Convergence in the wheat market, or lack thereof, has been an issue for the past few years within the futures industry, and wheat is perhaps the one market where credible evidence of a possible link between excess speculation and price can be found. On June 24, Sen. Carl Levin (D-Mich.) released a report stating many of the wheat futures contracts purchased and held by commodity index traders on CME Group over the last five years constituted excessive speculation. The report recommended that the CFTC phase out existing wheat waivers for index traders and consider imposing a position limit of 5,000 wheat contracts per index trader.
In a statement, CME Group said the report was “based on anecdotal information versus sound empirical and economic analysis.”
Joe Victor, vice president at Allendale, says Allendale’s research suggests that the lack of convergence cannot be pinned solely on the index funds. “Outside money positions in Chicago wheat [do] not support the claim that index funds or commodity funds can be blamed for a rise in prices,” he says.
Darin Newsom, senior analyst at DTN, says a lot of index fund trading was curbed by the collapse of the markets in general. “Markets will sooner or later come back to supply and demand issues. When the stock market began to break, fundamentals weren’t supporting this thing and there was no supply and demand to come back to,” he says.
Newsom thinks the report’s findings are “probably correct” and predicts the report will lead to new government regulations. “The more important lesson is that the breakdown in convergence, the breakdown in index fund participation and the collapse of index funds themselves all indicate that the markets work,” he says.
Victor says the small speculator is trading much larger volumes now than he was five years ago and says that may be an area that needs to be targeted more than strictly index funds. “There’s still an issue between futures and cash that has to continue to repair itself. The government need[s] to be very open to exploring the entire arena and not just blame it on index funds.”