Kraft and Mondelez face wheat trade claim

The two companies created from the former Kraft Foods were accused on Wednesday of manipulating US wheat markets with a "huge" position, in a case that raises questions about the extent to which commercial companies speculate in commodities.

The predecessor of Kraft Foods Group and Mondelez devised a strategy to depress the price of wheat and inflate the price of futures contracts in the agricultural commodity. This would help offset the cost of local wheat supplies near an Ohio mill that made the flour for Oreo cookies, Triscuit crackers and other brand names, the Commodity Futures Trading Commission said in a lawsuit.

The market movements earned Kraft more than $5.4m in profit, the CFTC said.

Kraft Foods Group was spun off from Kraft Foods in 2012 and is set to be taken over by Heinz in a deal announced last week. The surviving snacks group was renamed Mondelez.

The CFTC filed its civil complaint in an Illinois federal court on Wednesday as it prepared a new rule limiting speculation in commodity futures. The proposal is under fire from commercial groups which warn that their ability to hedge will be hit by a crackdown on money managers.

As part of its suit, the CFTC said Kraft had failed to renew an exemption from existing limits on wheat futures speculation before it bought $90m of soft red winter wheat futures on the Chicago Board of Trade.

Mondelez said: "As a standard practice, we don't comment on the details of active litigation," adding it did not expect any fine from the case to be material.

Kraft Foods Group said the trading at issue involved the business now owned by Mondelez, and "accordingly, Mondelez International will predominantly bear the costs of this matter and any monetary penalties or other payments that the CFTC may impose".

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The main allegation in the CFTC's complaint revolves around the difference between futures and spot prices of wheat, known as basis. According to the complaint, the original Kraft company was concerned about rising cash prices for wheat for sale near its mill in Toledo, Ohio, in the summer of 2011.

Because of the concerns, Kraft's senior management approved a strategy to build up a "huge long position" in wheat futures for December 2011 delivery.

The strategy succeeded in pushing down the premium of spot wheat from 80 cents above wheat futures to just 50 cents, a Kraft procurement executive said in a 2011 email cited in the complaint. In addition, the futures position also pushed up the price of December 2011 futures relative to those for delivery in March 2012.

Aitan Goelman, CFTC enforcement director, 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."

He added: "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."

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