on food. People have already died 

in food riots in Somalia, World Bank President Robert Zoellick warns that 33 other 

nations are at risk of unrest, and one billion Asians are at risk of hunger or malnutrition. 

So how did this crisis come to be? In a complex global economy, the domino effect 

began with lower than expected wheat harvests in the United States and Europe 

last year, prolonged drought in Australia and Eastern Europe, and poor weather in 

Canada, Western Europe, and the Ukraine. As supplies waned, prices rose, and 

some major grain producers, such as Argentina and Ukraine, barred exports to control costs at home, further reducing supplies and driving prices even higher. At the 

same time, global food consumption is increasing as developing nations develop. A 

rising middle class in India and China is causing increased demand for meat, which 

requires more feed grains. The record high price of oil increases food production, 

processing, and transportation costs. And finally, a weak dollar has increased the 

purchasing power of other countries’ currencies that are stocking up on relatively 

cheap U.S. food exports. 

Then, late last year—in an effort to promote American energy independence and 

help reduce the greenhouse gas emissions that are causing global warming—Congress required a fivefold increase in renewable fuels, which in turn led to an increase in demand for corn, and a further decrease in supplies of wheat and soybeans 

as farmland that traditionally was used to grow these crops has been converted to 

the more profitable corn crop. 

This confluence of events has had a dramatic impact on food prices as events spin 

off one another, creating a cycle of rising demand, dwindling supplies, and unstable 

prices. If you are poor, the effects can be deadly. 

The question is how we in Congress can help bring some relief. First, and probably foremost, Congress can and should consider strengthening the food assistance 

programs on which those Americans who are most at risk rely. Second, Congress 

is now in the midst of heated debate on a number of policies that will affect future 

food prices. The Food, Conservation, and Energy Act of 2008 (farm bill), for example, 

now in conference, would reduce subsidies for ethanol producers. The current 54- 

cents-per-gallon tariff on foreign imports of ethanol used as fuel is set to expire at 
120 

the end of Fiscal Year 2009 and Congress could take action to lower it. And third, 

the Renewable Fuel Standard imposed in last year’s energy bill could be reduced. 

This Committee has the unique ability to look across the Federal Government to 

assess the range of policies that influence the price and availability of ethanol in 

the marketplace. The policies we discuss today have the potential to shape future 

debates on the best way for Congress to respond to this global food crisis, and I am 

glad to welcome our witnesses who will help us better understand this issue. 

Andrew Siegel is the owner of When Pigs Fly Bakery, in York, Maine. He will 

discuss how rapidly rising commodity prices have negatively impacted his business. 

Rev. David Beckmann, President of Bread for the World, an organization that works 

to end world hunger, will talk about how rapidly rising food prices have led to a 

global food crisis. Bruce A. Babcock is an agro-economist from Iowa State University, who contends that passage of the expanded Renewable Fuel Standard was the 

tipping point in a number of factors that have caused unstable food markets. And 

Mark W. Rosegrant is Director of the Environment and Production Technology Division of the International Food Policy Research Institute. He will discuss the impact 

of global biofuels policies on food prices. Gentlemen, thank you in advance for your 

testimony. 

PREPARED STATEMENT OF SENATOR COLLINS FOR MAY 7, 2008 

Today we consider whether a change in American agriculture policy aimed at reducing our reliance on imported oil may be having serious, unintended consequences 

for food supplies and prices. 

According to the World Bank, global food prices have increased by 83 percent in 

the past 3 years. Here in the United States, an analysis of April 2008 prices shows 

even more remarkable one-year increases: 

• wheat, up 95 percent, • soy beans, up 83 percent, • corn, up 66 percent, and • oats, up 47 percent. 

Such increases in basic commodities naturally work themselves through the foodsupply chain. According to the U.S. Department of Agriculture, consumer prices for 

all foods increased by 4 percent in 2007—the highest annual rate since 1990—and 

the Department projects continued increases. 

