By Aruna Viswanatha And Jacob Bunge
The U.S. commodities regulator sued giant food companies Kraft
Foods Group Inc. and Mondelez Global LLC over alleged manipulation
of wheat prices in 2011, marking a fresh crackdown on how companies
outside the financial industry use derivatives markets.
In a lawsuit filed on Wednesday, the U.S. Commodity Futures
Trading Commission said Kraft and its former parent Mondelez earned
profits of $5.4 million through a 2011 effort to artificially lower
the price of physical wheat by buying large amounts of futures
contracts. Kraft and Mondelez were separated via a spinoff of North
American grocery operations to shareholders in 2012.
The case is an early test of the CFTC's new authority under the
2010 Dodd-Frank financial regulation overhaul that gives the agency
more flexibility in going after manipulation. The only other case
the regulator has brought under the provision to date is against
J.P. Morgan Chase & Co. over its "London Whale" trades.
The CFTC's allegations were jarring partly because grain futures
markets are set up to serve food companies and processors, who are
afforded special trading privileges to help them offset the price
risk they face buying crops, according to David Durra, president of
AgSpread Analytics LLC, a Chicago-based commodity trading firm.
"If what the CFTC alleges is true, it kind of challenges the
integrity of the entire market," Mr. Durra said. "It's normally the
speculative players who get the bad reputation."
Kraft and Mondelez didn't comment, citing pending
litigation.
Wheat prices spiked in the summer of 2011 after drought damaged
crops in Russia, Europe and China. That boosted the cost of grain
for food companies like Kraft, which the CFTC said uses 30 million
bushels of wheat a year to make products like Oreo cookies and
Wheat Thins crackers.
In response, according to the CFTC's complaint, Kraft's wheat
traders developed a plan in which the company would heavily buy
December-dated wheat futures contracts, sending a signal to other
traders that food companies and other grain processors intended to
acquire large quantities of wheat near the end of that year.
In response, according to the CFTC, the price for Kraft to buy
physical wheat prior to December would decline, because grain
companies that supply crops directly to food makers may have
believed that Kraft's mill didn't require as much grain
immediately.
"Kraft executed its plan, and the market reacted as Kraft
expected, yielding Kraft more than $5.4 million in futures trading
profits and savings from its strategy," CFTC officials wrote in the
complaint.
Kraft bought $90 million of December 2011 wheat futures in early
December 2011, the equivalent of a six-month supply of wheat for
its mill. The agency said the companies never intended to take the
order but instead expected the market to react to their large long
position by lowering cash wheat prices, which the market did.
Kraft and Mondelez also held long positions in December 2011
wheat on five days in early December 2011 that exceeded speculative
spot month position limits without having a valid exemption in
place, the regulator 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,"
the CFTC enforcement director, Aitan Goelman, said in announcing
the lawsuit.
Spokeswomen for Kraft and Mondelez said they couldn't comment on
active litigation.
Mondelez said in a regulatory filing in February that it expects
to "predominantly bear any monetary penalties or other payments
that the CFTC may impose" in the case.
Shares of Kraft Foods dropped 25 cents in after-hours trading to
$90.45, after rising 4% during regular trading. Mondelez
International was flat at $36.30.
Write to Aruna Viswanatha at aruna.viswanatha@wsj.com and Jacob
Bunge at jacob.bunge@wsj.com
Access Investor Kit for JPMorgan Chase & Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US46625H1005
Access Investor Kit for Mondelez International, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6092071058
Subscribe to WSJ: http://online.wsj.com?mod=djnwires