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Feeding frenzy
One big culprit in the global food crisis has been overlooked: The money. Pension
and index funds used a loophole to plow hundreds of billions of dollars into
commodities markets
SINCLAIR STEWART AND PAUL WALDIE
Globe and Mail
sstewart@globeandmail.com; pwaldie@globeandmail.com
May 31, 2008
LARNED, KAN. -- Tom Giessel rubs the heel of his palm against his forehead, exhales a moment, and
then begins again, trying to make sense of how the global food market has suddenly descended into
chaos.
He is seated on a couch in his modest white farmhouse, surrounded by acres of wheat that in a few days
will begin to flower, blanketing this central Kansas town with millions of tiny green beards. Beside
him, a sheaf of dried wheat spills out of a vase, while across the room, a stylized crucifix looms above
the entrance to the kitchen, a solitary stem writhing on the cross.
For three generations, grain has been his family's lifeblood, a source of sustenance and pride, reward
and hardship.
Mr. Giessel, 55, lived through the Russian Wheat Deal in the 1970s, when a sudden rise in exports to
the Soviet Union sparked a boom in prices. He has endured credit crises, political embargoes, and the
vicissitudes of weather and drought.
Yet in the more than 3½ decades he has been farming, he has never seen anything quite like this. The
prices of wheat, corn, soybeans and rice more than doubled in value in the span of several months,
sowing equal measures of confusion and fear in the American heartland. Commodities markets, where
these prices take their cue, have become so unpredictable that farmers now liken them to blackjack
tables in Las Vegas.
At the same time, the costs of fertilizer, herbicides and fuel - all crucial to agriculture - have
skyrocketed to record heights: Mr. Giessel's expenses alone jumped half a million dollars in the past
year, twice what they normally are.
"It used to be that I could figure on things from year to year," shrugs Mr. Giessel, a stout man with dark
eyes, thick forearms and a weathered countenance. "But now it's like driving down the road with no
headlights. You can look out the window and see the white lines, but you don't know what the hell
you're going to hit. This is the most risk I've been exposed to since I started farming."
The problems here go well beyond the Kansas border. The record escalation of food prices has played
havoc with every link in the food chain, from grain merchants to futures markets, from publicly traded
food companies to consumers.
Producers such as Mr. Giessel now find themselves on the front line of a mushrooming global crisis,
one that has sparked violent protests in some of the world's poorest countries, prompting aid agencies
to warn of a pending humanitarian catastrophe.

In the search for answers, pundits have attempted to pin the blame on the usual suspects: rising demand
from China and India, bad crop conditions and booming ethanol production.
Yet one major culprit behind these gyrating markets and unprecedented price spikes has been largely
overlooked: the deep-pocketed pension and index funds upon which most Canadians and Americans
depend for their retirements.
These funds have plowed tens of billions of dollars into agricultural commodities as a way to diversify
their assets and improve returns for their investors.
The amount of fund money invested in commodity indexes has climbed from just $13-billion (U.S.) in
2003 to a staggering $260-billion in March, 2008, according to calculations based on regulatory filings.
Michael Masters, a veteran U.S. hedge fund manager, warned a Senate hearing this month that this
number could easily quadruple to $1-trillion, if pension funds allocate a greater portion of their
portfolio to commodities, as some consultants suggest they are poised to do. Because agricultural
markets are small - relative to stock markets - the amount of cash pouring in gives these funds
substantial clout. Mr. Masters estimated that that these big institutional investors control enough wheat
futures to supply the needs of American consumers for the next two years, and blamed the "demand
shock" from these recent entrants to the commodities markets as arguably the primary factor behind the
sudden take-off in food prices.
"If immediate action is not taken, food and energy prices will rise higher still," he told the hearing.
"This could have catastrophic economic effects on millions of already stressed U.S. consumers. It
literally could mean starvation for millions of the world's poor."
The massive influx of cash has only occurred in the past few years. But its roots stretch back to the
Reagan era, when a court battle over oil price manipulation set off a domino effect that would
ultimately transform the arcane world of commodities trading.
Beginning with the energy market, regulators made a series of far-reaching decisions that gradually
loosened oversight of complex commodity derivatives and created loopholes for large speculators,
allowing them to trade virtually unlimited amounts of corn, wheat and other food futures.