The consequences reach far beyond data cells on some spreadsheet. They affect 

families who are forced to cut back on bread, meat, and dairy purchases and to 

apply their economic-stimulus checks to their grocery bills. The nutritional threat, 

especially to lower-income families with children or to senior citizens with limited 

incomes, is clear. The high prices and shortages also hurt small businesses like the 

Maine family bakery whose future is less secure due to escalating costs. 

The global consequences are also grim. As World Bank President Robert Zoellick 

warned last month, ‘‘33 countries around the world face potential social unrest because of the acute hike in food and energy prices. For these countries, where food 

comprises from half to three quarters of consumption, there is no margin for survival.’’ The impact of rising prices, food shortages, and export restrictions has devastating consequences for the billion people around the world living in dire poverty. 

We need a clearer view of how biofuel policies shape this troubling picture. So I 

am pleased that the Chairman has agreed to have the Committee carefully examine 

this issue. 

Subsidies for ethanol production, tariffs on ethanol imports, and mandates for ethanol use have certainly had an impact on the U.S. corn crop. In 1997, only 5 percent 

of the corn harvest was used for ethanol production. That portion grew to 20 percent 

of the 2006 harvest. The Department of Agriculture estimates that 24 percent of last 

year’s corn crop is currently being used for ethanol, and that ethanol’s claim on the 

2008 harvest will climb to 33 percent. 

Not surprisingly, increased demand for corn-based ethanol has diverted acreage 

from crops like wheat and soybeans to corn and has had ripple effects on the cost 

of feed for livestock. 

The USDA’s Long-Term Projections, released in February, note that the strong expansion of corn-based ethanol production affects virtually every aspect of the field 

crops sector, from domestic demand and exports to prices and allocation of acreage 

among crops. After 2008, the USDA believes that the high returns for corn crops 

will lead to still further reductions in wheat and soybean planting. As our witness 

from a Maine bakery will attest, such changes in the use of distant croplands can 

have profound local effects. 
121 

Certainly, American and European policies that promote corn or other food crops 

for ethanol are not the only factors in the sharp increase in food prices. Other factors include higher food demand in developing countries, higher energy and fertilizer costs, and weather events like the drought in Australia. 

Many of these factors are beyond the control of mankind, much less governments. 

By contrast, however, biofuel subsidies and mandates are within the control of governments. And the International Food Policy Research Institute estimates that, 

globally, biofuels development may account for a quarter to a third of the increased 

costs of food. We must therefore examine the impact that American biofuel policy 

is having on the global food crisis and whether our policy needs to be adjusted to 

mitigate unintended consequences in the United States and elsewhere. 

This is not an abstract matter of public policy. It affects the poorest people in our 

country and our world. It affects our bakeries, markets, restaurants, and family 

kitchens here and around the world. I look to today’s witnesses for assistance in 

helping us better understand the trade-offs inherent in our current biofuels policy. 

PREPARED STATEMENT OF SENATOR MCCASKILL FOR MAY 7, 2008 

As we will hear today, there is no singular cause to the rising cost of food. Among 

the contributing factors are higher energy costs that increase transportation, processing, and retail costs; low global food grain and oilseed supplies due to drought 

and poor harvests; changing eating habits due to rising incomes in large, rapidly 

emerging economies; demand for corn for ethanol competing with food and feed acreage; and increased U.S. exports as a result of a weakening dollar. What we are certain of though is that the high cost of food disproportionately affects our lower income citizens and the backbone of our economy, small businesses. 

It is imperative as we move forward in understanding and in responding to the 

rising cost of food that we do so in a measured and reasoned manner. Our solutions 

should balance not only the immediate needs to reduce the costs of food, but also 

the nation’s long term energy needs and carbon reduction objectives. It is important 

to note that any change in existing energy policy involving corn-based ethanol will 

not have an effect for at least two years, given 2008 crops are already in the ground 

and the harvest for 2009 will not be reaped until late in that year. 

