CFTC may restrict trades over wheat price concerns

WASHINGTON — Federal regulators are “seriously considering” restrictions in the wheat futures market being urged by lawmakers concerned over speculation they say has artificially inflated prices, hampering risk management by farmers and grain processors.

A yearlong investigation by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee found that the disconnect between the wheat futures and cash markets can mean higher prices for consumers. Several senators have called on the Commodity Futures Trading Commission to restrict the volume of index trading in the wheat futures market on the Chicago Board of Trade.

The agency “is seriously considering this recommendation … (and) will continue to closely monitor the performance of the wheat futures contract,” CFTC Chairman Gary Gensler told the Senate subcommittee at a hearing Tuesday.

Panel chairman Sen. Carl Levin, D-Mich., said such a review “is badly needed.” Several other members of the committee, representing farm states, voiced concern about the impact of market problems on wheat producers in those states.

But an official of the company that operates the Chicago Board of Trade, where wheat futures are traded, opposed such constraints and disputed the Senate probe’s findings.

Charles Carey, vice chairman of CBOT owner CME Group Inc., said new restrictions on index trading “are more likely to be harmful to the functioning of our markets than helpful.”

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.

Commodity index 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 investigation found. The trend has been especially pronounced since 2005.

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 subcommittee’s report found.

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, according to the report released last month.

“Bakers cannot escape the impact,” Hayden Wands, the director of procurement at Sara Lee Corp. and an official of the American Bakers Association, said at Tuesday’s hearing. “Today’s volatility represents millions of dollars daily in undue financial risk.”

Mark Cooper, research director at Consumer Federation of America, urged “more aggressive” limits on the amount of positions held by speculative traders.

Steven Strongin, head of the global investment research division at Goldman Sachs Group Inc., said he would favor some new position limits.

But in his testimony prepared for the hearing, Carey said the Senate report’s findings “are based on faulty economic analysis and a misunderstanding of basic market economics.”

Carey agreed that there is lack of convergence between wheat spot and futures prices — which he said the exchange is committed to solve. However, he rejected the notion that such “temporary order imbalances” have a lasting effect on prices.

The CBOT has been working to resolve the problem and is prepared to make further changes to the wheat futures contract if needed, Carey said. The exchange already has added new delivery points and increased the storage fee, he noted.

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 CFTC also announced Tuesday that it will hold the first of three public hearings next week to gather views on whether the government should impose limits on the number of futures contracts in oil and other energy commodities held by speculative traders.

The possible CFTC action take on added significance as Congress crafts sweeping new rules for financial markets.