All Eyes on US Wheat Spreads, Expanded Price Limits, Margins

February 10, 2008

       There’s only one thing Chicago Board of Trade traders will be watching when the U.S. grain markets open on Sunday night for Asian trade — wheat prices, in particular Minneapolis spring wheat. All three U.S. wheat exchanges in an emergency action late Friday decided to raise daily trading limits to 60 cents per bushel from 30 cents trying to break a deadlock in the runaway wheat markets. 
    For five consecutive days last week U.S. wheat futures markets rose the allowable 30-cent limit, with buyers overwhelming sellers and freezing trade until the following business day. CBOT traders said on Friday at one point there were 100,000 unfilled buy orders waiting to get into CBOT wheat, the busiest futures market of the three.
    Once the wheat market hits the limit, exchange rules prohibit trading until the next day. The only way traders have been able to trade these locked-up markets is through options. And options trade late Friday indicated that MGE March wheat was being valued at $20 to $21 a bushel versus its Friday close at $15.53  — a record high and three times the price of a year ago.  Options traders using these “synthetic” values also valued CBOT March wheat at 72 cents higher than Friday’s close and KCBT March wheat about $1.20 higher.
    So the stage seems set to have the buyers continue to overwhelm sellers on Sunday night. But one wild card will be the sharp increases in margins all exchanges have made. At Monday’s close, initial spec margins on each CBOT wheat contract will rise to $4,050 — up 100 percent from Friday — and KCBT wheat margins will also rise to $4,050 –  up 116 percent. MGE on Thursday already raised its wheat spec margin 54 percent to $3,510 per contract. More to come?
    How many players will be forced out of this poker game because they can’t ante up?
    In any case, for prices all eyes will remain on Minneapolis. The cash market is red-hot as exporters and millers scramble to find high-protein wheat. Grain firms holding short positions to hedge their cash positions are getting hammered by escalating margin calls. 
    As the week progresses the exchanges will systematically expand the trading limits by 50 percent, to 90 cents, on the next business day and another 50 percent on each subsequent day when two or more contracts in the same crop year close limit-up. 
    Chicago traders late Friday were most concerned what was going to happen to the futures spreads come Sunday night and Monday morning as the locked limit-up move was making it impossible for index funds to roll their long futures position. Funds like Goldman Sachs begin rolling their long position on the fifth business day of the month, which would have been Thursday, Feb. 7. 
    Some 60,000 CBOT wheat spreads, or 120,000 contracts need to be traded in Chicago by index funds, Chicago veteran traders estimated Friday afternoon. 
    “We already lost two days of the Goldman roll … we won’t be able to get it all done on Monday,” one Chicago wheat trader said. 
    Trade data released late Friday by the Commodity Futures Trading Commission showed that index funds were net long roughly 190,000 CBOT wheat (combined futures/options) positions and 29,000 KCBT wheat as of Feb. 5. The CFTC does not break out index positions for MGE wheat due to its smaller open interest and trading volume; but commercials held nearly 69 percent of the shorts in MGE wheat futures. The squeeze on all commercial hedgers in wheat has been unrelenting and looks to get worse in the coming week as the market tries to find adequate sellers in the runaway rally.

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