Fears that stronger US market regulation will remove index funds as big investors in the wheat market sent the price of the grain down 4%.

Chicago wheat for September dropped 21.5 cents to $5.13 ½ a bushel at one stage on Wednesday after from Gary Gensler, the head of the US Commodity Futures Trading Commission, said the regulator would review waivers which have allowed index funds to build large positions in some commodities.

The waivers were blamed in a report by US Senators last month for fuelling last year's spike in wheat prices, and of promoting a damaging gap between futures prices and real-world cash prices.

Mr Gensler told a Senate panel that the schism had "significantly diminished the usefulness" of wheat futures for trade hedgers, whose interests were a key CFTC concern.

"The reduced ability of these firms to hedge their price risks increases the cost of doing business," he said.

"Ultimately, it is the American consumer who will bear the burden of these increased costs."

Market 'very conscious'

However, the prospect of tougher regulation has prompted many investors to liquidate positions fearing that index funds, whose assets reached $200bn last year, will be forced to do the same.

"The market is very conscious of renewed government regulation of commodity markets," Frank Drum, the National Australia Bank agribusiness economist, said in a report on Wednesday.

In Chicago, market-watcher Vic Lespinasse, at GrainAnalyst.com, said: "Part of the reason for [Wednesday's] big sell off in wheat is comments by Gary Gensler.

"The thinking is that if the CFTC limits index fund positions in wheat by outlawing position limit waivers, this will have a bearish impact since index funds are always long, never short."

Index funds vs speculators 

Some observers fears that, even if regulation brings prices lower in the short-term, the impact on reducing farmers' incentives to invest will create problems further ahead.

Dave Hightower, founder of the influential Hightower Report, warned last week that ill-designed regulation could lead to "massive" crop shortages.

While speculators take a range of positions, index funds typically make long-term, long-only investments in commodities.

Since the beginning of June, when the present bear run in crops began, speculative funds have sold about 185,000 contracts of Chicago wheat, soybeans and corn, while index funds have increased their investment by 54,000 lots, Wednesday's NAB report said.

Chicago wheat stood 12.75 cents lower at $5.22 a bushel in late trade, with Kansas wheat for September down 8.25 cents at $5.57 a bushel.

In London, November wheat ended £3.25 lower at £106.50 a tonne, the contract's lowest for more than seven months, with Paris wheat for August ending down E3.75 at E132.00 at tonne.