Short term fixes such as waivers to Renewable Fuel Standards (RFS) have been 

proposed to reduce demand on corn—argued to reduce corn being diverted to ethanol production and freeing up acreage used currently in corn production for wheat 

production. The RFS requires the blending of 9.0 billion gallons of renewable fuel 

in transportation fuels in 2008, increasing to 36 billion gallons in 2022. Although 

increased ethanol production has contributed to the increase in food prices, the overall cost of crude oil and labor, coupled with increased global demand and reduced 

harvests also are principal causes of increased food prices. Studies indicate ethanol 

has kept fuel costs up to $0.40 cents cheaper in some parts of the U.S., as we face 

gasoline prices over $3.50 per gallon. 

Energy costs affect all levels of the food production sector. Recent record crude 

oil prices in excess of $120 per barrel affect costs throughout the marketing chain. 

Some of these costs are passed on to consumers in the form of higher prices. In 

2005, the most recent year for which data are available, direct energy costs and 

transportation costs accounted for roughly 8 percent of retail food costs. 

Clearly the $0.40 reduction in the price of fuel is a positive outcome of the RFS. 

We may learn today that the market will demand this cheaper alternative to fossil 

fuels and continue to refine corn into ethanol regardless of the RFS and other incentives. I believe corn-based ethanol and biodiesels are components of the long term 

solutions to the nation’s varied energy needs; however, I believe we need to broaden 

our scope beyond food commodities to alternative sources. 

Specifically, cellulosic sources such as corn stover and switchgrass can be a viable 

option for replacing some of the feed stocks currently occupied by corn. There are 

positive indications that with additional research and technology advancements, cellulosic biofuels can be a viable fuel option. Incentives that help the development of 

these types of advanced biofuels will not only allow us to diversify our fuel options 

but will also relive many of the sustainability concerns around corn based ethanol. 

At a time when we are facing unprecedented fuel costs and increasing inflation, I 

think the best policy is to invest in these untapped sources of cellulosic energy. 

I look forward to the testimony we are to hear before this Committee today. 
122 

PREPARED STATEMENT OF SENATOR STEVENS FOR JUNE 24, 2008 

Thank you Chairman Lieberman and Ranking Member Collins, and to our distinguished panelists for your attention to this critical issue. 

Today, the average price of a gallon on gas is $4.08. In some parts of Alaska, the 

price of a gallon of gas is over $8.00. 

There are not many immediate solutions but I am certain that this hearing—and 

related legislation—will help. The disruption in supply from the attack on Shell’s 

platform in Nigeria last week reminds us that oil prices are volatile enough without 

allowing speculators to run unregulated. 

With the Fourth of July bringing the peak of summer travel next week, Congress 

should act on this energy crisis before we all travel home while other Americans 

cannot afford to do so due to fuel costs. 

Most foreign producers believe Americans will pay any price for oil. Congress validates this belief each day that we fail to implement a comprehensive energy strategy. 

Americans are being taken advantage of not only by OPEC, but by speculators 

who are exempt from regulation by the U.S. Commodity Futures Trading Commission. When speculation in oil markets does occur, I believe there should be a legitimate reason for it. 

I would certainly define legitimate speculation to encompass the physical market 

for oil. Anytime an entity has the business need and capacity to make or take delivery of the product, their ability to buy futures contracts is necessary. 

But Congress must recognize that speculators who are not consumers of oil are 

hijacking the market, they are just trading paper barrels, not physical volumes of 

oil. 

There should be a limit on the extent to which investors in petroleum futures can 

increase their positions in this important commodity market. It should be a crime 

when speculators knowingly manipulate oil prices and drive up the price of fuel at 

the expense of the American family. 

Such actions undermine our country’s energy stability and energy security. Even 

major institutional investors have taken up oil futures markets as a major asset 

class in their financial portfolios. 

In the last 5 years, investments in commodity index funds jumped from $13 billion to $260 billion, and this increase is mainly comprised of oil futures. Excessive 

speculation in oil futures is causing our economy to decline. 

