Climate Change Financial Risk: Commodity Futures Trading Commission Edition

Guest post by Rud Istvan

WUWT reader Sara Bennett, PhD in Physical Oceanography, alerted Charles very recently (9/9/2020) to a new CFTC report titled Managing Climate Risk in the U.S. Financial System. As a professional climate subsystem researcher, she apparently thought it might make an interesting post topic. Charles email requested me to investigate (maybe because he knew I owned and operated a mid-size (~300 head) diary farm in Wisconsin for 37 years—so might even know what the CFTC is). What follows is a multipart story much richer than my last Atlantic SEAMS article; an even better illustration than Charles’ addendum thereto on how fake news gets manufactured and promulgated. Because this report is much more official than the Atlantic’s feeble GND SEAMS fake news.

CFTC

The Commodity Futures Trading Commission is the federal entity that regulates (wait for it) commodity futures trading, for example by Chicago’s Mercantile Exchange (CME).

Commodities include wheat, cotton, soybeans, corn, sugar, crude oil, jet fuel, metals like aluminum or copper, wood products like plywood, and much more.

Futures are just financial contracts that, at initiation, enable a producer to sell a fixed amount at a fixed price in advance of production, and at expiration enable a buying user to take physical possession of the agreed amount at that price. So, for example, a Dakota wheat farmer might sell a thousand bushels of his expected crop before planting, at a price that covers his expected costs plus profit. The farmer is hedging against an abundance harvest thus weak fall harvest prices, foregoing extra profit if the general harvest is poor but his is good. The buying wheat flour miller has an offsetting hedge against a poor harvest thus high wheat prices that might otherwise force higher flour prices. The farmer grows the crop during the summer, and the miller takes delivery after fall harvest. Both sides to this futures contract benefit from price and volume certainty. Both reduce exposure to volatile commodity price risk, to their mutual benefit.

In practice, the ‘sell/deliver’ dates can be any month of the year (futures contracts are some integer multiple of months, usually out just to 12 unless ‘long’). The necessary time buffer is simply physical storage, for example wheat stored in grain elevators. We used this ‘simple’ futures stuff sometimes on my dairy farm, although we also put in almost enough storage silos to largely avoid commodity futures commissions on an annual basis. Sell high, hold low—works if you have cash reserves from always only selling high. And my grain bin capital investment was mostly less expensive over time than CME futures commissions, at least at my dairy farm’s modest commodity scale.

Trading is a bit more (and less) interesting. Any futures contract can be bought or sold at any time by anyone at any price. That is the main trading commission business of the CME. Minus CME (or equivalent) transaction fees, all intermediate ‘commodity futures’ trades are a net zero sum game. If somebody made a dollar on a trade, somebody else lost a dollar. (Since the originating commodity volume and price then delivery volume and price are forever fixed by the original futures contract.) The best (and most humorous) trading example is Eddy Murphy’s movie Trading Places, where the trade was in frozen concentrated orange juice futures.

CFTC subcommittee ‘Climate Financial Risk’ report

CFTC’s head, in yesterday’s cited press announcement, summarized it thusly:

“The Climate Subcommittee adopted it [the new report] unanimously 34-0.

…They spent countless hours drafting an incredibly thorough report that has far exceeded expectations [whose, dunno, but for sure not mine].

…As we have seen in the past few weeks alone, extreme weather events continue to savage the nation, from severe wildfires in the West to the Midwest derecho and damaging Gulf Coast hurricanes. This trend—which is increasingly becoming our new normal—will likely continue to worsen in frequency and intensity as a result of climate change.

…Escalating weather events also pose significant challenges to our financial system.

…Now, with this report [we] can begin the process of taking thoughtful and intentional steps toward building a climate resilient financial system…”

Let’s summarize CFTC’s ‘new’ and ‘thoughtful’ narrative. Increasing extreme weather endangers commodity futures trading. Got to act before it is too late!!!

Science problems with ‘Managing Climate Risk’

The cited Western forest fires are mainly a result of poor forest management: insufficient thinning, and no salvage logging of pine bark beetle killed trees. In fact, in yesterday morning’s (9/10) reports on the lightning ignited Creek fire (which produced the largest pyrocumulonimbus cloud on record), 80-90% of the burning trees were standing dead (pine bark beetle) timber that could have and should have been already salvage logged then replanted. But not in California.

Iowa’s derecho is not an infrequent occurrence, as Roy Spencer has pointed out.