Only now, nearly two decades later, are the full consequences of those decisions being felt.
Any more
For months, governments and international bodies have been struggling to avert catastrophe. The
United Nations created a special task force on food security and called for emergency donations.
Leaders of the world's wealthiest countries are expected to make the food crisis a priority when they
gather for a G8 summit in July.
And the U.S. Congress has convened hearings into the matter, as have various other governmental and
regulatory bodies around the world, all in an attempt to understand how markets and prices careened
out of control.
They would do well to ask Fowler West. At a pivotal moment almost 20 years ago, Mr. West warned
that a series of rapid-fire moves to deregulate commodities trading could wreak unintended - and
perhaps calamitous - effects on these markets.
His alarms went unheeded.
In the early 1990s, Mr. West held a seat as a commissioner on the Commodity Futures Trading
Commission, the U.S. regulator charged with overseeing trading in hundreds of staple items, from corn
and wheat to oil and cotton. Mr. West was a lifelong Democrat; his boss, CFTC chair Wendy Gramm,

was a devout Republican and a believer in the laissez-faire, free-market philosophy espoused by
president Ronald Reagan, who once described her as his "favourite economist."
In the fall of 1990, the two clashed over the CFTC's response to a New York court decision involving a
little-known Bermuda energy company called Transnor Ltd.
Long forgotten by most, Transnor paved the way for wide-ranging deregulation of commodities
trading, an effort that helped to spur the rise of Enron Corp. and which has enabled the stampede of
large fund speculators into food markets.
In the winter of 1986, Transnor filed suit against some of the world's largest oil companies, alleging
that they manipulated prices on the Brent market, an informal oil trading system that at the time
determined the daily price of oil.
At first, few paid attention to the lawsuit. That all changed on April 18, 1990, when Judge William
Conner delivered a stunning ruling midway through the trial.
The case hinged on drawing a key distinction: Were the 15-day oil contracts that traded on the Brent
market "forward contracts" or "futures contracts"?
In a forward contract, the buyer and seller agree to the price of a commodity and a fixed date for
delivery. A farmer enters into a forward contract with a food company by promising to deliver a certain
amount of grain on a certain date at a certain price. Lawmakers have shied away from regulating
forward contracts under commodity trading laws because they are a fundamental part of how farmers
and food companies do business - and each agreement is unique.
A futures contract is the same basic agreement, but it trades on an exchange, and the buyer rarely - if
ever - takes delivery of the commodities. Instead, futures contracts are used mainly by farmers for
hedging and by investors for speculating. These contracts have historically been regulated.
In the Brent case, the difference was crucial, since the Brent market contracts did not trade on any
exchange and, in the U.S., were not regulated by the CFTC.
The oil companies, hoping to protect their cozy market, and avoid the red tape and transparency
requirements of regulation, argued they were forward contracts.
Judge Conner ruled against the companies, effectively rendering all Brent trading in the U.S. illegal.
Within days, international oil companies stopped trading with U.S. companies and the entire Brent
market was verging on collapse.
In Washington, oil industry lobbyists descended on the CFTC, seeking to get the regulator to mitigate
Judge Conner's ruling. They found a receptive ear in Ms. Gramm, the commission chair. Ms. Gramm
served as a director at the Office of Management and Budget, spearheading a variety of industry
deregulation efforts before President Reagan placed her in charge of the CFTC in 1988.
She arrived with other political credentials: her husband, Phil, who is now a senior economic adviser to
presidential candidate John McCain, was a Republican senator from Texas.
Even before the Transnor case, Ms. Gramm had started pursuing a deregulation agenda at the CFTC. A
year earlier, in 1989, the commission quietly issued a policy statement on swap transactions, deals in
which a buyer of commodities such as a pension fund acts through a middleman or a swap dealer -
usually a bank. The CFTC declared that it wouldn't regulate swap dealers.
The Transnor case represented another crucial win for financial speculators such as swap dealers.
When the court decision was handed down, Ms. Gramm moved quickly to soften the blow to the

energy sector, and turned the Transnor decision from an obscure footnote in the history of oil trading
into a critical launching pad for a wide-ranging redrawing of the rules of commodities markets.
On Sept. 25, 1990, a policy confirming that the Brent contracts were forward contracts - and therefore,
outside the scope of CFTC regulation - was put to a vote among CFTC commissioners.
