Mondelēz to bear costs in wheat futures manipulation charge

The U.S. Commodity Futures Trading Commission (CFTC) charged Mondelēz International and Kraft Foods for manipulation and attempted manipulation of the prices of cash wheat and wheat futures yesterday.

The civil complaint alleges that on five days in summer 2011 the companies - then a single entity - started a strategy to buy a six-month supply of wheat worth $90m, but never had the intention to take delivery of the wheat. Instead, the CFTC alleges the firms hoped the market would react to their huge long position by lowering cash wheat prices and strengthening the spread between December 2011 wheat and March 2012 wheat futures. Price shifts occurred and Mondelēz and Kraft earned over $5.4m in profit.

Aitan Goelman, the CFTC’s Director of Enforcement, 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. 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.”​

Kraft and Mondelēz are also accused of holding long positions on five days in December 2011 on wheat that exceeded the CBOT’s 600-contract speculative spot month position limit by as much as 2,110 contracts without having a valid hedge exemption in place or a bona fide need for that quantity of wheat.

From 2003 to January 2014, the firms are also allegedly conducted off-exchange futures transactions between two separate corporate trading accounts in violation of trading rules.

“In its continuing litigation against Kraft and Mondelēz, the CFTC seeks a permanent injunction from future violations of federal commodities laws, disgorgement, and civil monetary penalties,”​ said the CTFC in a release.

Kraft and Mondelēz response​

In 2012, Mondelēz span off from Kraft to create a separate international snacks business. Kraft Foods Group was preserved as a North American grocery business.

Basil Maglaris, director of corporate affairs at Kraft Foods Group, said:  “While Kraft is named in CFTC the complaint, the transaction at issue occurred before our spin-off from Mondelēz International in October 2012, and it involved the business now owned and operated by Mondelēz or its affiliates.  The CFTC complaint primarily focuses on the trading of wheat futures contracts in December 2011.  More specifically, the type of wheat involved in the transaction is used in products such as cookies and crackers, which are not made by Kraft Foods Group.”​

He said Mondelēz would therefore predominantly bear the cost of any penalties. “We do not expect this matter to have a financially material impact on Kraft,” said Maglaris.

Mondelēz refused to comment on active litigation, but said any fine issued by a court would not be material to investors.

The company said in a SEC filing before formal action was taken that it was cooperating with CFTC’s investigation. It said it expected to bear costs of any monetary penalties the CFTC may impose under a 2012 Separation and Distribution Agreement with Kraft.