The Senate Investigations Subcommittee has released a report examining the purchase of Chicago wheat contracts by index traders leading to significant unwarranted costs and price risks for farmers, grain elevators, grain processors and consumers.
"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, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations "It is another case of speculative money overwhelming a market, and federal regulators failing to take the steps needed to protect the market. In fact, the CFTC has allowed some index traders to exceed normal trading limits for wheat."
A one-year bipartisan Subcommittee investigation examined millions of trading records from the Chicago Mercantile Exchange, Kansas City Exchange, Minneapolis Grain Exchange, the Commodity Futures Trading Commission, and others to track and analyze wheat prices. The investigation determined that unwarranted price changes caused by index traders made it difficult to use the futures market to protect against price changes and generated significant unanticipated costs. Those costs included higher margin calls due to higher futures prices; failed hedges; and disruption of normal pricing patterns and relationships.
"The bottom line," said Levin, "is that excessive speculation in commodity indexes has created losers throughout the wheat industry, from wheat farmers to grain elevators, grain merchants, grain processors, and grain users like bakeries and cereal companies. Those groups can’t manage their price risks through hedging, and are socked with unwarranted costs from higher margin calls and failed hedges. When those costs are passed onto consumers, the result is higher food prices."
The report recommends that the CFTC apply the standard 6,500 wheat position limit to all commodity index traders in the wheat market to stop the excessive speculation. If that does not cure the pricing problems on the Chicago exchange, the report recommends lowering the position limit further, such as to the 5,000 contract limit that applied to wheat traders until 2005.
The National Grain and Feed Association issued a statement praising the report saying it reflects a view the NGFA has expressed for several years, and they concur with the report’s finding that the influx of capital from new players in the marketplace has contributed to the lack of convergence and placed financial stress on grain hedgers, particularly during periods of market volatility.
"The Senate report provides an important contribution to ongoing efforts to enhance performance of the CBOT wheat futures contract and return it to its primary purpose: to serve the needs of commercial grain hedgers and agricultural producers. We look forward to continuing that process with the subcommittee, the CME Group and the CFTC."