Hurricane Laura was no different than hurricane Rita. The frequency and ACE intensity of land-falling Atlantic hurricanes has not been increasing.

In fact, the IPCC’s own 2012 SREX explored the ‘increasing extremes’ climate change belief and found it false. For an analysis of the 2014 US National Climate Assessment chapter 1 ‘increasing extremes’ false narrative, see essay ‘Credibility Conundrums’ in my 2014 ebook Blowing Smoke. The earlier ‘increasing extremes’ ‘news reports’ were merely false narratives, no different than the brand new CFTC report.

Financial problems with ‘Managing Climate Risk’

Futures contracts hedge exactly against such weather risks. And they reset annually. If there were a perceptible increase in weather extremes risk caused by climate change, futures contract prices would rise to offset that gradually increasing physical risk.  They have not done so.

There can thus be NO systemic risk to the financial system despite the new CFTC report. Commodity futures are in any event not a large financial system component compared to, say, gross acceptance of subprime mortgages facilitated by Fanny and Freddy in 2008.

And, as the Trading Places frozen orange juice futures hilariously showed, the trading part of commodity futures just washes out.

Who were these 34 unanimously valiant CFTC climate subcommittee members?

Unlike the Atlantic’s SEAMS article, they are all conveniently identified on pp. 163-164 of this new report. They fall into three groups, from which I pick a few examples rather than commenting on all—but you can have fun doing the rest.

Group 1: card carrying ‘academic’ warmunists (a precise term derived from former Czech president Vaclav Klaus’ 2007 book Blue Planet in Green Chains, derived in footnote 24 to essay Climatastrosophistry in my ebook Blowing Smoke).

Prof. Jeffrey Duke, Director of Purdue Climate Change Research. A certified warmunist.

Mindy Lubber, founder and CEO (easy to be CEO if you are also the founder) of CERES, globally 125 people. I thought CERES might be a staple grains food consultancy. Nope, just small firm that “mobilizes investors and companies to tackle the world’s biggest sustainability challenges, including climate change, water, and workplace inequality.” CERES says Mindy “helped catalyze the 2015 historic Paris Accord.” Vogue named her a “climate warrior”. Certified warmunist.

Group 2: Warmunist NGOs.

Dave Jones, Nature Conservancy, Senior Director of Environment Research.

Nathaniel Keohane, Environmental Defense Fund, Senior Director of Environmental Research.

Group 3: professional corporate environmentalists.

Herré Duteil, BNP Paribas, Chief Sustainability Officer.

Rene Ramos, JPMorgan Chase, Executive Director, Climate Risk.

Start with the answer, select the team, and then work backwards to the report. This warmunist governmental narrative method is now fully transparent.

Finally, there is a complicit mainstream media narrative echo chamber

Lets start with the ‘conservative’ Wall Street Journal (WSJ), to which I have had a subscription since 1973 during my first year at HBS. Andrew Ackerman reported this breaking WSJ story under the headline, “Climate Change Poses Major Risk to Financial Stability”. (The WSJ link may be paywalled.)

Two WSJ observations. First, the article ‘truthfully’ passed along notice of the atrociously bad CFTC report, but as if it were likely true when it obviously isn’t. Second, Ackerman has NO inherent ability to investigate the report’s veracity. He is a 2004 journalism major from Emory, who before joining the WSJ financial team covered municipal bonds for a different financial services publication.

A couple of other ‘reported’ financial media to hammer the echo point home:

-American Banker’s headline was, “CFTC Panel Sounds Climate Warning”.

-MarketWatch’s headline was, “Groundbreaking climate change report sounds bipartisan alarm.” Where they got bipartisan from, dunno. Made it up?

Concluding thoughts

Thanks to Dr. Bennett for bringing this to Charles attention, and thanks to Charles for asking me to investigate her query. Was fun, and surprisingly easy, but also very disturbing. Consider the blatantly obvious yet spurious weather timing. Consider the biased ‘bipartisan’ subcommittee repeating provably false climate extreme ‘non-science’. Consider the uncritical MSM full echo chamber that resulted after just 24 hours. All not good.

Regards to all

FN: I repeat a frequent Willis admonition in re comments, but in a cruder form. You don’t like it, cite it, so I can (maybe eventually, as have a life) directly reply.

23 thoughts on “Climate Change Financial Risk: Commodity Futures Trading Commission Edition

  1. And financial risk is in people finding out just how much of a farce so-called “climate change” and the agenda behind it are.

