Maybe you are a Sherlock Holmes aficionado, or a modern day CSI fan. If you do well with “who done its” and other brain teasers, your sleuthing expertise is needed to solve the whys and wherefores about alleged speculation in the wheat market. Some big names have lined up on either side of the issue, and whether you want to investigate the issue or just want to be a juror, you might find the facts of the case closely connected with your marketing plan.

The US Senate’s Permanent Subcommittee on Investigations, no less, convened Tuesday to listen to witnesses praise and criticize the Committee’s findings of “Excessive Speculation in the Wheat Market.” The report alleges that “commodity index traders made such large purchases of Chicago Wheat Futures that they pushed up futures prices, disrupted the normal relationship between futures prices and cash prices for wheat, and caused farmers, grain elevators, grain processors, consumers and others to experience significant unwarranted costs and price risks.” Committee Chairman Senator Carl Levin said speculative money overwhelmed the market and federal regulators failed to control the problem; and he called for stronger action by the Commodity Futures Trading Commission (CFTC) to place a 5,000 limit on the number of contracts a trader can hold, deny waivers of that limit, and investigate index trading in other markets.

During the hearing, various witnesses took these positions:
• CFTC Chairman Gary Gensler said there had been volatility in the market, it should be free of excessive speculation, and the CFTC looked forward to solving the issues raised by the Senate Committee.
• Chairman Thomas Coyle of the National Grain and Feed Association said increased capital flowing into the market has reduced the effectiveness of hedging by grain elevators, but he did not want increases in regulations to the point of interfering with the market.
• Steven Strongin, Managing Director of Goldman Sachs, said index fund investors provide long term liquidity to the market, and the problem with convergence of wheat futures and cash was a function of the delivery mechanism, not caused by investors.
• Vice Chairman Charles Carey of the Chicago Mercantile Exchange said the CME was committed to solving the convergence issue and consulted with many economists before making delivery contract changes designed to resolve structural problems.

University of Illinois agricultural economists Scott Irwin, Darrel Good, Philip Garcia, and Eugene Kunda also read the Senate Committees report and said, “We find the …evidence neither “significant” nor “persuasive.” And they said the Senate staff dismissed all of the work the CME had done to address the issue of poor convergence of cash and futures by restructuring the delivery contracts for soft red wheat as well as the fact that academic analysis of the problem found that the convergence issue had nothing to do with index trading. The ag economists said the most serious problem with the Senate findings was to equate the flow of index money into the wheat market with actual demand for wheat. They said investors buy and sell contracts without demand for the physical commodity. The Illinois economists said futures for wheat and other commodities rose during the period in question when index funds held large positions in the market, but using accepted economic principles there was little evidence those positions impacted the price movement in the futures market. And they said the Senate Committee report ignored the academic research that indicated index funds were not responsible for the run up in prices, particularly in the wheat market.

The economists said there is persuasive evidence that current delivery markets for wheat are outside of the commercial flow of grain, and when changes were made in the corn and soybean delivery points the magnitude of commercial activity increase sharply. But they said wheat delivery markets are out of position and that causes poor basis and convergence performance, an issue recently addressed by the CME to add delivery locations. They concluded that, “By ignoring this central problem with the CBOT wheat futures contract, the Subcommittee points in the wrong direction in trying to fix problems with the contract. Index funds are a side-show compared to the real problems with the contract.”

Summary:
The lack of convergence between cash and futures has been a problem for the CBOT wheat contract. But has the problem resulted from large positions held by index futures traders or has the problem resulted from contract delivery points being out of the flow of the commercial wheat market? A Senate Committee investigation contends the problem stems from the former and wants more regulation of index traders. Agricultural economists say the problem stems from the latter and changes made by the CBOT and the CME staff are steps toward resolving the issue.