Our domestic oil crisis has combined with our economic instability and excessive 

oil speculation to become a vicious cycle. As energy prices continue to cripple our 

economy, inflation rises and the dollar weakens. 

One of the few places that investors see a safe bet is in energy markets because 

they know oil demand will continue to increase. I recently stated on the Senate floor 

that IEA predicted world oil demand to increase from 85 million barrels per day to 

116 million barrels per day. 

That is the reality and that is the future of oil. Therefore, more investors want 

to increase their positions in oil futures. Immediately, the CFTC needs to conduct 

a review to examine where unregulated trading in oil futures has most impacted 

the market. There must be full disclosure from anyone taking part in the oil speculation game. Last year Senator Feinstein and I worked across party lines to pass 

CAFE, which is the first Federal increase in vehicle fuel efficiency in three decades. 

Now, we work together again on S. 3131, the Oil Speculation Control Act of 2008. 

This bill requires the CFTC to identify and crack down on the oil commodity futures 

markets that have spun out of control. 

I would also like to point out what I am sure most if not all of our panelists will 

confirm: That oil speculation is driven by expectation. We can and should address 

part of high fuel costs by clamping down on the unfair exemptions in commodity 

markets. 

But so long as Congress fails to address the supply side of this issue we will not 

solve the problem. I have predicted higher oil prices many times simply due to my 

recognition that relying on unstable foreign sources of oil creates the potential for 

disruption and abusive pricing of our supply. 

Speculators also recognized that and therefore have been able to make a killing 

buying up futures contracts. It would be an understatement to say America needs 

a comprehensive approach. America needs a full court press against our energy crisis. 

This must include powerful signals to the world market that we will produce 

more, conserve more, research more alternatives and, when absolutely necessary as 

it is today, regulate more. 
123 

Speculators and competing world oil suppliers would take notice of this approach 

the moment Congress approves it. 

The fact is that the prospect of more supply coming online, together with conservation measures such as CAFE and investment in renewable energy, will combine to give speculators less to speculate about. 

Again I thank the Chairman and the Ranking Member and look forward to the 

testimony. 
124 
125 
126 
127 
128 
129 
130 
131 
132 
133 
134 
135 
136 
137 
138 
139 
140 
141 
142 
143 
144 
145 
146 
147 
148 
149 
150 
151 
152 
153 
154 
155 
156 
157 
158 
159 
160 
161 
162 
163 
164 
165 
166 
167 
168 
169 
170 
171 
172 
173 
174 
175 
176 
177 
178 
179 
180 
181 
182 
183 
184 
185 
186 
187 
188 
189 
190 
191 
192 
193 
194 
195 
196 
197 
198 
199 
200 
201 
202 
203 
204 
205 
206 
207 
208 
209 
210 
211 
212 
213 
214 
215 
216 
217 
218 
219 
220 
221 
222 
223 
224 
225 
226 
227 
228 
229 
230 
231 
232 
233 
234 
235 
236 
237 
238 
239 
240 
241 
242 
243 
244 
245 
246 
247 
248 
249 
250 
251 
252 
253 
254 
255 
256 
257 
258 
259 
260 
261 
262 
263 
264 
265 
266 
267 
268 
269 
270 
271 
272 
273 
274 
275 
276 
277 
278 
279 
280 
281 
282 
283 
284 
285 
286 
287 
288 
289 
290 
291 
292 
293 
294 
295 
296 
297 
298 
299 
300 
301 
302 
303 
304 
305 
306 
307 
308 
309 
310 
311 
312 
313 
314 
315 
316 
317 
318 
319 
320 
321 
322 
323 
324 
325 
326 
327 
328 
329 
330 
331 
332 
333 
334 
335 
336 
337 
338 
339 
340 
341 
342 
343 
344 
345 
346 
347 
348 
349 
350 
351 
352 
353 
354 
355 
356 
357 
358 
359 
360 
361 
362 
363 
364 
365 
366 
367 
368 
369 
370 
371 
372 
373 
374 
375 
376 
377 
378 
379 
380 
381 
382 
383 
384 

Æ