    USA must be saved from this socialist/marxist agenda….

    …. that is the REAL danger behind the AGW agenda.

    The GND would see the total collapse of the US economy , and probably world wide. !

  2. Lots of farmers have now gotten sophisticated with hedging contracts to protect themselves from losses in years when harvests are good, and thus prices go low. The CFTC is the government oversight and regulatory arm. While the CME and CBOT are where the contracts are arbitraged and what the CFTC oversees. This is similar to how the SEC oversees the equity stock markets like NASDAQ, NYSE, etc.

    The Chicago Board of Trade (CBOT) is where corn, soybean, soybean oil, soybean meal, wheat and rough rice futures are traded. The Chicago Mercantile Exchange (CME) is where futures in lean hogs, live cattle, and feeder cattle are traded. Both exchanges are now part of the CME group. In addition, cotton futures are traded at ICE Futures U.S. in New York.

    The idiocy at work here by the morons at CERES and other Warmunist-alarmists is that climate is not weather. Just as Anthony Watts pointed out in very clearly in his podcast of the Oregon-Washington fires, weather conditions that brought together this years fires were not present last year when the abundant rains and mild temperatures were allowing the grasses and undergrowth (this years low story fuels) in one year is not climate.

    So Farmers and cattlemen are hedging against weather events this year’s product, this harvest season, not climate change over 30 years and conditions as they might be in 2050 for farmers.
    A season’s crops is harvested that year not in 2050. For cattlemen, a 400 lb calf goes to the market feed lot that year (and at McDonalds 6 months after that as an ingredient in a Quarterpounder™). Not in 30 years. Each year (harvest season) the cycle starts over and everyone prices accordingly.

    For a quick primer on when and why Farmers hedge their crops and with vignettes-examples explained, see more here: https://extension2.missouri.edu/g602

    ======
    As a hat tip about betting on the future, the biggest hat tip of all always goes to Yogi Berra with his: “It’s tough to make predictions, especially about the future.”

    All these warmunists are the same mindset as the Malthusian Exemplar, Paul Ehrlich. This story about his failed malthusian instincts and the future price of commodities in a future time point has been discussed before here at WUWT but bears repeated/reminding:

    The Simon–Ehrlich wager:
    So uber Malthusian Prof Paul Ehrlich, a biologist by training, famously made a famous bet in 1980 with another Cornucopian business professor Julian L. Simon. The wager was whether a basket of commodities (5 mineral-metals: chromium, copper, nickel, tin, and tungsten.) would be more costly (Ehrlich) or less costly in 10 years, 1990.
    Ehrlich lost the bet without any doubt on all 5, as all the commodities they bet on were cheaper 10 years later. Julian Simon won because the price of three of the five metals went down in nominal terms and all five of the metals fell in price in inflation-adjusted terms, with both tin and tungsten falling by more than half. Ehrlich had to pay Simon $576.07 to settle the wager.
    More here on the wager: https://en.wikipedia.org/wiki/Simon–Ehrlich_wager

    Now of course those were commodities that Ehrlich-Simon wager were metals, not agricultural products as discussed here. But the Malthusian Warmunists should take caution on NOT repeating their fellow-traveller Paul Ehrlich’s lost wager with investors’ money in the agricultural commodities markets in the coming years and decades. And if the investors do lose money betting on agricultural commodity prices versus some cargo cult climate change junk output from the IPCC, then the investing world has a word for them: They are called “suckers.”

    • Another point, oft discussed here at WUWT, is the likely analog for the current Modern Warm Period since 1850 (or 1950) is likely the past period of the Medieval Warm Period , roughly 850 AD (or 950 AD) to about 1350 AD (or 1450 AD), exact dates may vary by source. We know of two stories during of agricultural expansion during the Medieval Warm Period, the Chaco Indian culture of Mesa Verde in the 4 Corners region of the US, and the Greenland Norse pastoral colonies.

      The Anasazi American Indians (the Chaco culture) were growing maize (aka C4 corn) on the 6,500-7,000ft elevation Mesa Verde plateau from 850 to their cultures final and rapid collapse around 1275 AD. The maize output on the plateau that the culture depended upon apparently increased over 400 years enough to allow for an increasing level societal size and construction of habitats. That is until the climate grew colder and drier. The climate change that benefitted them was warming, and the climate change that did them in was cooling, which led to drier conditions.

      So again, going back to the analog of the MWP and agriculture, it is not the warming we need to worry about, it is a cooling Earth that will crash agricultural outputs.

