U.S. grain markets recoil as CFTC cracks whip

CHICAGO, Aug 19 - U.S. grain markets recoiled on Wednesday as a government agency curbed speculative positions held by two firms, with traders and analysts expecting similar action against other deep-pocketed index funds.

Wheat futures at the Chicago Board of Trade, the world's top grain exchange, gave up gains to post losses and hit contract lows after the Commodity Futures Trading Commission announced its action against the two companies.

The CFTC said it was withdrawing so-called no-action letters that exempted Deutsche Bank AG's DB Commodity Index Tracking Master Fund and another unnamed firm from speculative position limits for soybean, corn and wheat futures contracts.

A government source later said the unnamed firm was Gresham Investment Management.

"CFTC is starting to move to get these guys out of position and it could be a real mess," said a CBOT grains trader, who declined to be named.

Index funds, which typically buy and hold contracts for long periods, have been blamed for running up prices of commodities such as crude oil, metals, and grains via excessive speculation.

According to CFTC data released on Friday, index traders held more than 190,000 long positions in CBOT wheat futures and options as of the close of trading on Aug. 11, about 46 percent of total open interest. Holders of long futures positions hope to turn a profit as prices rise.

They also accounted for about 29 percent of total open interest in both the corn and soybean markets at the CBOT, which is owned by CME Group Inc.

"Initially it's bearish because it forces a signal that some longs may have to get out of the market," Shawn McCambridge, analyst for Prudential Bache Commodities, said of Wednesday's CFTC action.

Analysts said there were concerns that other index funds that are currently exempt from position limits in wheat, corn and soybean markets could also lose their exemptions, forcing them to sell off their hefty long positions.

"It's finally hitting the market and DB is a big player as an index fund. A lot of the upswing in the market over a year ago was index fund buying," said Jack Scoville, analyst for The Price Futures Group.

"The index funds are very passive, but they're also very long," he said.

A trade source, who declined to be named, said the two firms named on Wednesday hold 25,000 July wheat contracts and 35,000 December corn contracts.

Goldman Sachs Group Inc, which operates the Goldman Sachs Commodities Index Fund, has a similar exemption that could be revoked, the trade source said. The company did not have immediate comment.

Government regulators have been positioning to reign in excessive speculation, which has been blamed for food and energy price inflation as prices for corn, soybeans and wheat hit record highs last summer.

Crude oil prices hit a record high above $147 a barrel before slumping to just over $30 early this year.

CBOT September wheat futures fell 4-1/2 cents to $4.66 a bushel after dropping to a contract low of $4.57-3/4. It was the lowest for a spot contract in eight months.

Corn futures rebounded from their lows to close higher amid a surge in oil futures while soybeans ended mixed.