It passed 3 to 1.
Ms. Gramm faced one vocal critic in her push to keep the Brent market unregulated: Fowler West, the
lone 'no' vote.
"It was the way we were doing it, the speed with which we were doing it," Mr. West recalled in an
interview. "It was that kind of an attitude that did open the door up for a lot of problems."
Ms. Gramm defends the CFTC's actions, and says the commission faced pressure from Congress to act.
Senior CFTC staff, as well as a majority of commissioners, agreed with the interpretation concerning
forward contracts, she noted.
"I don't think it was done too quickly," Ms. Gramm, who now chairs the Regulatory Studies Program at
George Mason University's Mercatus Center, told The Globe and Mail in an interview.
Mr. West, meanwhile, wasn't merely outvoted. He was muzzled.
Although he wrote an official dissent after the vote, Ms. Gramm and the other commissioners blocked
his views from being published in the CFTC's official record.
Furious, Mr. West retaliated by voicing his concern about the CFTC's moves to the New York State
Bar Association. The regulator, he told the lawyers' group, "may soon be paying a price for its
politically expedient statutory interpretation. I doubt that its new forward contract exemption can be
restricted to large international oil and trading firms represented by influential lawyers."
He concluded with an ominous warning: "The public, down the road, will suffer from this fit of
deregulation, no matter how well intentioned."
Mr. West's remarks were published in a law journal, and the efforts by the CFTC to quiet him stirred a
furor in D.C. legal circles.
Two years later, Congress amended the Commodity Exchange Act to require the CFTC to publish
dissenting opinions.
Into the promised land of deregulation
Much as Mr. West predicted, the Transnor case proved to be a watershed event. The CFTC's embrace
of a narrow definition of a futures contract built on the regulator's earlier promise that it would not
police swap transactions.
Together, these moves opened up a new frontier of commodity trading, enabling financial speculators
to buy and sell complex derivatives away from the prying eyes of regulators and exchanges.
For these dealers in the late 1980s and 1990s, the shrinking CFTC rulebook created a "virtually
regulation-free promised land," Philip McBride Johnson, who was CFTC chairman from 1981 to 1983,
later told a congressional committee.
The vast majority of this trading boom occurred in the oil and energy markets, both of which are
sufficiently large and liquid to accommodate legions of traders.
It wasn't long before dealers began gravitating toward the smaller agricultural commodities markets as
well.

To get exposure to a broad array of commodities, many institutional investors preferred to invest in an
index that tracked the futures market. These indexes typically comprise a basket of products, from oil
and gas to wheat, cotton, and precious metals, each given a weighting according to the size of its
individual market.
As funds began making more and more index investments, their ownership of food futures increased
correspondingly.
Yet the food markets are a somewhat different beast, with a different set of rules, and it wasn't long
before this infusion of money hit another regulatory snag.
For almost 75 years, the CFTC has imposed limits on how much of certain agricultural commodities,
including wheat, cotton, soybean, soybean meal, corn, and oats, can be traded by non-commercial
players - that is, investors who are not part of the food industry. So-called "commercial hedgers," like
farmers or food processors, can trade unlimited amounts in order to manage their risk.
The limits were designed to prevent manipulation and distortion in what are relatively small markets,
and at the same time to allow for a small amount of speculative activity, in order to provide liquidity
for trading.
For decades, the restrictions didn't pose much of a problem. And then, in 1991, as new money began
pouring in, the playing field suddenly shifted.
Emboldened by the CFTC's laissez-faire approach, a bank approached the regulator and, for the first
time, requested an exemption from speculative trading limits in an agricultural commodity.
The unnamed bank was acting as a "swap dealer" for a pension fund: Essentially, it was a middleman
who helped the pension fund get exposure to commodities. A spokesman for the regulator declined to
identify the bank or the pension plan, citing confidentiality requirements.
Understanding how a swap transaction like this works is critical to grasping why the CFTC ultimately
granted an exemption to this bank - and in so doing, opened a loophole that has since allowed hundreds
of billions of dollars worth of fund money to rush into the commodities markets.
Let's say a pension fund wants to make a large investment in commodities, but the size of that
investment would violate the trading limits on wheat. Rather than invest directly in the futures market,
the fund can invest its money with a middleman, such as a bank, in what is called a swap transaction.