      And even the IPCC’s reports on agricultural outputs under Climate Change show a net benefit to agricultural grain outputs from Canada and Russia under all projected emissions scenarios, including RCP 8.5 as growing seasons lengthen moving northward in those countries. And both Canada and Russia have abundant surface water resources to allocate to irrigation for increased grain output if both the demand and warming climate is there.

    • Especially for agriculture-based commodities: increasing CO2 means increasing harvests.
      The risks, if any, go the other way around.
      If warming is real? Longer growing seasons are also beneficial for farmers…

      • Longer growing seasons, greater drought tolerance, greater bio-mass production, reduced frost damage, all directly attributable to increased CO2.

        The benefits of CO2 are manifesting, yet very rarely reported, while the harms are failing to manifest except in the hype.

  3. 80-90% of the burning trees were standing dead (pine bark beetle) timber that could have and should have been already salvage logged then replanted. But not in California.

    I read this sort of stuff and I wonder, “Is this really true?” After a short search I find that California’s regulations have made the timber industry unprofitable to the point that most lumber in the state is imported from Oregon and Washington. Salvaging operations of specifically pine bark beetle damage didn’t turn up.

    • Steve, the lumber from Oregon and Washington is probably actually from British Columbia and just passing through Oregon and Washington to California. The Spotted Owl has stopped logging on public lands in the USA NW, including “School Sections”, and the rules on private lands, although allowing logging, are restrictive.

      • And even in British Columbia, the AAC (Allowable Annual Cut) is dropping by at least a 1/3, mainly due to the Pine Beetle that all happened as the Pine forests all became mature at the same time and created the beetle due to the ‘food’ source being ripe. Which was the result of the vast fires in the late 19th century, when these same forests suffered a similar cyclic fate. Plus now everything is getting harder to permit, such as habitat for the Caribou. Lumber was $875 last week, (the highest ever) since we can’t meet demand, as a lot of folks are stuck at home in the pandemic so are renovating their homes.

        • Earthling2 September 12, 2020 at 7:33 am

          …in British Columbia…in the late 19th century, … these same forests suffered a similar cyclic fate.

          One of my sayings from my file of quotes & smart remarks says:

          Observing something for the first time, doesn’t mean it has never happened before.

  4. Rud,
    That CFR plot diminishes your credibility. CFR is primarily controlled by historical testing capacity development, as I am sure you already know.
    There are 156 countries in the world with populations over one million. Of all of these countries, only 8 of them today have a recorded COVID-19 population fatality rate which is higher than the USA – 3 countries in Europe and 5 in South America. This is not something to be bragging about.

  5. Just to be clear for those unfamiliar with commodities trading, you are cashed out each day. Unlike regular stocks and bonds where you can hold as the price fluctuates and cash out when the timing is right, commodity accounts are done on a daily basis. If you are at a loss at the end of the day, you must cover that with cash or assets. It is called a margin call. That is the danger of commodity futures trading. Also, although unlikely, if you are not able to sell your futures contract, you will have to take delivery of the commodity. What would the average person do with 10,000 bushels of wheat? This type of trading is not for amateurs or the faint hearted.

  6. Taking another stab at cap and trade – but maybe without the cap. Don’t forget the CCX – Chicago Climate Exchange – or that Government Sachs tried an exchange of their own. All (most?) other futures are based on a physical that has a price. But what is this climate thingy and what is its actual spot (today’s) price

    As a former auditor in that field, I am more than disappointed in the CFTC and its “commission” of activists.

    • Banks were in the forefront of dematerialising commodity futures. It had lots of advantages to them: they didn’t have to make or take delivery, which requires real assets and supplier and consumer contracts at a minimum. They didn’t have to close out positions so that physical supply and demand were taken to delivery: they could instead rely on the cash out price, which they could influence heavily with the one commodity they do possess: cash for margin collateral – which they can also ration to those I the market who are not banks.

      The negative prices for WTI earlier in the year were the result of a storage squeeze in one of the contracts where real delivery still exists. I suspect that some banks were badly burned in the process.

  7. Correction: Notwithstanding the PhD in physical oceanography, I’m not a “professional climate subsystem researcher” but an international environmental safeguards specialist, meaning, I do environmental management related work on infrastructure projects (mostly flood control drainage and irrigation but also roads and bridges etc), mostly in developing Asia and mostly funded by Asian Development Bank. “Climate change” is a very small part of my work. But at least I’ve taken some math and “hard” science courses since high school 😉

  8. The financial risk due to climate change is INSIGNIFICANT compared to the financial risk of poorly conceived climate legislation.

