UnitedStatesSenateCommitteeonHomelandSecurityandGovernme...

http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.Majorit...

Contact:LesliePhillips (202)2242627 June23,2009

InvestigationsSubcommitteeReleasesLevinCoburnReportOn ExcessiveSpeculationintheWheatMarket

ReportCallsforClampdownonIndexTradersBuying WheatFutures
WASHINGTONToday,SenatorCarlLevin(DMich.),ChairmanoftheU.S.Senate PermanentSubcommieeonInvestigations,andSen.TomCoburn(ROkla.),ActingRanking MinorityMember,releaseda247pagereportentitled,ExcessiveSpeculationintheWheat Market,examininghowcommodityindextraders,intheaggregate,havemadesuchlarge purchasesontheChicagowheatfuturesmarketthattheyhavepushedupfuturesprices, disruptedthenormalrelationshipbetweenfuturespricesandcashpricesforwheat,and causedfarmers,grainelevators,grainprocessors,consumers,andotherstoexperience signicantunwarrantedcostsandpricerisks. Inthelastthreeyears,speculatorshavespentbillionsofdollarsoncommodityindexes,and thenancialrmssellingthoseindexinstrumentshavepurchasedbillionsofdollarsin commodityfuturestoosettheirnancialrisks,creatingpricedisruptionsforproducersand consumers,saidLevin.Inthecaseofwheat,wefoundthatindextraderspurchasedhuge numbersofwheatcontractsontheChicagoexchange,increasedfuturespricesrelativeto cashprices,andcreatedunwarrantedcostsandrisksforwheatfarmers,grainmerchants, grainprocessors,andconsumers.Itisanothercaseofspeculativemoneyoverwhelminga market,andfederalregulatorsfailingtotakethestepsneededtoprotectthemarket.Infact, theCFTChasallowedsomeindextraderstoexceednormaltradinglimitsforwheat.Levin added,ItistimefortheCFTCtochangecourse,reinincommodityindextraders,andclamp downonexcessivespeculationthatisdisruptingcommodityprices. AoneyearbipartisanSubcommieeinvestigationexaminedmillionsoftradingrecordsfrom theChicagoMercantileExchange,KansasCityExchange,MinneapolisGrainExchange,the CommodityFuturesTradingCommission(CFTC),andotherstotrackandanalyzewheat prices.Thedatashowedthatcommodityindextraderstraderswhoarenotproducersor consumersofwheat,butbuywheatfuturestohelposettheirnancialexposurefrom sellingcommodityindexinstrumentstothirdpartiesinjectedbillionsofdollars,inthe aggregate,intothewheatfuturesmarketoverthelastsixyears.Commodityindextraders increasedtheirholdingsfromatotalofabout30,000wheatcontractsin2004,upto220,000 contractsin2008.Thatsevenfoldincreasedramaticallyenlargedthemarketshareof commodityindextradingsothat,ineachyearsince2006,commodityindextradersheld between35%and50%ofalloutstandingwheatfuturescontractsontheChicagoexchange. TheSubcommieeinvestigationuncoveredsubstantialandpersuasiveevidencethat,by purchasingsomanyfuturescontracts,commodityindextraders,intheaggregate,pushedup

1of4

1/14/201110:35PM

UnitedStatesSenateCommitteeonHomelandSecurityandGovernme...

http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.Majorit...