The bank might agree to pay the fund a return on a commodity index - if the index rises 10 per cent in
the next year, the bank will pay out that 10 per cent. But the bank doesn't want to be on the hook for 10
per cent, so it hedges its risk by wading into the commodities market, and using the fund's money to
buy futures. Essentially, it is buying futures to mirror the performance of the index, so that if prices
rise, it can pass that gain along to the fund without digging into its own pocket.
It is this notion of a middleman that swayed the CFTC. Had the pension fund invested all of its money
directly in futures, it would not be allowed to exceed the trading threshold.
But the swap dealer was a different story. The CFTC ruled that it was only buying futures to hedge its
risk with the pension fund client; therefore, much like a food industry hedger, it deserved to be exempt
too.
The move was further evidence of the regulator's hands-off approach under Ms. Gramm. Since that
time, the regulator confirmed it has approved 20 additional exemptions for swap dealers, some of
whom may strike agreements with multiple funds.
"The underlying philosophy seemed to be that the big guy could take care of himself and there was no
need for a lot of regulation," Mr. West recalled.

"It was actually told to me by the chairwoman that these [big companies] don't need us regulating them
and hampering them, because they can take care of themselves. That missed the point. The point was,
sure they can take care of themselves - but it wasn't them I was worried about."
Still, despite this apparently favourable treatment, many swap dealers and derivatives traders remained
nervous: Although the CFTC had provided welcome assurances, the regulator did not have the formal
power to enshrine these exemptions as binding rules.
Brokerage firms, energy traders and other financial players aggressively lobbied Congress on the issue,
and in 1992, the U.S. government passed new legislation that enabled the CFTC to determine which
derivatives could be considered forward contracts and receive exemptions.
Armed with this new power, the CFTC quickly handed out nine different exemptions for certain energy
contracts. One of the recipients was a Houston-based pipeline entity called Enron Corp. that was
branching out into the energy trading arena.
In January 1993, just as President Bill Clinton was being inaugurated, Ms. Gramm left the CFTC. Five
weeks later she joined the board of Enron.
Congress, however, wasn't done. In 2000, it introduced an array of exemptions, including one for
electronic trading of energy contracts. This new rule, which prompted the creation of numerous overthe-counter
trading systems allowing buyers and sellers to avoid scrutiny, was later given a nickname:
the Enron Loophole.
Beyond the Enron Loophole
Oddly enough, the CFTC's decision to exempt swap dealers from trading limits did not incite an
immediate rush of fund money into agricultural commodities.
Many pension plans, in particular, were still inherently conservative and viewed commodities as a
high-risk playground better suited to speculators.
One of the earliest funds to venture into commodities futures was the Ontario Teachers' Pension Plan. It
began with a tentative $100-million (Canadian) investment in 1997, and is now one of the world's
larger commodities investors, with about $3-billion committed.
Not long after Teachers made its first commodities investment, Leo de Bever, then a vice-president
with the fund, acknowledged in a speech at a New York conference that the strategy was
unconventional for a fund like his. "We are probably an exception, rather than the rule in North
America," he said.
That didn't last long. Throughout the 1990s, pension funds from Japan to Canada began accumulating
assets at a furious clip. Around the world, the bulging baby boom demographic was contributing record
amounts of new money into pension plans and retirement funds. At the same time, pension funds were
freed from the traditional shackles of fixed-income investments, like bonds, which produce low returns,
and began depositing cash in stock markets, infrastructure and real estate.
This boosted returns, and added further bulk to their growing assets. Worldwide institutional fund
assets have soared from around $200-billion (U.S.) in 1980 to over $20-trillion today.
But that growth didn't come without setbacks. The dot-com crash in 2001 wiped out billions of dollars
worth of value, and offered a painful lesson in the need for further diversification. Suddenly,
commodities emerged as a logical vehicle to help pension plans spread around their risk, and at the
same time get a measure of protection against inflation.

It didn't hurt that when pension and index funds descended en masse into these markets, they found
ready-made loopholes that enabled them to make much larger investments than they would otherwise
have been able to.
Consider the scale of the increase over the past seven years.
