U.S. Agency Forced Ferruzzi to Trim Soybean Holdings

The Chicago Board of Trade, engaged in a bitter fight with a giant Italian agricultural firm over a possible attempt to corner the soybean futures market, revealed Thursday that federal regulators had separately ordered the Italian company to reduce its soybean contract holdings.

The order caused the loss of millions of dollars for Ferruzzi Finanziaria S.p.A., an Italian company that held contracts calling for delivery of 23 million bushels of soybeans, far more than the actual supply of available soybeans in warehouses totaling about 10 million to 12 million bushels.

The company claimed that it was buying big supplies of actual soybeans, and contracts for deliveries of millions of bushels more, for use by its Central Soya subsidiary, which makes soybean products.

Karsten Mahlmann, the Board of Trade chairman, said Thursday that regulators at the Commodity Futures Trading Commission decided on the morning of July 11 to order a reduction of soybean holdings to 3 million bushels. The action applied only to Ferruzzi, which had a special exemption from normal trading limits.

Mahlmann’s revelation came as a surprise to the members of the House Agriculture conservation and credit subcommittee. Wendy Gramm, the Commodity Futures Trading Commission chairman, told the subcommittee earlier this week that she had been in contact with the Board of Trade during the current controversy. But she made no mention of her own agency’s moves against Ferruzzi’s position in soybeans.

Kate Hathaway, CFTC spokeswoman, said Thursday that there was no intention to mislead. She acknowledged that the agency had revoked one firm’s special exemption allowing larger than normal trading activity. But she refused to confirm that Ferruzzi was the firm mentioned.

“On Tuesday we did not comment on this letter or other actions we had taken because the market was still trading,” she said. “We feared that disclosing any action would have a market effect.” Mahlmann testified on the last active day for July soybean contracts, after the market had closed, she noted.

Meanwhile, the soybean futures contract for July dropped 59 cents a bushel Thursday, closing at $6.88, 55 cents below the price on July 11, when the Board of Trade ordered traders to reduce their contracts to no more than a million bushels. In issuing their order, Board of Trade officials presumably feared a squeeze in the market by Ferruzzi. Each contract obligates the holder to buy or sell 5,000 bushels of soybeans for delivery at a future date. Ferruzzi had accumulated a huge position, with contracts to purchase more soybeans than actually existed.

Persons who had contracts to sell soybeans would be unable to meet their obligations since Ferruzzi held so much of the supply, and presumably would be able to dictate the terms of any financial settlement from the sellers.

The board ordered that all soybean traders reduce their holdings to no more than a million bushels by Thursday, the date of expiration for the July futures contract.

Ferruzzi has sued the Board of Trade, arguing that the order to reduce contracts changed the trading rules and caused the company big losses by driving down the value of a futures contract. Foreign investors were reportedly worried that the board’s action indicated discrimination against non-American players in the volatile commodity futures business. Mahlmann defended the board’s action in ordering the soybean contract reduction. The step “dramatically enhanced the credibility of the board,” demonstrating that an individual market participant “is not bigger than the market itself,” he told a news conference after testifying at the congressional hearing.

Both the CFTC and the Board of Trade are watching the August futures market with some apprehension. There are open contracts for August delivery of more than 80 million bushels of soybeans, compared to supplies of 12 million bushels in warehouses.

Hathaway of the CFTC said: “We are completely aware of the market situation and who is in it.” She refused to discuss whether Ferruzzi is under restrictions. “It is an active market, and we are not able to talk about specific actions,” she said.