The Derivative Project

Revisiting Betsy Jensen, Kraft and Wheat Derivative Dabbling

Revisiting Betsy Jensen, Kraft and Wheat Derivative Dabbling

Revisiting Betsy Jensen, Kraft and Wheat Derivative Dabbling

Time provides more and more perspective on what appear to have been shenanigans by Wall Street during Dodd Frank derivative rule making.

Minnesota farmer, Betsy Jensen, wrote in a New York Times Op Ed, Reap What You Swap, August 10, 2010, an Opinion arguing against the position presented by the Wheat Association before Congress, that excessive speculation is harming their markets.  Ms. Jensen wrote:  “I hope the Commodity Futures Trading Commission will resist casting the net so wide that it ensnarls those for whom the markets were created: grain buyers and sellers.”

Why had Ms. Jensen taken this contrary position to her industry as an end user?  Why had the New York Times not provided informed debate contrary to this Op-Ed?  The Derivative Project wrote in 2010 about this confusing position, contrary to the Wheat Association:

Nebraska and Minnesota Farmer’s Alert:  Snake Oil and Dodd Frank Ag Swap Reform

Five years later, the CFTC has filed a complaint, that “end user” Kraft has been manipulating the wheat markets, to their benefit, yet harming the farmers’ actual wheat exposures hedged in the futures’ markets..  “The Complaint also alleges that Kraft and Mondelēz 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.”

The heart of the CFTC charges “speculative positions without a bona fide hedging need”.

Rule Number One:  Hedging is not speculating.  You cannot do both.  There are farmers, end users, that need futures markets to hedge and traders that arbitrage, speculate and create liquid and orderly markets, that help the end users get more efficient prices.

Matt Levine at Bloomberg View takes an interesting view of an End User, that Kraft was simply arbitraging price disparities between two markets, through a massive position.  He writes:

“That seems like, you know, arbitrage: Kraft found a mispriced market, bought in one place, sold in another and drove the prices closer to true value.

I don’t know. Kraft/Mondelēz seem to be fighting this case; they haven’t said a lot but nor have they settled yet. There are other CFTC allegations — that Kraft exceeded position limits, and that it did some transactions “did not comply with exchange rules for noncompetitive, off-exchange futures trades” — that seem more straightforward and easy to prove. But is this market manipulation? I don’t really know what manipulation means, so I think it’s hard to answer that question. Certainly it’s not as easy as the CFTC seems to think.”

End Users are not traders, contrary to Bloomberg’s Matt Levine’s thesis, that they should be out seeking arbitrage opportunities and moving markets. (Bloomberg’s other services benefit by the activity of increased speculation, they are not a neutral party in this debate.)  That is the role of traders.  End users, like farmers that are hedging their future crop deliveries, on the futures exchanges, posting margin, limited by position sizes, are hedging and locking in prices, they are not seeking to arbitrage.  The CFTC is clear in its definition of end users and a “bona fide hedging need.”

Violations of existing CFTC rules to maintain fair and orderly markets cost consumers in terms of:

  • Greater regulatory costs, as evidenced by the costs for the CFTC to file this complaint
  • Excessive costs to the end users that rely on these markets

An economy that is not sustainable, is an economy filled with corporations that manipulate markets to the detriment of others, with a singular focus on short-term profits, that serve Kraft and Mr. Buffett.

We hope the media, five years later, including Bloomberg, will inform the public with the facts on the role of the CFTC, hedging by end users and the role of speculation and arbitrage, without further confusion to the general public.