Commodity Corner

Views on commodities and energy

CBOT fund-led wheat rally another Wall Street hurdle for grain exporters?

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wheat-jpg1                                                    The weakest U.S. dollar in 15 months along with ample American wheat supplies should be spurring strong U.S. wheat exports this season. But the United States, typically the world’s largest wheat exporter every year, is seeing exports of that grain down 30 percent from a year ago as many big overseas buyers source wheat from cheaper suppliers, namely Russia, France and Germany. 
 
What’s more, nearby Chicago Board of Trade wheat futures prices have jumped nearly 25 percent since October 1, ignoring the weak exports, weak domestic cash basis and ample stocks of wheat on hand.

The economics of wheat supply and demand don’t seem to be adding up. What gives?
 
Some grain traders and analysts who study the CBOT wheat market think the latest price action in wheat may just be another symptom of the malaise grain traders have complained about with “convergence.” A chorus of protests by grain users like the National Grain and Feed Association for two years have blamed “Wall Street Index Funds” for buying grains — particularly, CBOT wheat — en masse and far beyond what is merited by basic grain market fundamentals.
 
The price inflation has caused a persistent disconnect, they say, between CBOT wheat and real-world prices and essentially ruined CBOT as a reliable hedging market for grain firms because the inflated CBOT wheat futures prices no longer “converge” with cash markets in delivery periods. Now, some traders wonder if the same fund-driven demand for CBOT wheat contracts is pricing U.S. wheat out of the world export market at a time fundamentals should be letting it compete.
 
Egypt’s main government wheat buyer, for example, has passed on U.S. wheat in its last six snap tenders. The most recent snub occurred this past week when it bought cheaper French, Russian and German supplies. Egypt has long been the single biggest buyer of U.S. soft red winter wheat, the CBOT par delivery grade. U.S. wheat shipped from the Gulf of Mexico this marketing season has been running roughly $25 to $35 per tonne higher than the wheat from the Black Sea region or France, exporters say. Freight is also more expensive.
 
“What worsened the situation in just in the last week or two is we’ve seen U.S. wheat futures escalate 60, 70, 80 cents despite a weak fundamental outlook, basically on fund buying,” said Mike Krueger, senior analyst for World Perspectives, who also runs a grain advisory service in Fargo, North Dakota. “Funds of all types, index and hedge funds whatever you want to call them, have simply been buying wheat and that drove markets sharply higher.”  

Weekly trader commitments data issued on Friday afternoon from the Commodity Futures Trading Commission confirmed the trend.

Index funds — funds which by their nature only hold a long position — were shown to be holding almost half (47 percent) of all the total long open interest in CBOT wheat as of Tuesday, Nov. 17. 
Managed funds — speculators which hold both long and short positions based on daily market trends — were also buyers, reducing their net short position in CBOT wheat by 10,300 contracts in the same period. But these big players remained net sellers in the wheat market as a group.
 
So it all adds up to what? For starters, probably a more critical eye once again from the CFTC, which has been holding public hearings since the summer under its reform-minded chairman Gary Gensler seeking a solution to the convergence issue as a way to restore the CBOT’s role as a hedging market. 
Few are happy with the “convergence” solutions proposed so far by the CME, including the most recent one — still under consideration — of tinkering further with wheat storage fees at elevators. CME — dependent on volume to remain the dominant market for world wheat speculators — continues to try to please all players, from Wall Street to Main Street. 
 
But it may be only a matter of time before U.S. wheat exporters as a group — all of whom are members of the influential NGFA — come to CFTC and blame Wall Street’s financial engineers for sabotaging the world’s top wheat exporter.

USDA monthly report, weather in spotlight for CBOT grains

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iowa-pods-2At this time of year there is generally a bearish sentiment in Chicago grain markets due to the onset of the U.S. harvest, a world bellwether for supply. That is particularly true this autumn as evidence mounts that U.S. farmers will harvest not only their largest soybean crop in history, as the government is currently forecasting, but perhaps a record-large corn crop as well. USDA’s next crop estimates will be issued on Friday. 
 
“It’s going to be a biggie — the big dominant feature. Where do you want to place your bets heading into those numbers?” said Dan Basse, president of AgResource, a Chicago-based ag markets consultant.
 
Last month, the U.S. Department of Agriculture forecast a 2009 U.S. corn crop at 12.954 billion bushels, with an average yield of 161.9 bushels per acre, and soybean production at 3.245 billion bushels, yielding 42.3 bpa. The record for the U.S. corn crop is 13.074 billion bushels in 2007, and for soybeans, the 3.197 billion bushels reaped in 2006. Two closely watched research firms updated their forecasts last week, with brokerage FC Stone of Des Moines, Iowa, and consultant Informa Economics in Memphis both expecting USDA to boost its crop estimates this Friday. 
 
“With the private survey guys all showing higher corn and bean production, you’ve got a negative yield psychology all week going into the report,” said Dan Cekander, a grains market analyst at brokerage Newedge USA in Chicago. 
   
That sentiment hit CBOT markets hard on Friday, especially soybeans, which fell below $9 a bushel to a 6-1/2-month low. Sobering U.S. jobs data issued by the U.S. Labor Department on Friday added to bearish sentiment and worries about a recovery in the economy. Employers cut 236,000 jobs in September, far more than the 180,000 that had been expected. 
   
MOTHER NATURE NOT HELPING 
It is an adage at the Chicago Board of Trade that “big crops get bigger” once the late stages of maturity are reached and corn kernels and soybean pods make a final “fill.” But if there is anything injecting caution to all the bears in the grain markets at the moment, it is the weather. That factor will remain in play as a possible brake on CBOT price weakness the coming week. The Midwest harvest is already running a couple of weeks behind given crop immaturity. But recent rains and forecasts are not likely to to give farmers a bigger harvest window in the coming week.
   
“It’s pretty much a supply watch,” Basse said. “When will Mother Nature allow for a combine to roll freely and for the cash markets to be resupplied?”
   
Most traders expect export announcements to be limited, notably for soybeans with top buyer China on vacation until late in the week. China markets reopen on Oct. 9,following National Day holidays. 
   
WHEAT STRUGGLES
Wheat continues to struggle with large U.S. and global stocks and slid to new life-of-contract lows on Friday. But the biggest shake-up in wheat came in the spreads, the price differences between futures of various contract months.
 
These differentials jumped and fell violently — and expensively — for speculators as the grain industry, the CBOT and its regulator the Commodity Futures Trading Commission traded ideas back and forth about the best way to improve the hedging performance of the troubled CBOT wheat market. The trigger to the violent moves were competing proposals on the timing of when to adjust storage fees for wheat at CBOT- approved grain elevators. Some shell-shocked spread traders were threatening to file lawsuits by the end of the week. 
 
For the week, the CBOT December wheat fell nearly 2 percent to $4.41-1/4. Benchmark November soybeans fell 4 percent to $8.85 a bushel. December corn was near unchanged at $3.33-1/2.

PHOTO: Soybean field near Ames, Iowa, taken Sept. 26 by Christine Stebbins. High pod counts have many expecting a huge U.S. harvest.