NEW YORK (Commodity Online) : Continuing its proxy war against commodity derivatives markets for food price hikes, United Nations Conference on Trade and Development demanded more regulation for the market. In its latest report, UNCTAD said an increase in financial investment in associated derivatives markets has had a significant impact on the prices of a wide range of commodities, and must be countered by regulatory action, including direct interventions in those markets. Prices for many commodities have been rising since the mid-2000s, but volatility has also increased greatly. Much of the increase in prices appears to have been driven by fundamental factors such as rising demand from fast-growing developing economies and concerns about supply shortages linked to political changes in the Middle East. But politicians in some developing economies have argued that an increase in financial investment in commodity markets has exaggerated those moves, hitting poorer countries particularly hard. French President Nicolas Sarkozy has put commodity prices at the top of the agenda of the Group of 20 industrialized and developing nations this year, and a number of international regulators are working on proposals to improve the workings of commodity derivatives markets. But some commodity producing countries, and governments in those nations in which commodity derivatives markets are based, are wary of an increase in regulation that, in their view, could further distort prices and affect commodity production. In a new report, the United Nations Conference on Trade and Development came down firmly on the side of those who argue financial investment has affected prices, and needs to be controlled. "Rising volumes of financial investments in commodity derivatives markets has encouraged herding behavior through which price determination in commodity markets increasingly follows the logic of financial investment rather than market fundamentals," UNCTAD said. UNCTAD estimated that prior to the recent dip, "excessive speculation" had accounted for 20% of the price of crude oil. It noted that commodity prices have increasingly responded to the release of important economic data, such as U.S. unemployment figures. That was difficult to explain from the perspective of supply and demand, but suggested an increased correlation with the bond, equity and foreign exchange markets in which financial investors have traditionally traded. "For cocoa, there can hardly be any link between United States employment and world chocolate consumption," UNCTAD said. UNCTAD said that by pushing prices higher and increasing their volatility, the growing role of financial investors was distorting global economic policy making

Source