Senate investigates speculation in wheat market

Several market participants appeared before a Senate subcommittee today to discuss the effect of excessive speculation on the price of wheat futures.

The hearing was held after a report was released last month by Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, and Senator Tom Coburn, an acting ranking minority member. Entitled 'Excessive Speculation in the Wheat Market', it called for a clampdown on traders buying wheat futures.

Discussing the subcommittee's investigation detailed in the report, Levin said: "We found that index traders purchased huge numbers of wheat contracts on the Chicago exchange [over the last three years], increased futures prices relative to cash prices, and created unwarranted costs and risks for wheat farmers, grain merchants, grain processors, and consumers."

He added that speculative money had overwhelmed the market and federal regulators had failed to address the issue.

Levin called on the Commodity Futures Trading Commission (CFTC) to phase out waivers to permission limits that are sometimes granted to traders. If this fails, he said the CFTC should consider imposing more rigorous limits.

Testifying in front of the subcommittee today, Gary Gensler, chairman of the CFTC, admitted that a continued lack of convergence between wheat futures and cash positions had reduced the market's usefulness for commercial hedgers. He said the CFTC was seriously considering the committee's recommendation to phase out existing waivers for index traders and that the topic would be discussed in upcoming hearings on applying federal position limits to commodity trading announced on July 7, 2009.

Gensler detailed that the average difference between the Chicago Board of Trade (CBOT) wheat futures price at contract expiration and Toledo cash wheat prices rose from an average of about 5 cents per bushel in 2005 to 47 cents in 2006, narrowed to 24 cents in 2007, but widened again to $1.07 in 2008.

The Chicago Board of Trade (CBOT) implemented changes that took effect from the July 2009 contract to address the problem, but the difference between the futures and cash price is still 83 cents. Gensler called this unacceptable, adding that several market participants had stopped using the CBOT wheat futures contract as a result.

Also testifying today, Charles Carey, vice chairman of CME Group, argued that numerous studies arranged by CME failed to support the conclusion that index traders or swap dealer participants caused volatility, high prices or lack of convergence. He added that, while the CME was committed to solving the convergence issue, the subcommittee's recommendations would cause more harm than good to the market.

The CME hopes to see significant improvement in convergence by mid-September, according to Carey, if not by the end of the year. He said this would be prompted by several contract modifications made in recent months by the Chicago Board of Trade (which is owned by the CME Group), including adding delivery points and increasing the storage fee seasonally. If this does not have an impact Carey said the exchange had additional modifications "at the ready".