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.