"CFTC filed a civil enforcement complaint against Kraft Foods Group, Inc., and Mondelez Global LLC Wednesday, alleging the company manipulated the CBOT wheat futures market, exceeded speculative position limits and engaged in numerous noncompetitive trades in 2011.
NEWS
CFTC: Wheat Market Manipulated
CFTC Alleges Kraft Foods Manipulated Wheat Futures, Cash Prices in 2011
Katie Micik DTN Markets Editor
Wed Apr 1, 2015 06:30 PM CDT
OMAHA (DTN) -- The CFTC filed a civil enforcement complaint against Kraft Foods Group, Inc., and Mondelez Global LLC Wednesday, alleging the company manipulated the CBOT wheat futures market, exceeded speculative position limits and engaged in numerous noncompetitive trades in 2011.
The complaint alleges that in an attempt to drive down high cash prices, Kraft held 3,150 December CBOT wheat futures contracts -- 15.75 million bushels of wheat worth $93.5 million -- on Nov. 29, 2011, the contract's first delivery day. By Dec. 7, 2011, Kraft's spot-month position was 87% of the open interest in the contract.
"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," CFTC Director of Enforcement Aitan Goelman said in a press release. "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."
Kraft uses about 30 million bushels of soft red winter wheat each year, or about 2.5 million bushels per month. Ninety percent of that wheat is used at its Toledo, Ohio, flour mill. The complaint alleges that the flour mill's storage was 80% full at the time, and that Kraft had no intention of taking delivery of the wheat.
From the end of June to the end of August, cash wheat prices in Toledo, Ohio, climbed from $5.74 to $7.72 per bushel.
Kraft deviated from its traditional hedging practices, that is taking long positions in futures that match its needs and offsetting those positions when it acquires physical grain. Instead, Kraft used "its status as a commercial hedger to acquire a huge long position in December 2011 wheat futures in order to induce sellers to believe that Kraft would take delivery," despite the fact that CBOT contract specifications aren't optimal for milling.
The complaint cites emails between Kraft's senior management and the director of global procurement showing that Kraft thought the large futures purchase would allow it to buy wheat in the cash market at depressed prices while making money on its spread position.
"In addition, there is a key dynamic to understand: Once the market sees that Kraft is 'stopping' December wheat, we anticipate the futures curve will begin to flatten, reducing the profitability of wheat storage, thereby reducing the commercial wheat basis to Kraft," an email cited in the complaint said. "We will then have the option of redelivering the wheat acquired through the futures market. This will then quickly reverse the negative cash flow impact."
After Kraft executed the strategy, another email explained that the December-to-March futures spread narrowed by 11 cents, resulting in a "marked-to-market gain of $3.6 MM on our open spread position. Meanwhile, with the narrowing spread, the cash wheat basis has declined from 80 cents to 50 cents over Dec futures. As we begin purchasing this cheaper basis commercial wheat, we will unwind the existing spread position."
Kraft had hoped to save $7 million on the cost of cash wheat. In the end, Kraft took delivery of 1,320 shipping certificates -- receipts that entitle the holder to grain in storage -- but only loaded out 660,000 bushels (132 contracts), just 5% of the long position it held in early December.
After the cash market declined, Kraft sold 1,188 shipping certificates for nearly $36 million. Kraft offset the remaining 826 long futures contracts on Dec. 9.
December 2011 wheat futures prices climbed from $5.75 cents on November 28, 2011, to $6.12 on Dec. 2. At the same time, cash prices fell from $6.16 to $5.86, resulting in a $5.4 million profit to Kraft.
Kraft's trading strategy violated speculative position limits, which is 600 contracts in the spot month, 5,000 contracts for any single contract month or 6,500 contracts combined, the CFTC alleges.
Commercial end users like Kraft can apply for exemptions to position limit. Indeed, Kraft had done so but was late in submitting a renewal, meaning the traditional speculative limits applied. Also, the CFTC said Kraft didn't have a bona fide commercial need for the long position it acquired in December 2011, also putting it afoul of position limit rules.
CFTC's investigation also found that Kraft used an off-exchange transaction called Exchanges for Related Positions to offset some of its long and short market positions. The transaction didn't transfer physical wheat between two independent parties, which is a violation of the Commodity Exchange Act.
A spokesman for Kraft Foods told DTN that Kraft Foods was spun off from Mondelez Global in October 2012. Mondelez now contains the wheat procurement operations in question and "will predominantly bear the costs of this matter and any monetary penalties or other payments that the CFTC may impose" per the terms of their separation agreement.
A spokesperson from Mondelez said the company doesn't comment on details of active litigation. An SEC filing from Feb. 20, 2015, acknowledged the CFTC investigation, said the company was cooperating but wasn't sure it'd be able to avoid litigation.
