Senate probe finds inflated prices in wheat market

WASHINGTON -- A rise in speculative trading in wheat futures has artificially inflated their prices, making it harder for farmers and grain processors to hedge against risk. That can mean higher prices for consumers, according to a yearlong inves...

WASHINGTON -- A rise in speculative trading in wheat futures has artificially inflated their prices, making it harder for farmers and grain processors to hedge against risk. That can mean higher prices for consumers, according to a yearlong investigation by a Senate panel.

Senators are calling on federal regulators to restrict the volume of index trading in the wheat futures market on the Chicago Board of Trade.

Some analysts and lawmakers also blame the surge in popularity of commodity index funds for artificially boosting the prices of oil, gasoline, corn and other commodities.

The investigative panel of the Senate Homeland Security and Governmental Affairs Com-mittee found in a report to be released Wednesday that aggressive speculation in the wheat futures market has disrupted normal price patterns and hurt the ability of farmers, grain processors and others to hedge against risk.

The findings take on added significance as Congress crafts sweeping new rules for finan-cial markets.


"Speculators have overwhelmed the wheat futures market and ... undermined (its) value," Sen. Carl Levin, D-Mich., the subcommittee's chairman, told reporters Tuesday. "Excessive speculation in commodity indexes has created losers throughout the wheat industry."

Those players, from wheat farmers to grain elevators, merchants and processors, and users like bakeries and cereal companies, "can't manage their price risks through hedging and are socked with unwarranted costs from higher margin calls and failed hedges," said Levin. "When those costs are passed on to consumers, the result is higher food prices."

Commodity indexes are made up of futures contracts for delivery in different months. Commodity index traders sell financial instruments whose values rise and fall along with the value of the index on which they are based.

The traders buy wheat futures to help offset their risk from selling the instruments to third parties. That pumps billions of dollars into the market and lifts demand and prices for wheat futures, the Senate inquiry found. The trend has been especially pronounced since 2005.

Margin calls occur when farmers or other users are required to put more money into their futures accounts to cover obligations because the contracts they bought declined in value.

The trading volume in wheat futures has created a large gap between prices in the futures and spot, or cash, markets. It has prevented the normal convergence between the two at the time when the futures contract expires and delivery is due, the report found.

The average gap between futures and spot prices for wheat at expiration time on the Chi-cago exchange more than doubled to $1.53 last year from 60 cents in 2007. The gap was 34 cents in 2006 and about 13 cents a bushel in 2005, according to the report.

Still, wheat futures for July delivery finished at about $5.47 a bushel Tuesday on the Chi-cago Board of Trade, down from $8.66 a year ago. The CBOT is part of the CME Group Inc., which also controls the Chicago Mercantile Exchange and the New York Mercantile Ex-change.


The Senate report recommends that the Commodity Futures Trading Commission end the allowance for some index traders that enables them to hold more than the standard 6,500 wheat futures contracts at a given time. Some traders on the Chicago exchange have been allowed to hold as many as 53,000 contracts, according to the report.

The CFTC has denied there was a problem, Levin said. But new CFTC Chairman Gary Gensler "seems ready to act to protect the markets from excessive speculation," he said.

"As the (CFTC) continues our own analysis and appropriate regulatory responses, Chair-man Levin's recommendations will be given the utmost attention and careful consideration," Gensler said in a statement Tuesday.

Spokesmen for the Chicago Mercantile Exchange and Kellogg Co. didn't return calls for comment Tuesday afternoon.

Katy Ziegler Thomas, vice president for government relations of the National Farmers Un-ion, said that speculators "are the cause for the commodity bubble that has had such a nega-tive impact on our members."

Concern over speculation in the oil futures market reached a high point last fall when the House approved measures aimed at curbing such activity and trading abuses in oil and other commodity markets, despite a threatened veto by President George W. Bush. The bipartisan legislation called for giving the CFTC broader authority and limiting the size of the position that traders can hold in certain markets. It failed to move in the Senate.

And the CFTC twice last year took the unusual step of disclosing investigations into the possible manipulation of prices -- of crude oil and cotton futures.

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