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momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
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Focus on issues

The U.S. Senate denounces excessive speculation
on agricultural futures markets

Report from the U.S. Senate permanent subcommittee on investigations

On 25 June, the US Senate permanent subcommittee on investigations published a report examining the impact of speculation on price changes in wheat futures market.

Entitled "Excessive Speculation in the wheat market”, this report is the 5th in a series initiated in 2003, which focuses on commodity pricing methods. The first four reports were devoted to energy commodities (gas, oil, etc…). Two of them have already shown how excessive speculation has destabilized prices.

This report is the first devoted to agricultural commodities and seeks to determine the cause of recent price hyper-volatility. It clearly casts doubts on speculation, and more particularly index funds whose exponential growth on futures markets has exacerbated the rise in speculation .

Here we present the main conclusions of this report, which stresses the "unreasonable fluctuations and unwarranted changes" of contract prices traded on the wheat futures markets between 2006 and 2008. It is these that are causing the disparity between futures prices and cash prices.

Paul- Florent Montfort, Analyst of momagri

Increasing Commodity Index Speculation

A commodity index is calculated using the prices of the futures contracts for the commodities that make up the index. Each commodity within a commodity index is assigned a “weight,” and the contribution of each commodity toward the value of the index is calculated by multiplying the current price of the specified futures contract for that commodity by the assigned weight. All of the major, broad-based commodity indexes include soft red winter wheat futures contracts traded on the Chicago exchange as one of their component commodities.

The purchase of a financial instrument whose value is linked to a commodity index offers the buyer the potential opportunity to profit from the price changes in futures contracts for a broad spectrum of commodities, without having to actually purchase the referenced commodities. Typically, hedge funds, pension funds, and other large institutions purchase these financial instruments with the aim of diversifying their portfolios, obtaining some protection against inflation, and profiting when commodity prices are rising. Since they are not involved in selling or buying actual commodities, and do not use these instruments to hedge or offset price risks regarding the actual use of the underlying commodities, the purchasers of commodity index instruments are making a speculative investment.

The large growth in commodity index speculation is a recent phenomenon. It is only over the past six years that financial institutions have heavily marketed commodity index instruments as a way to diversify portfolios and profit from rising commodity prices. The total value of the speculative investments in commodity indexes has increased an estimated tenfold in five years, from an estimated $15 billion in 2003, to around $200 billion by mid-20081.

The amount of speculation in the wheat market due to sales of commodity index instruments has, correspondingly, grown significantly over the past five years. CFTC data indicates that purchases by index traders in the largest wheat futures market, the Chicago Mercantile Exchange, grew sevenfold from about 30,000 daily outstanding contracts in early 2004, to a peak of about 220,000 contracts in mid-2008, before dropping off at year’s end to about 150,000 contracts. (Figure ES-1). The data shows that, during the period from 2006 through 2008, index traders held between 35 and 50% of the outstanding wheat contracts (open long interest) on the Chicago exchange and between 20 and 30% of the outstanding wheat contracts on the smaller Kansas City Board of Trade.

The presence of index traders is greatest on the Chicago exchange compared to the other two wheat exchanges, and is among the highest in all agriculture markets. In addition, neither of the other two wheat markets, nor any other grain market, has experienced the same degree of breakdown in the relationship between the futures and cash markets as has occurred in the Chicago wheat market. Accordingly, the Subcommittee focused its investigation on the role of index trading on the Chicago exchange and the breakdown in the relationship between Chicago wheat futures and cash prices.

Impact of Index Instruments on the Wheat Futures Market

Commodity indexes have an indirect but significant impact on futures markets. A commodity index standing alone is a computational device unsupported by any actual assets such as futures or commodity holdings. Financial institutions that sell index investments, however, have created three basic types of financial instruments tied to commodity indexes: commodity index swaps, exchange traded funds (ETFs), and exchange traded notes (ETNs). Commodity index swaps are sold by swap dealers and are the most common index instrument; ETFs and ETNs offer index-related shares for sale on a stock exchange. The value of commodity index swaps, index-related ETFs, and index-related ETNs rises and falls with the value of the commodity index upon which each is based.

Speculators who buy index instruments do not themselves purchase futures contracts. But the financial institutions who sell them the index instruments typically do. In the case of commodity index swaps, for example, swap dealers typically purchase futures contracts for all commodities on which an index is based to offset their financial exposure from selling swaps linked to those futures contracts. CFTC data shows that, over the past five years, financial institutions selling commodity index instruments have together purchased billions of dollars worth of futures contracts on the Chicago Mercantile Exchange.

The Subcommittee investigation has found that the large number of wheat futures contracts purchased by swap dealers and other index traders is a prime reason for higher prices in the wheat futures market relative to the cash market. Commodity traders call the difference between the futures prices and the cash price “the basis.” Index traders typically do not operate in the cash market, since they have no interest in taking delivery or making use of a wheat crop. Instead, index traders operate in the futures markets, where they buy futures contracts to offset the index instruments they have sold. The additional demand for wheat futures resulting from these index traders is unrelated to the supply of and demand for wheat in the cash market.

In the Chicago wheat market, the result has been wheat futures prices that are increasingly disconnected from wheat cash prices. Data compiled by the Subcommittee shows that, since 2006, the daily gap between Chicago wheat futures prices and wheat cash prices (the basis) has been unusually large and persistent. Figure ES-2 presents this data for the last eight years.