  9. This is truly about the most useless report imaginable, written by people who do not understand the futures markets.

    Futures are used by people within an industry to protect against price risk. For a buyer of a commodity, his risk is prices may move higher in the future. He will hedge by buying futures contracts at the price for March delivery today for delivery in March ‘21. Let’s say a user of corn buys today at $3.75 per bushel for delivery in March.

    No matter what happens between now and March, he has locked in his price at $3.75 per bushel. Regardless of who gets elected President, trade relations with China, or a weather event, due to Global warming or not, our buyer will pay $3.75 for corn in March whether the cash price is $2.50 or $10.00.

    A producer of corn can sell next years crop today for delivery in Sept ‘21 for $3.85 per bushel. Whether the price of corn next September is $2.50 or $10.00, he will receive $3.85 per bushel.

    The point is that each producer or user is selling or buying at a price he can live with at a date in the future. His purpose is to eliminate the risk of the price changing adversely between today and the time in the future. Importantly, the buyer or the seller is not trying to guess reasons that may cause price changes, he just wants to eliminate the change in price risk however it occurs.

    As a result, changes because of global warming are irrelevant to the working of the futures market, and is not something the CFTC can do anything about. Soybean prices gyrated all over the place as a result of negotiations with China, yet the futures market itself was never imperiled. Nor did the CFTC commission a study on the long term effect of trade policy on soybeans.

    As another poster commented, positions are marked to market daily. If a buyer bought at $3.75 and the price today for that contract month is $3.00, the buyer puts up $.75 per bushel in collateral that day. As a result, there is little risk that either a buyer or seller will not be able to meet his financial obligation if the price moves against him.

    The futures market is a price risk management tool, not an event risk management tool

  10. From the report: “Traditional risk-modeling techniques, which rely heavily on historical data, will become increasingly unhelpful guides to the future.”
    Translation: We have seen no negative impacts yet, but we will sow panic anyway.

    • We’ve had a few of those. Oil markets have repeatedly got oil geopolitics wrong, with consequent huge price excursions up and down. Or you could look at the models for interest rate and mortgage derivatives that turned out to be hopeless. Nothing to do with climate.

  11. If I’ve understood this correctly, the CTFC report essentially says “climate change” will result in poor harvests from now on and this will drive futures contract prices higher. As this is certainly total BS, there must be some significant potential to make some serious money by betting the other way. I’m not into gambling, but if I were I can’t imagine a better way to improve ones odds of winning than this. Hmm … I wonder if any of those government regulatory watch dogs will be looking at trading in commodity futures by the authors of the CFTC report to see if they bet opposite of their report’s conclusions.

  12. The comment about Malthus and the Ehrlich-Simon bet reminded me of a term I haven’t heard in quite some time: Peak Oil

    Peak oil was completely wrong. In 1956 peak oil was predicted by 1970 – at the latest. Then in 1974 the
    predictions said 1995. Again in 2001 the “grim prediction” was 2010, much like the grim predictions of catastrophic climate change.

    It’s always 10 or 20 years down the road, always wrong, and always with plenty of excuses as to why the predictions were off.

    But it’s still coming if we don’t change our lifestyle. Just wait til 2030!!!

  13. From the article: “-MarketWatch’s headline was, “Groundbreaking climate change report sounds bipartisan alarm.” Where they got bipartisan from, dunno. Made it up?”

    Unfortunately, it may be bipartisan.

    I heard Kevin McCarthy, the Republican minority leader of the U.S. House of Representatives practically agree that climate change was happening and humans had something to do with it, in an interview on Fox and Friends, this morning.

    Republican representative Matt Gaetz, a very influential member of Congress, apparently thinks Human-caused climate change is real.

    I’m not sure we have any skeptic Republican warriors in the U.S. Congress at all, other than Oklahoma U.S. Senator Jim Inhofe. Most of them that go on the record sound like McCarthy and Gaetz.

    At least our leader, President Donald Trump, still gets it right, and that’s the most important thing at this time:

    https://dailycaller.com/2020/09/14/trump-casts-doubts-about-climate-change-during-briefing-on-california-wildfires/

    “President Donald Trump suggested Monday that there isn’t a scientific consensus regarding climate change’s role in the recent California wildfires.”

    end excerpt

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