futuresprices,createdanunprecedented,large,andpersistentgapbetweenfuturesand cashwheatpricesintheChicagomarket,andimpededthetwopricesfromconvergingat contractexpiration.Forexample,theaveragegapbetweenfuturesandcashpricesonthe expirationoffuturescontractsontheChicagoexchange,calledthebasis,grewfromabout from13centsperbushelin2005,to34centsin2006,to60centsin2007,to$1.53in2008,a tenfoldincreaseinfouryears. Theinvestigationdeterminedthattheseunwarrantedpricechangesimposedanundue burdenonwheatfarmers,grainelevators,grainmerchants,grainprocessors,consumers,and othersbymakingitdiculttousethefuturesmarkettoprotectagainstpricechangesandby generatingsignicantunanticipatedcosts.Thosecostsincludedhighermargincallsdueto higherfuturesprices;failedhedges;anddisruptionofnormalpricingpaernsand relationships.Theinvestigationfoundthatamajorreasonforeachoftheseproblemsisindex tradingthat,asawhole,constitutedexcessivespeculationinthewheatfuturesmarket. Theboomline,saidLevin,isthatexcessivespeculationincommodityindexeshas createdlosersthroughoutthewheatindustry,fromwheatfarmerstograinelevators,grain merchants,grainprocessors,andgrainuserslikebakeriesandcerealcompanies.Those groupscantmanagetheirpricerisksthroughhedging,andaresockedwithunwarranted costsfromhighermargincallsandfailedhedges.Whenthosecostsarepassedonto consumers,theresultishigherfoodprices. TheCommodityExchangeActrequiresthekeyfederalcommoditiesregulator,theCFTC,to preventexcessivespeculationbyimposingpositionlimitsoncommoditytraders.Butinthe wheatmarket,insteadofrestrictingtraderstonomorethan6,500wheatcontractsatatime, itsstandardpositionlimitforwheat,theCFTChasallowedsomecommodityindextradersto holdupto10,000,26,000,even53,000contractsatatime.Sixcommodityindextradersare currentlyauthorizedtoholdatotalofupto130,000wheatcontractsatatime,insteadofup to39,000contracts,oronethirdlessifstandardpositionlimitswereapplied. Tostoptheexcessivespeculation,theLevinCoburnreportrecommendsthattheCFTC applythestandard6,500wheatpositionlimittoallcommodityindextradersinthewheat market.IfthatdoesnotcurethepricingproblemsontheChicagoexchange,thereport recommendsloweringthepositionlimitfurther,suchastothe5,000contractlimitthat appliedtowheattradersuntil2005.Inaddition,thereportrecommendsthattheCFTC analyzetheimpactofcommodityindextradingonothercommodities,includingcrudeoil,to determineifexcessivespeculationisdistortingprices. Thisreportisthe hinaseriesreleasedbytheSubcommieeoncommoditypricingsince 2003.Therstfourfocusedonenergyprices,includingforgasoline,crudeoil,andnatural gas.Twohavefocusedonhowexcessivespeculationcandistortcommodityprices. A2006reportfound,forexample,thatbillionsofdollarsincommodityindextradingonthe crudeoilmarkethadincreasedfuturespricesin2006,andwereresponsibleforanestimated $20outofthethen$70costforabarrelofoil.A2007reportshowedhowasinglehedgefund namedAmaranthmadehugetradesonthenaturalgasmarket,pushedupfuturesprices,

2of4

1/14/201110:35PM

UnitedStatesSenateCommitteeonHomelandSecurityandGovernme...

http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.Majorit...