From 2000 through 2005, the average daily difference between the average cash and the futures price for soft red winter wheat traded on the Chicago exchange was about 25 cents. During the second half of 2008, in contrast, the price of the nearest wheat futures contract on the Chicago exchange was between $1.50 and $2.00 per bushel higher than the average cash price, an unprecedented price gap (basis)2. During that period, the average cash price for soft red winter wheat ranged from $3.12 to $7.31 per bushel, while the futures price ranged from $4.57 to $9.24. The fundamentals of supply and demand in the cash market alone cannot explain this unprecedented disparity in pricing between the futures and cash markets for the same commodity at the same time.

In addition, increasingly, the wheat futures prices on the Chicago exchange have not converged with the cash prices at the expiration of the futures contracts. Figure ES-3 shows the extent of this price gap (basis).

The data underlying this chart shows that the average difference between the cash and futures price at contract expiration at the delivery location in Chicago for the Chicago wheat futures contract rose from an average of about 13 cents per bushel in 2005 to 34 cents in 2006, to 60 cents in 2007, to $1.53 in 2008, a tenfold increase in four years.

In the same period during which these pricing disparities occurred, CFTC data shows a very large presence of index traders in the Chicago wheat market. Since 2006, index traders have held between one-third and one-half of all of the outstanding purchased futures contracts (“long open interest”) for wheat on the Chicago exchange. For most of 2008, the demand for Chicago wheat futures contracts from these index investors was greater than the supply of wheat futures contracts from commercial firms selling grain for future delivery. During July 2008, for instance, index traders buying wheat futures contracts held, in total, futures contracts calling for the delivery of over 1 billion bushels of wheat, while farmers, grain elevators, grain merchants, and other commercial sellers of wheat had outstanding futures contracts providing for the delivery of a total of only about 800 million bushels of wheat. Under these circumstances, the additional demand from index traders for contracts for future delivery of wheat bid up the futures prices until prices were high enough to attract additional speculators willing to sell the desired futures contracts at the higher prices.

The investigation found that, in 2008, the greater demand for Chicago wheat futures contracts generated by index traders was a significant factor in the relative increase in the wheat futures price compared to the cash price (the basis) during that period. In addition, a significant cause of the resulting price disparity between the futures and cash markets, which was far greater than the normal gap between futures and cash prices, was the purchases of Chicago wheat futures by index traders.


The ongoing large gap between wheat futures prices and cash prices is a problem of intense concern to the wheat industry, the exchanges, and the CFTC. The CFTC has conducted several public hearings and recently formed a special advisory subcommittee to make recommendations on how best to address the problem. The Chicago exchange has amended its wheat contract in several respects—to provide for additional delivery locations, to increase the storage rate for wheat, and to change certain specifications for deliverable wheat—in an effort to improve trading and create a more active cash market that will force cash and futures prices to converge.

These actions to date, however, do not address one of the fundamental causes of the problem—the large presence of index traders in the Chicago wheat market. These index traders, who buy wheat futures contracts and hold them without regard to the fundamentals of supply and demand in the cash market for wheat, have created a significant additional demand for wheat futures contracts that has as much as doubled the overall demand for wheat futures contracts. Because this significant increase in demand in the futures market is unrelated to any corresponding supply or demand in the cash market, the price of wheat futures contracts has risen relative to the price of wheat in the cash market. The very large number of index traders on the Chicago exchange has, thus contributed to “unwarranted changes” in the prices of wheat futures relative to the price of wheat in the cash market. These “unwarranted changes” have, in turn, significantly impaired the ability of farmers and other grain businesses to price crops and manage price risks over time, thus creating an undue burden on interstate commerce. The activities of these index traders constitute the type of excessive speculation that the CFTC should diminish or prevent through the imposition and enforcement of position limits as intended by the Commodity Exchange Act.

This is why the report recommends implementing specific measures, particularly the application of position limits as applied to most other financial operators. In effect, some traders on the wheat market are allowed to hold up to 53 000 contracts at a time ... According to the report, six index funds are currently authorised to hold 130 000 contracts on wheat at a time, 20 times more than the authorised limit for standard financial operators.

The report recommends position limits of no more than 6 500 contracts per trader specializing in index funds. In cases of extreme price volatility, it even suggests reducing this limit to 5 000 contracts. Recommendations that have been followed: On 19 August, the CFTC withdrew the rights to exceed position limits of two participants3 on the U.S. market for wheat, corn and soybean derivatives.

This report and the rapidity of the measures that followed, is proof once again that the Americans, eulogists of liberal capitalism, do not hesitate in adopting a pragmatic approach when necessary, steering away from ideological channels to stabilize agricultural commodity prices. It is also interesting to note that the U.S. Senate Permanent Subcommittee on Investigations, the author of this series of reports on speculation, reports directly to the Homeland Security and Governmental Affairs and not the committee for economic affairs or agriculture. A topic of national security then.

Paul- Florent Montfort, Analyst of momagri

1 This estimate reflects both the actual amounts invested in commodity index related instruments and the appreciation in value of those investments due to increasing commodity prices.
2 Typically, traders define basis as the difference between the cash and futures price (basis = cash – futures). In this report, the basis is defined as the difference between the futures and cash price (basis = futures – cash) in order to give a positive value to the basis when the futures price is higher than the cash price, as it typically is in the wheat market.
3 DB Commodity Services (subsidiary of Deutsche Bank) and Grosham Investment Management, a New York commodity investment company (approximately 6 billion dollars in asset management).
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Paris, 22 June 2018