In 2000, long-only speculative investors - that is, investors like these funds who are only betting that
prices will climb higher - had committed about $4.7-billion to commodities, according to figures
compiled by Gresham Investments, a New York firm specializing in commodities. That number has
almost doubled every year since, hitting $80-billion in 2005, and $175-billion in 2007. As of today,
most estimates peg total fund investment at approximately a quarter of a trillion dollars. Indeed, a study
this month by Greenwich Associates found that almost 40 per cent of commodities investors have only
been active in these markets for the past three years.
Meanwhile, as this fund money stormed in and demand rose, prices for a range of food staples, such as
wheat, soybeans and corn, began escalating. Between 2000 and 2007, the price of wheat increased 147
per cent on the Chicago Board of Trade. Over the same period, corn increased 79 per cent and soybeans
72 per cent. In the past year, in particular, the price moves have been dramatic.The CFTC's moves to
deregulate the sector, meanwhile, only inspired calls for more deregulation. As more funds piled in,
stoking demand for agricultural futures contracts, speculators began clamouring for more flexibility
with trading limits.
In 2005, the CFTC obliged by expanding trading limits on the amount of wheat, corn, oats and
soybeans that traders could buy or sell at any one time on the futures markets.
Then, in 2006, Deutsche Bank and another undisclosed index fund operator asked the CFTC to exempt
them from all trading limits, much as it had done for swap dealers.
The CFTC didn't provide an outright exemption, but gave these two funds pretty much the same thing:
a "no-action letter," assuring the funds that they would not be subject to penalties if they breached the
limits.
Last fall, after other funds began jockeying for similar treatment, the regulator issued a proposal to
offer index and pension funds full exemptions, meaning they wouldn't have to go through a swap dealer
to circumvent trading limits. The CFTC also asked for comments on a proposal to once again raise
trading limits for speculative investors, such as hedge funds.
For many in the food industry, who had begun to suspect a strong link between the market's wild
swings and this influx of new fund money, this was the last straw.
The One Hundred Years War
On a Tuesday morning in late April, a group of more than 100 people shoehorned themselves into a
cramped conference room in the Washington headquarters of the CFTC. There were farmers and
bakers, brokers and stock exchange officials, pension fund executives, professors, and even cotton
growers, all convening for what was, by any measure, an extraordinary meeting: In the midst of
skyrocketing prices for food and unheard of gyrations in futures contracts, the chief commodities
regulator was trying to figure out whether the markets it oversees still worked properly.
Almost immediately, fault lines emerged between the "commercial" players - farmers, grain elevators,
processors, and anyone else directly involved in the food chain - and "speculators" - index funds,
pension plans, hedge funds, and other investors who buy futures to bet on price movements, but who
never intend to take physical possession of the commodity.

One by one, the commercials took their turn at the microphone, ticking off a laundry list of grievances:
Prices were moving too quickly and unpredictably; grain elevators were at their credit limit, depriving
farmers of a primary source of hedging risk.
And, for some mysterious reason, the price of the futures contract was not converging with the
underlying price of the cash commodity it represented when that contract drew close to expiration.
Can a market be trusted if prices soar the same day reports come out showing that there is an
oversupply of that product, they asked. Is the market sound when prices shoot up 85 per cent in a
matter of days and then fall back down again for no apparent reason? Almost to a person, these
commercials laid a large portion of the blame at the feet of investment funds, particularly the pensions
and indexers who are able to skirt trading limits.
Many in the food industry complained that these index funds don't behave like traditional speculators in
commodity markets. Unlike hedge funds, which actively buy and sell contracts, and make bets on price
increases and decreases, index funds are passive investors. They take positions in various commodities
and hang on for extended periods, betting that prices will continue to go up. Critics claim that this has
resulted in a kind of hoarding, and that the market no longer reacts the way it should to supply and
demand factors.
"It's the National Corn Growers Association's opinion that large funds have an overwhelming influence
in these markets," Gary Niemeyer, a representative for the NCGA, told the roundtable. "This thing is
just getting totally out of hand. The money is unreal."
Few were more pointed in their criticisms than the cotton growers. Cotton isn't part of the global food
crisis, nor is it suffering from diminished supplies. Yet in one 90-minute stretch this spring, the futures
for this commodity jumped a full 25 per cent, confounding just about everyone in the industry.
