Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility.

Curbing the proportion of a commodity derivatives market that a single trader can control may help rein in "excessive speculation," the commission said in an e-mailed statement. Price fluctuations hurt farmers, food-makers and consumers, including in the poorest countries, the commission said.

"We need regulators to keep a closer eye on positions taken up in respect of commodity derivatives," Michel Barnier, the EU's financial services chief told reporters in Brussels today. "This will include the possibility of introducing position limits if necessary," he said. "Personally speaking I believe in this."

French President Nicolas Sarkozy said in Davos last week that speculation was driving up food prices. World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, according to a United Nations report earlier this month, contributing to the uprising that ousted Tunisia's Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.

The possible trading measures are included in a strategy paper published today by the commission on commodities markets and raw materials.

David Fuller's view Commodities have entered the second decade of a secular bull market or supercycle, which resumed following the 2008 global market meltdown. This is fundamentally driven by factors which Fullermoney has long summarised as: Supply Inelasticity Meets Rising Demand.

Commodity price moves, particularly to the upside over the last decade, have also been propelled by speculation because most investors and traders wish to participate in 'the best game in town'. We saw this in 1H 2008 and we have seen it again in recent months.

When the combined factors of fundamental shortages and speculation create front page headlines regarding commodity price inflation and shortages, governments are often blamed. We have seen this in a number of countries recently, not least China and India in recent months and Egypt over the last few weeks.

Governments can do little about global shortages of commodities, at least in the short term, but they can curb speculation and hording. In the West, we can expect to hear more on this subject over the next few months from the EU, and also the Commodity Futures Trading Commission (CFTC) in the USA.

This will create a headwind for commodity markets, although probably not strong enough to check the upward trends in markets where there are genuine supply concerns, not least for the grain and bean complex over the next few months, until we eventually receive better crop news.

Since rising commodity prices increase inflationary pressures, they are bearish for government bonds. They are also a headwind for stock market indices. However the effect on individual sectors varies considerably. For instance, rising commodity prices are bearish where they increase corporate input prices significantly, but they can be a boon for commodity shares.