The irregularities in the wheat futures market that lead the Commodity Futures Trading Commission to order an unprecedented suspension of trading were spotted more than three months ago, a CFTC member told a congressional hearing yesterday.
Commissioner Read P. Dunn said the agency sent warning letters late last year to two big speculators who were trading in wheat for delivery in December. The two were among "a few" speculators who controlled more than 75 percent of the December wheat futures maket, he said.
After trading in the December contract was completed, at what Dunn described as "unusually high" prices, some of the same speculators began amassing huge numbers of contracts for delivery in March.
Dunn said the CFTC stepped in when the price of wheat on the Chicago Board of Trade "got out of line" with prices in other Midwestern markets. Dunn said wheat prices on the Chicago futures market "were not accurately reflecting the value of wheat."
Dunn traced the troubles in the wheat market to December, revealing for the first time the origin of the wheat crisis, when he testified before a House agriculture appropriations subcommittee.
Dunn warned that the agency's powers to move against irregularities in the futures market will be severly limited unless the U.S. Court of Appleas eventually overturns a lower court ruling in the wheat case.
The CFTC last Thursday declared an emergency in the wheat market and for the first time ordered trading in the March contract halted and prices frozen.
The Chicago Board of Trade challenged that order in court, obtained a temporary injunction blocking the CFTC from acting. The injuction was upheld by the U.S. Court of Appeals in Chicago.
Late Monday night, the CFTC announced it would not try to take the case to the U.S. Supreme Court, but would continue its legal fight in the appeals court.
Arguing that Congress meant for the CFTC and not the courts to decide when a market emergency exists, Dunn said the court case could prove crucial to the commission's future.
He urged the appropriations panel to approve an additional 20 people for the commission's staff to help it cope with exploding growth in the futures markets.
When the CFTC was created in 1974, futures were traded in 17 commodities and total volume was 18 million contracts a year. No trading is at the rate of 70 million contracts a year, in 46 commodities with applications pending for 24 more and another dozen applications expected to be filed.
Dunn's appearance before the subcommittee was the first CFTC report to Congress on the wheat incident. Sen. Robert Dole (R-Kans.) has asked the Senate Agriculture Committee for a detailed study of the situation, including public hearings.
In his testimony yesterday, Dunn supplied new details to back up the CFTC's charge that a half handful of speculators were trying to corner the market in wheat for March delivery and force up the price.
Noting that the possibility of shortages of wheat that could be delivered to satisfy futures contracts began to appear in December, Dunn said the CFTC began closely watching activities on the Chicago Board of Trade at that time.
Without identifying the persons involved, dunn said "certain professional speculators" began in December to buy large numbers of contracts for delivery of wheat in March.
By the first of March -- when the contract allowed wheat to be delivered -- half a dozen large speculatros controlled about 50 percent of the market, CFTC surveillance officers found. This group held contracts entitling them to delivery of 14 million bushels of wheat, although only onesixth that amount was then available.
Dunn said the concentration of contracts in the hands of a few speculators grew greater and by last Friday four men held 90 percent of the contracts. The four were all professional grain speculators called "floor traders" on the Chicago Board of Trade.
Not only did the speculators control the futures market, they also controlled much of the wheat needed to satisfy the futures contract, dunn said. "One large speculator, also a floor trader, held about half of the deliverable supply in Chicago and Toledo (Ohio) elevators."
That situation created the opportunity for the speculators to force up wheat prices and that was occurring, Dunn said.
He said wheat in Chicago was selling on March 2 for 70 cents a bushel more than in Minneapolis, although it cost no more than 40 cents to ship the grain between the two cities.