Cotton volatility was held up as one of the clearest signs to date that soft commodity prices have
become unhinged from market fundamentals, and may instead be reacting to the moves of large fund
traders.
"This makes no sense," complained Billy Dunavunt, the long-time chairman of Dunavunt Enterprises,
and the closest thing to a living legend the industry possesses. "The market is broken, it's out of whack,
and someone has got to step in and give some relief."
The funds, not surprisingly, dismissed these charges as baseless, and argued their involvement added
liquidity to the market, enabling farmers and food producers to offload unwanted risk.
"I did not see a convincing case that index money has changed the stated objectives of this market,"
insisted Bob Grier, a fund manager at Pimco, one of the biggest players in the agricultural commodities
market.
The odd thing is, this meeting could have occurred 150 years ago, and it wouldn't have seemed out of
place.
The modern-day commodities market was born in 1848, when 82 merchants banded together to create
the Chicago Board of Trade. Until that point, the grain trade was unpredictable, at best, and utter chaos,
at worse.
Buying did not take place in any organized fashion, and individual farmers tended to transact with
separate parties, leading to wide discrepancies in pricing. Because farmers typically sold their wares
after harvest, the glut of grain often resulted in low prices.
Chicago, with its nascent railway lines and proximity to the Great Lakes and Midwestern farming
country, was a natural place to bring everyone together. For the first time, farmers could manage their

isk in a systematic way: They would agree with a buyer to deliver grain, at some specific date in the
future, at a specific price.
This was a forward contract. But it wasn't until almost 20 years later, in 1865, that a proper futures
market took shape.
So popular did these contracts become in the late 19th century that hundreds of exchanges began
popping up across the United States, specializing in everything from butter and eggs to wheat, cotton
and livestock.
Soon, speculators began to pour into the market, making bets on whether commodities would rise or
fall in value. They never had to take possession of the commodity, but could buy a future at one price,
and then sell it days, weeks, or months later.
Almost from the start, there was controversy. "There was an orgy of speculation and market
manipulation during the Civil War," Dan Morgan wrote in his book the Merchants of Grain. "The
Board printed rules governing trading in 1869, but abuses of all kinds continued - fraud, bribery of
telegraph operators to obtain confidential information (until coded messages were used), and the
spreading of false rumours to influence prices. Outside the trading floor at Jackson and La Salle streets,
bucket shops, not much different from bookie joints or other gambling establishments, flourished."
In Canada, meanwhile, farmers were so upset they pushed the government to create a national cooperative
in order to avoid selling grain through futures markets altogether. Those efforts led to the
formation of the Canadian Wheat Board in 1935.
Even today, North American farmers view speculators as gamblers, exchanging pieces of paper in
hopes that prices will move the way they want them to, but never getting their hands dirty with the
physical product.
Yet, despite this uneasy symbiosis, most would agree that speculation performs a vital role in the
markets: If farmers or food producers want to hedge against their risk by selling a futures contract -
say, to deliver wheat a year from now at $8 a bushel - they need speculators who are willing to buy the
contract in a bet that prices will rise by the delivery date.
The question, going back to the infancy of the markets, was one of balance: How much speculation was
necessary to allow the markets to function smoothly?
After the First World War, when wheat prices plunged, the farming industry blamed the speculators,
accusing them of using short-selling tactics to drive down the market. Widespread instances of market
manipulation, meanwhile, incited Congress to introduce bills attempting to eliminate futures trading
altogether.
Although they were narrowly defeated, problems in the market highlighted the need for improved
regulation, leading first to the Grain Futures Act of 1922, and then to the Commodities Exchange Act
of 1936. The latter expanded the scope of regulation to cover other commodities, including cotton, and
for the first time imposed limits on speculators to prevent manipulation or distortion of the market.
In other words, non-commercial traders in the futures market could only buy a certain amount of wheat,
corn and other products covered under the act.
The measures were put in place to protect farmers, who have a couple of ways to manage their risk:
They can participate directly in the futures market, or they can enter into a forward contract with a
grain elevator, who promises to buy their crop at a certain price. (Canadian farmers sell most of their
wheat through the wheat board, but they use a similar system for selling other crops, including canola).

Directly trading in futures isn't all that popular for farmers, owing both to the complexity of the futures
market and the capital required to manage a trading position.
