Kraft Foods Group Inc. and Mondelez International Inc. were sued by a U.S. regulator over claims they made $5.4 million by manipulating the price of wheat.
In 2011, traders at the formerly-combined companies made a “huge” bet in the futures market that wheat prices would rise, the Commodity Futures Trading Commission said in a lawsuit filed Wednesday in federal court in Illinois. The purpose of the trade was to entice sellers to lower wheat prices in the cash market, according to the CFTC.
“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,” Aitan Goelman, CFTC’s enforcement director, said in a statement.
The lawsuit is a rare example of the CFTC going to court to enforce regulations against manipulation and excessive speculation in agriculture and energy markets. A Dutch proprietary trading firm was ordered to pay $14 million in 2012 to settle CFTC allegations that it manipulated oil markets.
The wheat trading occurred before the 2012 breakup of the former Kraft Foods Inc. Kraft Foods Group and Mondelez are now separate companies.
Kraft Foods Group doesn’t expect the litigation to have a “material impact,” as Mondelez will “predominantly bear the costs,” Basil Maglaris, its director of corporate affairs, said in an e-mailed statement.
In a Feb. 20 filing with the U.S. Securities and Exchange Commission, the Deerfield, Illinois-based company said it was cooperating with the government in the previously disclosed probe. The company intends to vigorously litigate the CFTC’s lawsuit, said a person close to the matter, who asked not to be identified because of the pending legal case. Mondelez declined to elaborate beyond the February disclosure.
Wheat was rising in the run up to Kraft’s improper trades, which prompted the company to deviate from its practice of only using futures contracts to hedge prices, the CFTC said.
In December 2011, Kraft agreed to buy $90 million of wheat futures, equivalent to a six-month supply of the grain. The company, one of the biggest U.S. users of wheat, had no intention of taking delivery. Instead, the company wanted the market to react by cutting prices, allowing it to buy wheat in the cash market at a lower value, the CFTC said. The strategy was approved by senior management, according to the regulator.
At the time, Kraft consumed about 30 million bushels of wheat a year, using it to make products like Oreo and Chips Ahoy! cookies and Triscuit crackers, the CFTC said.
Kraft’s trades resulted in the company holding derivatives positions in excess of limits allowed by the Chicago Board of Trade. The company didn’t have valid exemptions from the limits, according to the CFTC.
“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,” Goelman said.
Greg Grow, director of agribusiness at Archer Financial Services in Chicago, said he hadn’t heard about the investigation until Wednesday.
“It’s something that has very little, if any, affect on current market aspects,” he said. “I don’t think it’s going to have a market impact. I think anybody who participates in the market is very cautious about complying with changing regulations.”