US regulator charges Kraft, Mondelez with rigging wheat prices

The US Commodity Futures Trading Commission (CFTC) on Thursday said that it is filing a civil enforcement complaint in the US District Court for the Northern District of Illinois against Kraft Foods and Mondelez International for manipulation and attempted manipulation of the prices of cash wheat and wheat futures. 

CFTC 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.

Both companies were named in the complaint because the trades took place before Kraft split into two in 2012. The complaint also comes less than a week after Kraft agreed to be acquired by H.?J. Heinz in a multi-billion dollar deal (See: 3G Capital in talks to buy Kraft Foods Group for over $40 bn).

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 the wheat and instead executed this strategy expecting the market to react to their enormous long positions by lowering cash wheat prices and strengthening the spread between December 2011 ;rices 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.

Aitan Goelman, the CFTC's director of Enforcement, said, ''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.''