Who is in charge of regulating the wheat futures market? That agency is the Commodity Futures Trading Commission (CFTC) which oversees trading in the futures markets. One area of regulation is the number of open contracts any one person can have at any given time. The limit is 6,500 contracts.
So then what caused the price of wheat to go wild last year? It seems that the CFTC was complicit in that they gave exemptions for traders to go beyond the 6,500 limit. One trader was allowed to hold 53,000 contracts. Then to make matters worse, six traders ganged up and held 130,000 contracts. According to Bill Tomson, the value of these investments jumped "from an estimated $15 billion dollars in 2003 to around $200 billion by mid 2008.
The effects of this speculation has been devastating. Index traders who take long positions drove up the price of wheat futures to more than $2.00 per bushel over cash. Wheat futures contracts usually last for three months, after which time the longs and the shorts are matched to zero. However the excessive speculation caused an imbalance in the market when it came time to match up the contracts.
Now Congress has gotten in the act with Senator Carl Levin spearheading the investigation. His committee is blaming the CFTC for allowing this excessive speculation.
Listen to this excuse from Bill Chilton, a CFTC commissioner.He said that he has concerns about the detrimental effect of "excess speculation and called the exemptions "questionable" and deserving a fresh review by the commission.
Now isn't this another fine kettle of fish? Here we have a regulatory agency giving its full blessing to the speculators by letting them go beyond the established trading limits.
Are you paying more for wheat products due to this speculation?
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
6-24-2009 @ 6:42PM
Claude Foutch said...
Connie, I read this story early today in the WSJ and the sort of accompanying article by Thomas Frank re the gross failures of agency appointees, particularly during the Bush years of cowboy capitalism. Yes, I think we have been paying more, a lot more for the bread we used to purchase. We formerly bought a nice Italian loaf at a Portland, Oregon bakery but the price rose up to $4.25 last Fall and being a retiree, I decided that it had become too costly. Grand Central Bakery lost a customer. This loaf is really excellent being made of hard red wheat, probably grown in SE Washington state. Unfortunately, the CFTC likely caused the bakery to loose a client.
7-07-2009 @ 2:26PM
ToldYaToldYa said...
The trickle down effect of speculators not willing to play by the rules is rampant disrespect for the law in our country. Greed may have allowed them to acquire wealth materially, but their morality is more than bankrupt. Those who scoff at that statement know inside it's truth yet are too arrogant to admit to themselves the fact they have no real status in what matters most. They are weak men.