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Futures going against grain

Wheat prices artificially inflated by speculative trading, probe shows

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 Committee found in a report to be released today 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 financial 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 Chicago 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.

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.

The CFTC has denied there was a problem, Levin said.


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