Most farmers, like Mr. Giessel in Kansas, choose to enter forward contracts with grain elevators. Last
September, for instance, he struck an agreement with a local co-op to sell a third of his 2008 wheat
crop at $5.30 a bushel: a price that looked good at the time, and that looked horrible in the spring, when
wheat moved close to $13. The grain elevator, once armed with this agreement, immediately sells
futures in the market at roughly the same price to minimize its risk.
But here's the rub: Every time the futures price rises, the elevator must post an equivalent amount of
money in the form of margin - a kind of goodwill bond in case the farmer has a problem delivering the
physical crop.
That's fine if the price of wheat nudges up a few nickels. But when an elevator sells a futures contract
at $6 a bushel, and that price doubles, it must then post an additional $6 worth of margin on every
bushel. That means going to the bank for a very big loan, which is easier said than done in today's
credit environment.
"A year ago, we're sitting here with a $7-million line of credit," said Kim Barnes, a hulking man who
works as an assistant manager with the Pawnee County Co-op. "Now it's over $19.5-million. And our
interest costs have gone from $7-million last year to $14-million this year. Last year, because we were
in uncharted waters, the banks allowed you to come back to the well. But we've all been told this year
that you've got to live within your means."
Translation? Most elevators will only accept futures contracts for this year, and won't offer contracts to
farmers looking to lock in prices for their 2009 or 2010 crop, depriving them of a common risk
management tool. Some elevators are only offering contracts 60 days out, while a few unlucky ones
have fallen into insolvency, unable to meet margin calls as prices accelerated to record levels.
As if this unpredictability weren't bad enough, key input costs like fertilizer, fuel and herbicide have
soared, affecting farmers on both sides of the border. These inputs are a bit like taxes: Once they go up,
they stay up, regardless of whether commodity prices fall again, as they have already done in the wheat
market. That can take a big bite out of profit if the commodities don't remain at their current high
levels.
For farmers, this sudden unpredictability is proof that commodities markets are no longer doing what
they were supposed to do. "The commodity market was designed to provide a forward pricing tool to
protect ourselves," said Ian Wishart, a farmer in western Manitoba, "not to provide an opportunity for
someone else to make profits."
In the lead up to the April meeting in Washington, the CFTC resisted the idea that ballooning fund
investments were responsible for the dramatic upswing in commodity prices.
Yet given the outpouring of concern from farmers, the regulator wasn't taking any chances. At the
meeting, acting chairman Walt Lukken said the CFTC would temporarily shelve plans to move ahead
with two proposals: Raising the limits, once again, for speculative traders like hedge funds, and
formalizing an exemption from any trading limits for index funds.
"I will be very cautious about moving forward with such initiatives at this time," Mr. Lukken said. "I
believe that before acting, this agency must be certain that additional speculative pressures will not
exacerbate the anomalies we are experiencing in these markets."
All Roads Lead to Rome

Next week, international leaders will gather in Rome for the High-Level Conference on World Food
Security, hosted by the UN Food and Agriculture Organization, in an effort to bring the spiralling food
crisis under control.
In a report leading up to the summit, the UN warned that 22 countries, including Eritrea, Niger,
Comoros, Haiti and Liberia, are particularly vulnerable to the recent rise in food prices, and the agency
is calling for urgent measures to ensure the world's poorest citizens have affordable access to food.
The UN has also acknowledged that the speculative money flowing into commodities markets could be
wreaking havoc with prices, joining officials from other international bodies, including the World
Bank, in drawing attention to the problem.
In the face of stiff criticism from U.S. agriculture and this widening concern abroad, current and former
CFTC officials have insisted the massive movement of investors into commodities has not distorted the
markets.
Ms. Gramm claimed that deregulation and changes to the futures market have nothing to do with
today's rising food prices. That notion, she said, "is just plain flat wrong."
"Volatility in the futures market doesn't cause prices [to rise]," she said. "Futures markets are an
indicator of what's going on in the cash market, not vice versa."
Senator Carl Levin, a Michigan Democrat who heads a subcommittee that is probing commodities
prices, disputes this point of view. The CFTC, he said this week, hasn't addressed the issue of how this
influx of money into futures markets has affected price.
"You monitor, you update, you study, and then you don't do a darn thing about it," Mr. Levin said.