CFTC is seeking a permanent injunction from future violation of futures laws, disgorgement and civil monetary penalties."
Katie Micik can be reached at katie.micik@dtn.com
NEWS
CFTC: Wheat Market Manipulated
CFTC Alleges Kraft Foods Manipulated Wheat Futures, Cash Prices in 2011
Katie Micik DTN Markets Editor
Wed Apr 1, 2015 06:30 PM CDT
OMAHA (DTN) -- The CFTC filed a civil enforcement complaint against Kraft Foods Group, Inc., and Mondelez Global LLC Wednesday, alleging the company manipulated the CBOT wheat futures market, exceeded speculative position limits and engaged in numerous noncompetitive trades in 2011.
The complaint alleges that in an attempt to drive down high cash prices, Kraft held 3,150 December CBOT wheat futures contracts -- 15.75 million bushels of wheat worth $93.5 million -- on Nov. 29, 2011, the contract's first delivery day. By Dec. 7, 2011, Kraft's spot-month position was 87% of the open interest in the contract.
"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," CFTC Director of Enforcement Aitan Goelman said in a press release. "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."
Kraft uses about 30 million bushels of soft red winter wheat each year, or about 2.5 million bushels per month. Ninety percent of that wheat is used at its Toledo, Ohio, flour mill. The complaint alleges that the flour mill's storage was 80% full at the time, and that Kraft had no intention of taking delivery of the wheat.
From the end of June to the end of August, cash wheat prices in Toledo, Ohio, climbed from $5.74 to $7.72 per bushel.
Kraft deviated from its traditional hedging practices, that is taking long positions in futures that match its needs and offsetting those positions when it acquires physical grain. Instead, Kraft used "its status as a commercial hedger to acquire a huge long position in December 2011 wheat futures in order to induce sellers to believe that Kraft would take delivery," despite the fact that CBOT contract specifications aren't optimal for milling.
The complaint cites emails between Kraft's senior management and the director of global procurement showing that Kraft thought the large futures purchase would allow it to buy wheat in the cash market at depressed prices while making money on its spread position.
"In addition, there is a key dynamic to understand: Once the market sees that Kraft is 'stopping' December wheat, we anticipate the futures curve will begin to flatten, reducing the profitability of wheat storage, thereby reducing the commercial wheat basis to Kraft," an email cited in the complaint said. "We will then have the option of redelivering the wheat acquired through the futures market. This will then quickly reverse the negative cash flow impact."
After Kraft executed the strategy, another email explained that the December-to-March futures spread narrowed by 11 cents, resulting in a "marked-to-market gain of $3.6 MM on our open spread position. Meanwhile, with the narrowing spread, the cash wheat basis has declined from 80 cents to 50 cents over Dec futures. As we begin purchasing this cheaper basis commercial wheat, we will unwind the existing spread position."
Kraft had hoped to save $7 million on the cost of cash wheat. In the end, Kraft took delivery of 1,320 shipping certificates -- receipts that entitle the holder to grain in storage -- but only loaded out 660,000 bushels (132 contracts), just 5% of the long position it held in early December.
After the cash market declined, Kraft sold 1,188 shipping certificates for nearly $36 million. Kraft offset the remaining 826 long futures contracts on Dec. 9.
December 2011 wheat futures prices climbed from $5.75 cents on November 28, 2011, to $6.12 on Dec. 2. At the same time, cash prices fell from $6.16 to $5.86, resulting in a $5.4 million profit to Kraft.
Kraft's trading strategy violated speculative position limits, which is 600 contracts in the spot month, 5,000 contracts for any single contract month or 6,500 contracts combined, the CFTC alleges.
Commercial end users like Kraft can apply for exemptions to position limit. Indeed, Kraft had done so but was late in submitting a renewal, meaning the traditional speculative limits applied. Also, the CFTC said Kraft didn't have a bona fide commercial need for the long position it acquired in December 2011, also putting it afoul of position limit rules.
CFTC's investigation also found that Kraft used an off-exchange transaction called Exchanges for Related Positions to offset some of its long and short market positions. The transaction didn't transfer physical wheat between two independent parties, which is a violation of the Commodity Exchange Act.
A spokesman for Kraft Foods told DTN that Kraft Foods was spun off from Mondelez Global in October 2012. Mondelez now contains the wheat procurement operations in question and "will predominantly bear the costs of this matter and any monetary penalties or other payments that the CFTC may impose" per the terms of their separation agreement.
A spokesperson from Mondelez said the company doesn't comment on details of active litigation. An SEC filing from Feb. 20, 2015, acknowledged the CFTC investigation, said the company was cooperating but wasn't sure it'd be able to avoid litigation.
CFTC is seeking a permanent injunction from future violation of futures laws, disgorgement and civil monetary penalties."
Katie Micik can be reached at katie.micik@dtn.com
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