Wheat prices were inflated by index investors and the Commodity Futures Trading Commission should enforce limits on positions to curb speculation, a congressional investigation reported. Index traders pushed futures beyond levels justified by supply and demand, Senator Carl Levin said yesterday as he released a report by the Senate Subcommittee on Investigations into price movements in 2008 wheat trading. The Chicago Board of Trade needs to eliminate waivers that allow funds to hold more than 6,500 contracts at any one time, which would lower the influence of non-agricultural buyers, Levin said. Speculation “created unwarranted costs and risks for wheat farmers, grain merchants, grain processors and consumers,” Levin, the Michigan Democrat who leads the subcommittee, told reporters. Index traders “have undermined the futures market” and can sometimes force consumers to pay more for food and limit the ability of farmers to manage risk, said Levin. Wheat prices in Chicago surged 48 percent in two months before reaching a record $13.495 a bushel on Feb. 27, 2008, as adverse weather cut production in Australia and Canada. Futures dropped 60 percent since then as the global recession cooled demand and bigger crops replenished supplies. Corn and soybeans also set records in 2008, helping to push U.S. food inflation to 5.9 percent for the year, the most since 1980. CFTC Chairman Gary Gensler called the report a “significant contribution in understanding the potential effects of index trading” in commodity futures markets. In an e-mailed statement, he said the agency will give the “utmost attention” to the panel’s recommendations. Physical Products Commodities speculation increased last year as investors sought havens from plunging equities, leading to concern from farm groups that prices for grains and cotton were being artificially pumped up. The “bubble” in crude oil, corn and other physical products cost the U.S. more than $10 billion in unnecessary expense, Michael Masters, the president of the Masters Capital Management LLC, a hedge-fund operator, said in a February report. The CFTC pledged to respond aggressively to speculators, and lawmakers in both houses of Congress introduced bills to rein in the trading, but nothing was enacted. Since then, pressure to address the issue has subsided as crop prices fell and other regulatory issues took priority. Strict position limits would lessen the spread between futures prices and contract settlements on their days of expiration, a difference that turns markets from risk-management tools to “gambling,” Levin said. Along with setting firm limits at 6,500 contracts, the CFTC also needs to examine speculation in oil, corn, soybean and cotton markets, he said. Commodity Indexes A January review of 11 studies on commodities speculation by the federal Government Accountability Office found little evidence linking the actions of commodities-index traders and speculators with price movements in futures contracts. The studies “generally did not find statistical evidence of such a relationship,” Orice M. Williams, the GAO’s director for financial markets and commodity investment, wrote in a letter to House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat. Banning waivers would not have much effect on index traders, who have little influence on commodity prices, said Scott Irwin, a University of Illinois agricultural economist. “These are swaps dealers. They’re very smart, and they’ll find a way around the limits or go to an exchange where the rules better fit their needs,” he said yesterday in a telephone interview. Irwin said speculation was “at best, a minor, second-order factor” behind last year’s commodity-price gains. More important reasons included rising ethanol use, drought, increased export demand and the government’s refusal to allow farmers to take acreage from the federal Conservation Reserve Program without penalty, he said. The subcommittee’s investigation examined records from the Chicago Board of Trade, Kansas City Board of Trade, Minneapolis Grain Exchange and the CFTC.

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