Amid this controversy, there remains a growing sense that the CFTC will have to implement some
measure of added regulation to address concerns about soaring prices.
In the aftermath of the subprime mortgage debacle, U.S. lawmakers are trying to usher in a new era of
regulation and scrutiny - one that demands far greater transparency on exotic derivative instruments,
whether they be tied to the housing bubble or the commodities markets.
This month, the Senate passed legislation aimed at closing the Enron loopholes and bringing electronic
energy trading under the purview of the CFTC. Facing growing pressure to rein in soaring prices, the
CFTC announced Thursday that it is investigating possible manipulation of crude oil prices by traders.
More than one farmer has pointed to the Federal Reserve's assistance in helping JPMorgan to buy
troubled brokerage firm Bear Stearns, and openly wondered why the U.S. government couldn't make a
similar intervention in the food market. Many would say the stakes are higher, and carry with them
something of a moral obligation.
"The tsunami they refer to as the food crisis should be the wake-up call to all of us that we have to get
our priorities right," said Diana Klemme, a vice-president and grain division director at Grain Service
Corp., an Atlanta firm that advises farmers on risk management.
"It's not just about the Kansas wheat crop, or the Iowa corn crop," she said. "This is about the world.
And it's hard for us to step back and say we have to put this in context."
Even farmers like Mr. Giessel, preoccupied as they are with pressing concerns at home, readily
acknowledge that the problems with commodities trading resonate far beyond the heartland.
"We're commoditizing everything, and losing sight that it's food, that it's something people need," he
said. "We're trading lives."
TIMELINE

1848
82 businessmen form the Chicago Board of Trade (CBOT) for producers, buyers and sellers of grain.
1865
CBOT develops futures contracts for grains. Hundreds of other futures markets spring up across the
U.S., including the Butter and Cheese Exchange in New York (which later became the New York
Mercantile Exchange) and Chicago Butter and Egg Board (later changed to Chicago Mercantile
Exchange).
1887
Winnipeg Grain and Produce Exchange founded (renamed Winnipeg Commodity Exchange in 1972).
Operated as a cash market only for the first 18 years before becoming a futures market.
1905
Grain Growers Grain Co. Ltd. created in Saskatchewan as a co-operative for farmers.
1917
Wheat futures trading suspended on the Winnipeg exchange, leading the federal government to create
the Canadian Wheat Board two years later.
1920
Canadian Wheat Board disbanded.
1922
U.S. passes Grain Futures Act in response to widespread manipulation in the futures markets. The law
cracked down on "excessive speculation" and established a framework for regulated commodity
exchanges.
1923
Wheat pools created in Alberta, Saskatchewan and Manitoba to market grain for farmers.
1935
Canadian Wheat Board re-established by the federal government to market grain.
1936
U.S. enacts Commodity Exchange Act to broaden regulations to include trading in other agricultural
commodities, including cotton, butter and eggs.
1943
The CWB is granted a monopoly to sell prairie farmer's wheat; wheat trading on the Winnipeg
exchange suspended.
1958
Agricultural Stabilization Board created in Canada to provide price support to farmers in various
commodities.
1972
Farm Products Marketing Agencies Act enacted in Canada, leads to the creation of marketing boards
for dairy and poultry products.

1974
U.S. government creates the Commodity Futures Trading Commission (CFTC) to regulate commodity
exchanges.
1989
CFTC issues a "swaps policy statement," saying it would not seek to regulate over-the-counter swap
transactions.
1990
Transnor decision prompts CFTC to rule that Brent North Sea contracts are forward contracts and not
subject to regulation.
1997
Ontario Teachers' Pension Plan becomes one of the first pension plans to invest in commodities, with a
$100-million investment.
2000
Commodity Futures Modernization Act in the U.S. codifies exemptions and exclusions for various
energy and financial derivatives from CFTC oversight.
Intercontinental Exchange created in Atlanta as an electronic energy trading platform.
2005
CFTC expands position limits in wheat, corn and soybean trading for speculators.
2006
CFTC grants index funds exemptions from position limits imposed on speculators.
2008
In February, prices for some wheat contracts surge 85 per cent on Minneapolis Grain Exchange.
Trading is so heavy the contract hits daily limits 12 times, forcing the exchange to expand them.
Paul Waldie