Senate report finds funds drove up wheat prices

by Ron Sterk
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WASHINGTON — A report from the U.S. Senate Permanent Subcommittee on Investigations said Tuesday large purchases of wheat futures by commodity index funds in aggregate constituted "excessive speculation" and resulted in "significant unwarranted costs and price risks."

"In the last three years, speculators have spent billions of dollars on commodity indexes, and the financial firms selling those index instruments have purchased billions of dollars in commodity futures to offset their financial risks, creating price disruptions for producers and consumers," said Senator Carl Levin of Michigan, chairman of the subcommittee that issued the 247-page report titled "Excessive Speculation in the Wheat Market."

The one-year bipartisan subcommittee investigation examined millions of trading records from the Chicago Board of Trade (now part of the Chicago Mercantile Exchange), the Kansas City Board of Trade, the Minneapolis Grain Exchange, the Commodity Futures Trading Commission (C.F.T.C.) and others to track and analyze wheat prices.

"In the case of wheat, we found that index traders purchased huge numbers of wheat contracts on the Chicago exchange, increased futures prices relative to cash prices and created unwarranted costs and financial risks for wheat farmers, grain merchants, grain processors and consumers," Mr. Levin said.

Data showed commodity index traders increased their holdings from about 30,000 wheat contracts in 2004 to 220,000 contracts in 2008.

"That sevenfold increase dramatically enlarged the market share of commodity index trading so that, in each year since 2006, commodity index traders held between 35% and 50% of all outstanding wheat futures contracts on the Chicago exchange," the report said.

The subcommittee found that the large number of wheat futures contracts purchased and held by commodity index traders on the Chicago futures exchange constituted "excessive speculation," which resulted in increased futures prices relative to cash prices, impeded (cash and futures) price convergence, unwarranted price changes and undue burden on commerce.

The average basis (the gap between futures and cash prices at a given location) at contract expiration for Chicago wheat grew from about 13c per bu in 2005, to 34c in 2006, to 60c in 2007, to $1.53 in 2008, "a tenfold increase in four years," the report noted.

Unwarranted price changes imposed undue burden on those involved all along the wheat marketing chain, from producer to consumer, the subcommittee said. The costs included higher margin calls due to higher futures prices, failed hedges and disruption of normal pricing patterns and relationships, the report said.

The report also said that C.F.T.C., which regulates futures trading, actions to waive position limits for commodity index traders "facilitated excessive speculation in the Chicago wheat futures market" and was "inconsistent with the C.F.T.C.’s statutory mandate to maintain position limits to prevent excessive speculation."

The higher futures prices also inflated crop insurance premiums and impaired the "accuracy of the formulas used to determine payouts to farmers."

The subcommittee recommended the C.F.T.C. phase out existing waivers and reapply standard position limits, impose additional restrictions on commodity index traders if the problem persists after the waiver phase out, analyze other agricultural futures to see if similar problems exist and strengthen data collection for non-agricultural commodities, especially crude oil.

"It is time for the C.F.T.C. to change course, rein in commodity index traders and clamp down on excessive speculation that is disrupting commodity prices," Mr. Levin said.

The report was the subcommittee’s fifth on commodity pricing since 2003, but the first on agricultural prices. The others mostly focused on energy markets.

The subcommittee plans to hold a hearing on excessive speculation in the wheat market in July.

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