Governments are rightly concerned over the economic and societal impact of high prices and excessive volatility in consumer-sensitive commodities, but the intensity of the debate as to whether or not speculation is a cause has left little room for rational analysis. For this reason, the FOA retained FTI Consulting to review 20 reports, covering a range of the more recent and historically significant studies that have addressed this topic.

They found that the only area of real consensus on causation was the undoubted and underlying impact of supply and demand imbalances, exacerbated by a variety of geo-political factors, problems in production and distribution and distortions generated by government policies in the area of strategic reserves, taxation and trade barriers.

Acknowledging the potential for speculation to “amplify” underlying price trends (up or down) and to generate short-term price “bubbles”, there was no evidence to suggest that speculation played a role in causing long-term trends in commodity prices. As one French economist put it, “It is not the froth that causes the wave”!

IOSCO recently released its “Principles for the regulation and supervision of commodity derivatives markets”, which focussed on the need for robust market surveillance, better access to trading and position information, correlated contract design, the use of strengthened position management powers (including position limits), effective enforcement and enhanced transparency. While there may be issues about ensuring proportionality and implementing the IOSCO Principles into rules, few would quarrel with the direction of travel.

The intensity of this debate has also generated a view in some quarters that speculation is manipulation by another name. It is not. Trading on price alone is a perfectly legitimate market activity. Further, it is essential in terms of sustaining market liquidity, smoothing out cross-market pricing anomalies and facilitating the growing risk-management needs of “real economy” corporates.

Further, it should be noted that many financial participants in commodity markets are not speculating at all, but investing in commodities as an alternative asset class or hedging their portfolios – and few would quarrel with those trading objectives.

Governments may be understandably anxious to control prices of economically-important commodities, but it needs to be recognised that this is not the role of the regulatory authorities. Their concern is less about pricing outcomes – however uncomfortable they may be – and more about market integrity and the authenticity of the price formation process.

Market economics and continued market functionality depend upon governments and regulatory authorities eschewing populism in favour of a rational and measured approach to this issue, concentrating the need for action on what drives the wave, rather than focusing on the “froth”.

Anthony Belchambers is the chief executive of the Futures and Options Association 

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