Senators are calling on federal regulators to restrict the volume of index trading in the wheat-futures market on the Chicago Board of Trade.
Some analysts and lawmakers also blame the surge in popularity of commodity index funds for artificially boosting the prices of oil, gasoline, corn and other commodities.
The investigative panel of the Senate Homeland Security and Governmental Affairs Committee found in a report to be released Wednesday that aggressive speculation in the wheat-futures market has disrupted normal price patterns and hurt the ability of farmers, grain processors and others to hedge against risk.
The findings take on added significance as Congress crafts sweeping new rules for financial markets.
"Speculators have overwhelmed the wheat-futures market and ... undermined (its) value," Sen. Carl Levin, D-Mich., the subcommittee's chairman, told reporters Tuesday. "Excessive speculation in commodity indexes has created losers throughout the wheat industry."
Those players, from wheat farmers to grain elevators, merchants and processors, and users like bakeries and cereal companies, "can't manage their price risks through hedging and are socked with unwarranted costs from higher margin calls and failed hedges," said Levin. "When those costs are passed on to consumers, the result is higher food prices."
Commodity indexes are made up of futures contracts that traders buy to help offset their risk from selling the instruments to third parties. That pumps billions of dollars into the market and lifts demand and prices for wheat futures, the Senate inquiry found. The trend has been especially pronounced since 2005.
Margin calls occur when farmers or other users are required to put more money into their futures accounts to cover obligations because the contracts they bought declined in value.
The trading volume in wheat futures has created a large gap between prices in the futures and spot, or cash, markets.
The average gap between futures and spot prices for wheat at expiration time on the Chicago exchange more than doubled to $1.53 last year from about 13 cents a bushel in 2005, according to the report.
Still, wheat futures for July delivery finished at about $5.47 a bushel Tuesday on the Chicago Board of Trade, down from $8.66 a year ago.
The Senate report recommends that the Commodity Futures Trading Commission (CFTC) end the allowance for some index traders that enables them to hold more than the standard 6,500 wheat-futures contracts at a given time. Some traders on the Chicago exchange have been allowed to hold as many as 53,000 contracts, according to the report.
The CFTC has denied there was a problem, Levin said. But new CFTC Chairman Gary Gensler "seems ready to act to protect the markets from excessive speculation," he said.
Katy Ziegler Thomas, vice president for government relations of the National Farmers Union, said that speculators "are the cause for the commodity bubble that has had such a negative impact on our members."