The American Bakers Association (ABA) last week called on Congress to immediately place contract limits on index funds in order to allow markets to return to their original price discovery functions.

Hayden Wands, director of procurement at Sara Lee Corp. and chairman of the ABA Commodity and Agricultural Policy (CAPC), testified before the Senate Permanent Subcommittee on Investigations regarding how index funds increase volatility and cause convergence problems in the wheat market.

“ABA has long held the position that index funds must operate under contract limits,” said Robb MacKie, ABA president and CEO. “We applaud the subcommittee for adopting ABA’s recommendation to implement such a limit.”

Wands testified that index fund speculation in the wheat markets “increases volatility within the market [and] renders the market much less effective as a hedging tool.”

“The index funds’ buy-and-hold strategy wreaks havoc on the wheat market,” Wands added. “ABA believes that through the implementation of contract limits, the market will respond more to fundamental supply and demand influences than the investment whims of index funds.”

ABA has proposed categorizing index funds separately from a bona-fide commercial hedger and increasing reporting requirements on index funds in the market. ABA also proposed imposing contract limits on index funds similar to those currently operating as traditional market speculators.

ABA has been focusing on this issue since the fall of 2007. ABA urged the Commodity Futures Trading Commission (CFTC) to drop its proposal to offer contract limit exemptions to investment firms.

The CFTC will be holding hearings on excessive commodity market speculation in late July or early August.

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