Fears mount over political interference in commodities

Many commodity traders are worried about potential political interference in markets and prices as France’s Nicolas Sarkozy and US President Barack Obama call for regulation of the sector.

Anthony Ward, co-founder and principal manager of Armajaro’s CC+ commodities fund, is concerned about the level of regulation being placed on hedge funds and in particular a possible move by politicians to interfere in commodity trading.

“We are definitely worried,” said Ward. He said comments by French President Nicolas Sarkozy about the need for more regulation and in particular calls for more rules to curtail the rise in food prices were worrying for the industry.

“He is saying it is [commodity traders’] fault food prices have gone up. That is a confused and wrong conclusion,” Ward said. He made his comments during a panel discussion at the GAIM International 2011 conference in Monaco.

“If there are limits on commodities, it will create a hike in prices,” he warned. He cautioned that if trading positions were turned into inventories, food prices would rise even more.

Ward, a commodities trading advisor, was a director and head trader for cocoa and coffee at Phibro before setting up Armajaro.

Sarkozy called for increased regulation of commodity trading in a speech at a European Union (EU) conference on raw materials and commodities. He said the EU should have tougher rules and wanted to see rules stopping “market abuse” and a central global registry for all commodities trades, according to press reports.

Coast Sullenger, founder and managing director of Gaia Capital Advisors, echoed Ward’s concern. “I think that investments in physicals and futures in the agri space are dangerous because of the potential regulatory threat,” said the portfolio manager of Gaia Resources Fund and Gaia World Agri Fund, during another panel discussion at Gaim.

However, Sullenger remained relatively optimistic about prospects. “We think we are on the verge of a new green revolution that means a lot of investment in agri. We think agri prices will remain high for fundamental reasons which I think most people are aware of. The fact is that over the last 40-50 years in real terms agri prices as a basket have fallen by as much as 40% ,which is quite dramatic especially compared to other natural resources,” he said.

Another panel member also expressed concerns about political meddling in commodities. “We expect some damaging stuff coming out of the Group of 20 (G20),” commented Niels Clemen Jensen, founding partner and chief executive partner of Geneva-based Absolute Return Partners, a London-based private partnership providing independent asset management and investment advisory services globally to institutional and private investors, charities, foundations and trusts.

President Sarkozy, who is also heading G20 under its rotating presidency, as well as US President Barack Obama, are “on the warpath” as far as commodities are concerned and are specifically focusing on food prices, said Jensen.

“He [Obama] wants to regulate the commodity markets. There is going to be a lot of regulatory stuff coming out over the next six to 18 months which could be damaging to commodity prices.”

Jensen also cautioned investors in commodities about the potential diversification effect against equities. “In addition to that, there are a lot of people who have bought commodities for reasons that they will regret eventually, because they think they are a diversification to equity risk.

“The reality is that over the last two to three years the correlations between equity returns and commodity returns have been very close to one another and there will be some very disappointed investors when they realise commodities do offer the diversification they expected them to. For these reasons we are holding back,” he concluded.

Regulators began to be interested in commodity trades in 2010. Alerted by reports of rising prices and speculation in the markets, regulators in the European Union (EU) and US announced last year moves to limit the positions investors could take in ­commodities ­contracts.

 

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