Even during the darkest days for the ag bulls (the October - December period 2008), commercials remained leery of going long to hedge their costs. As a result, bakers and other food industry groups suffered higher costs. Their belated reluctance to enter the market during the spring growing season is hampering costs AGAIN b/c of another factor - the poor weather.
I believe that commodity prices are unlikely to return to 2008 levels b/c of the Fed and other central banks talking down commodities. Deflation remains a significant factor in the macro picture. So far, this year's rise in agriculture prices is more a combination of poor weather and inflation expectations built on the back of Chinese stockpiling.
WSJ(6/24)UPDATE: Commodities: Panel Targets Wheat Speculators
(From THE WALL STREET JOURNAL) By Bill Tomson
Speculation in wheat futures by commodity index traders, who control billions of dollars worth of contracts, is ruining the price-hedging system used by the farm sector and could translate into higher prices for food manufacturers and consumers, a Senate panel said in a report released Tuesday.
The Senate's Permanent Subcommittee on Investigations conducted a yearlong probe of the wheat market and suggested in a 247-page report that new limits are needed for index traders, and a government regulator said the situation warranted a "fresh" review.
The report and the subcommittee's chairman, Sen. Carl Levin (D, Mich.), blame the Commodity Futures Trading Commission for facilitating the index traders by allowing some to go well beyond normal buying limits. The CFTC is the regulatory agency charged with overseeing futures markets.
"The CFTC helped create the problem by allowing some index traders to exceed the standard limit on the number of wheat contracts that traders are supposed to be able to hold at any one time," Mr. Levin said.
Traders are supposed to be limited to holding 6,500 wheat future contracts, but the CFTC has granted several exemptions and "no-action" letters that allow traders to go well above the limit -- up to 53,000 contracts, in one instance.
"Together these hedge exemptions and no-action letters permit six index traders to hold a total of up to 130,000 wheat futures contracts at any one time," the report said. "CFTC data indicates that, from 2006 to mid-2008, the total number of outstanding contracts . . . attributable to commodity index traders in the wheat market was about 200,000 contracts. That means that the six index traders granted waivers from trading limits may have held up to about 60% of all the outstanding wheat contracts held by index traders."
The value of the investments in commodity indexes "has increased an estimated tenfold in five years," according to the report, "from an estimated $15 billion in 2003 to around $200 billion by mid-2008."
Bart Chilton, a CFTC commissioner, said Tuesday he has had his own concerns about the detrimental effect of "excessive speculation" and called the exemptions "questionable" and deserving "a fresh review by the commission."
Heavy buying by index funds that only take long positions -- essentially bets that prices will
move higher -- are "at least in part responsible for higher wheat prices and the 'lack of convergence' between futures and spot prices at the expiration of contracts," Mr. Chilton said.
The long-only stance of index traders is unlike the behavior of other market participants, who follow market trends and alternate between long positions or short positions, which are expectations prices will decline. "This is a concern because it creates uncertainty in the marketplace and undermines the price discovery process," Mr. Chilton said.
In addition to CBOT, a subsidiary of the CME Group Inc., wheat futures are also traded on the Kansas City Board of Trade and the Minneapolis Grain Exchange.
The problem caused by index traders became particularly exaggerated last year when futures prices were more than $2 per bushel higher than cash prices during "convergence," the time when futures go into delivery and futures prices and cash prices are supposed to come together in order to facilitate hedging.
"The futures price became disconnected from the cash price, staying far higher than the cash price due to the index traders," Mr. Levin said.
Mr. Levin said Tuesday the index traders must be reigned in to bring back harmony to the system that was originally meant to help farmers, grain warehousers, and food producers hedge crop prices.