ANALYSIS-Index funds only partly to blame for grain rally

* Index funds had about the same wheat bets at $5 and $13

* CFTC clamping down on speculative positions

* Trade says CFTC shares blame for record prices in 2008

CHICAGO, Sept 1 - At the height of a blistering rally in U.S. wheat last year, index funds -- widely blamed for the surge -- held about the same number of bets in Chicago futures as when prices were about 60 percent lower.

The almost steady number of net long positions held by index funds for almost a year while prices rallied seems to indicate that the funds were not the primary driving force behind the surge that led to higher U.S. food prices in 2008.

Government data showed that index funds, which buy and hold futures contracts in anticipation that prices will go higher, had bought 200,000 contracts, or net long positions in industry parlance, when Chicago Board of Trade wheat was trading at just $5 per bushel in early March 2007.

Positions held by these funds remained fairly stable in the run-up to the record highs above $13 a bushel in early March last year. They were net long over 194,000 contract three months before the peak, 191,000 the month before and 189,000 the week before.

"Index funds were only part of the problem," said Joe Victor, analyst for research and advisory firm Allendale Inc.

Index funds, and other speculative-investors, are facing the brunt of a crackdown by U.S. regulator, the Commodity Futures Trading Commission (CFTC), following the rally of commodities prices last year.

Speculators have been widely blamed for the stampede to record high price levels last year that led to higher prices for food products like cereals.

And public pressure has prompted the CFTC to begin imposing stricter measures in an attempt to rein in excessive speculation in the U.S. futures markets.

"Their actions most likely will and need to be based on fact since it comes from the government. My understanding is the CFTC and SEC (Securities and Exchange Commission) essentially are working in tandem and they are trying for more market transparency, trying to give everyone a better look at who is in each market," Allendale's Victor said.

An exponential growth in volume at the CBOT amid the introduction and expansion of electronic trading, although the recession has had an impact this year, has made it difficult to track the entities behind trading positions.

"Four or five years ago before the big price explosion, local traders might trade 25 to 50 lots (contracts) in a day, but now it could be 400 to 500 lots in a day," Victor said.

And "with the advent of electronic trading...it's impossible to look at a screen and know who it is (trading)," he added.

CFTC PARTLY TO BLAME

While funds have been blamed for the wild gyrations in the markets, relaxed trading rules were also to blame, sources say.

The CFTC in an about face, last month withdrew the so-called no-action letters that exempted Deutsche Bank AG's DB Commodity Index Tracking Master Fund and Gresham Investment Management from speculative positions limits for wheat, corn and soy futures. ID:nN19477588

"Any time somebody buys and isn't forced to sell, it makes sense that they are part of the rally," said Roy Huckabay, analyst for Chicago-based trade house The Linn Group.

Sources said there were about 26 similar grain exemptions after the CFTC sent letters to the funds last year, saying they basically could trade without limits.

"(That) was supposedly to give the little guy a chance to invest in these markets," a veteran CBOT trader said.

"Now they are withdrawing those permission letters and imposing (speculative) position limits, so you could say the CFTC was as much at fault for last year's price rallies as anyone else," he added.