Major grain buyers face charges of cheating farmers

by Glenn Caleval

Views expressed reflect the author and do not necessarily coincide with the views of FNA.

It was no April Fools prank when the United States government disclosed it had compelling evidence that the biggest buyers of wheat in that country used their extreme market power to manipulate wheat prices, cheating farmers in the process. Specifically the corporations abused paper trades of futures wheat to drive down the price they would have to pay for actual current delivery and then, using a variety of techniques, relieved themselves of the normal exposure such excessive futures buying would entail.  (Full text of news release below).

Simply, the buyers worked out a way to cheat farmers out of the fair market value of their grain.

This should open the eyes of those who blindly declare that if an act is done by private businesses it must be private enterprise and therefore defended from any interference. If by “private enterprise” we mean “competitive free markets,” then this is alleged to be an example of how private interests can and will use private transactions to enrich themselves by abusing the market. On the other hand, if the attitude is that any transaction occurring between private parties attracts such protection, let the drug dealers have at ‘er.

Farmers are particularly exposed to manipulation by an industry that has steadily concentrated more and more market power with a virtually free hand, on the strength of the mysterious argument that they have to grow ever bigger to withstand global competition. Yet there is little competition in evidence.

When you see a market where the sellers are earning 100%, 200% even higher than 400% profits, you should immediately understand that you are not looking at a free competitive market. It may be a lot of things, but it is not competitive, and it is not a free market by any meaningful definition.

This is not to say that the human beings involved are necessarily bad or even acting in bad faith. If there is clear wrong doing, as may be proven in this case, then, yes, those are bad people. More frequently it is a simple case of people doing their jobs and trying to do them very well. For input suppliers that means doing the best job possible of extracting ever more value out of the farmer to maximize profitability for shareholders (or frequently single private owners).

The solution is not to condemn the people succeeding at their mission (absent real wrong doing). It is to aggressively pursue your own mission to maximize farm profitability. That means working with the farm business alliance to expand your own market power and when the opportunities are presented, to own your own piece of the supply chain.

Those farmers who are unwilling to consider becoming their own customers would appear to be happy with the status quo, and God bless ’em. Those who are not satisfied with receiving a fraction of the value the farm creates,  do the “considering” part:  check out the Genesis plan, or contact FNA and look at what it might mean to become a member of the farm business alliance.

Text of Original News Release

April 1, 2015
CFTC Charges Kraft Foods Group, Inc. and Mondelez Global LLC with Manipulation of Wheat Futures and Cash Wheat Prices
CFTC also charges violations of position limits and noncompetitive trading

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement Complaint in the U.S. District Court for the Northern District of Illinois against Kraft Foods Group, Inc. and Mondelez Global LLC, headquartered in Northfield and Deerfield, Illinois, respectively, for manipulation and attempted manipulation of the prices of cash wheat and wheat futures. The Complaint also alleges that Kraft and Mondelez violated speculative position limits by holding wheat futures positions in excess of speculative position limits established by the CFTC and the Chicago Board of Trade (CBOT) without a valid hedge exemption or a bona fide hedging need, and engaged in numerous noncompetitive trades in CBOT wheat.

Aitan Goelman, the CFTC’s Director of Enforcement, stated: “This case goes to the core of the CFTC’s mission: protecting market participants and the public from manipulation and abusive practices that undermine the integrity of the derivatives markets. A market participant who is not happy with cash prices available to it may not resort to manipulative trading strategies in an attempt to artificially lower that price.”

According to the CFTC Complaint, in response to high cash wheat prices in late Summer 2011, Kraft and Mondelez developed, approved, and executed in early December 2011 a strategy to buy $90 million of December 2011 wheat futures, which amounted to a six-month supply of wheat. The CFTC Complaint alleges that Kraft and Mondelez never intended to take delivery of this wheat and instead executed this strategy expecting that the market would react to their enormous long position by lowering cash wheat prices and strengthening the spread between December 2011 wheat and March 2012 wheat futures. Those price shifts did occur and, according to the CFTC Complaint, Kraft and Mondelez earned over $5.4 million in profits.

The CFTC Complaint also alleges that on five dates in early December 2011, Kraft and Mondelez held long positions in December 2011 wheat that exceeded the CBOT’s 600-contract speculative spot month position limit by as much as 2,110 contracts without having a valid hedge exemption in place or a bona fide need for that quantity of wheat.

Finally, the CFTC Complaint alleges that beginning in or about 2003 and continuing through January 2014, prior to each of the five annual delivery periods for CBOT wheat, Kraft and Mondelez conducted off-exchange futures transactions between two separate corporate trading accounts that did not comply with exchange rules for noncompetitive, off-exchange futures trades.

In its continuing litigation against Kraft and Mondelez, the CFTC seeks a permanent injunction from future violations of federal commodities laws, disgorgement, and civil monetary penalties.

The CFTC staff members responsible for this case are Division of Enforcement staff Robert Howell, Jennifer E. Smiley, Joseph Patrick, Susan Gradman, Scott Williamson, and Rosemary Hollinger, and Division of Market Oversight staff David Amato, Gene Kunda, and Jerry Lavin.

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Dennis Holden