andincreasednaturalgaspricesforconsumers.Thisreport,therstbytheSubcommieeto examineagriculturalprices,useswheatasacasehistoryduetotheavailabilityofdetailed commodityindextradingdata,thelargeproportionofcommodityindextradingonthe Chicagoexchange,andthedramaticpricingproblemsaectingwheattradedontheChicago exchange. InJuly,theSubcommieewillholdahearingonexcessivespeculationinthewheatmarket. Thereportsndingsandrecommendationsareasfollows. FINDINGSANDRECOMMENDATIONS A.FINDINGS (1)ExcessiveSpeculationinWheat.Thelargenumberofwheatfuturescontractspurchased andheldbycommodityindextradersontheChicagofuturesexchangeoverthelastve yearsconstitutedexcessivespeculation. (a)IndexTradersIncreasedFuturesPricesRelativetoCashPrices.Thelargenumberof wheatfuturescontractspurchasedbyindextradersontheChicagoexchangecreated additionaldemandforthosecontractsandwasamajorcontributingfactorintheincreasing dierencebetweenwheatfuturespricesandcashpricesfrom2006to2008. (b)IndexTradersImpededPriceConvergence.Overthepastfewyears,thelargenumberof Chicagowheatfuturescontractspurchasedbyindexinvestorshasbeenamajorcauseofthe frequentfailureofwheatfuturesandcashpricestoconvergeuponcontractexpiration. (c)UnwarrantedPriceChanges.TheadditionaldemandforChicagowheatfuturescontracts aributabletocommodityindextraderscontributedtounreasonableuctuationsor unwarrantedchangesinwheatfuturesprices,resultinginanabnormallylargeand persistentgapbetweenwheatfuturesandcashprices(thebasis).Largelyasaresultofindex trading,theaveragedierencebetweenthecashandfuturespriceatcontractexpirationrose from13centsperbushelin2005,to34centsin2006,to60centsin2007,to$1.53in2008,a tenfoldincreaseinfouryears. (d)UndueBurdenonCommerce.Theunwarrantedchangesinwheatpricesresultingfrom thelargeamountofindextradingintheChicagowheatfuturesmarketcreatedanundue burdenoninterstatecommerce.Thisundueburdenwasimposedonfarmers,grainelevators, grainmerchants,grainprocessors,andothersbyimpedingusefulhedgingstrategies, imposingsignicantunanticipatedcosts,andprovidinginaccurateindicationsofexpected pricesinthewheatmarkets. (2)CFTCWaiversFacilitatedExcessiveSpeculation.CFTCactionstowaivepositionlimitsfor commodityindextradersfacilitatedexcessivespeculationintheChicagowheatfutures market.WaivingpositionlimitsfortheseindextradersisinconsistentwiththeCFTCs statutorymandatetomaintainpositionlimitstopreventexcessivespeculation.

3of4

1/14/201110:35PM

UnitedStatesSenateCommitteeonHomelandSecurityandGovernme...

http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.Majorit...

(3)InatedFuturesPricesAectCropInsurance.Becausefederalcropinsurance,whichis backedwithtaxpayerdollars,usesfuturespricesinitscalculations,inatedfuturesprices caninateinsurancepremiums,whosecostissharedbyfarmersandtaxpayers,andimpair theaccuracyoftheformulasusedtodeterminethepayoutstofarmers,resultingineither overpaymentsorunderpayments. (4)PoorDataImpedesAnalysis.Thereisalackofadequatedataonthenumberoffutures contractspurchasedbycommodityindextradersfornonagriculturalcommoditieslikecrude oil.Improveddataisessentialtoanalyzetheextenttowhichindextradersmaybe contributingtohigherfuturespricesandexcessivespeculationincrudeoilandother markets. B.RECOMMENDATIONS (1)PhaseOutExistingWheatWaiversforIndexTraders.TheCFTCshouldphaseout existingwaivers,grantedthroughexemptionsornoactionleers,whichpermitcommodity indextraderstoexceedthestandardlimitof6,500wheatcontractspertraderatanyone time,andreapplythestandardpositionlimitdesignedtopreventexcessivespeculationin thewheatmarket. (2)TakeFurtherActionIfNecessary.IfpricingproblemsintheChicagoexchangepersist a erthephaseoutofindextraderwaiversanda erimplementationofotheractionsbeing takenbytheChicagoexchange,theCFTCshouldconsiderimposingadditionalrestrictions oncommodityindextraderstoreduceexcessivespeculation,suchasbyimposingaposition limitof5,000wheatcontractsperindextrader. (3)AnalyzeOtherAgriculturalCommodities.TheCFTCshouldundertakeananalysisof otheragriculturalcommoditiestodeterminewhethercommodityindextradershave increasedfuturespricescomparedtocashpricesorcausedpriceconvergenceproblems,and whetherpositionlimitwaiversforindextradersshouldbephasedouttoeliminateexcessive speculation. (4)StrengthenDataCollectionforNonAgriculturalCommodities.TheCFTCshoulddevelop reliabledataontheextenttowhichcommodityindextraderspurchasenonagricultural commodityfuturescontracts,especiallycrudeoilandotherenergycommodities.Oncethis dataiscollected,theCFTCshouldevaluatetheimpactofindextradinginthesemarkets,and whetherpositionlimitsforindextradersshouldbephasedouttoeliminateexcessive speculation. _______________________ Contact:TaraAndringa2022283685 Tara_Andringa@levin.senate.gov

4of4

1/14/201110:35PM