Commodity Corner

from Global News Journal:

Can export bans be challenged at the WTO?

Russia’s ban on grain exports as a heat wave parches crops in the world’s third biggest wheat exporter has raised questions whether such export curbs break World Trade Organization rules. Russia is not a member of the WTO, and it remains to be seen how its new grain policy will affect its 17-year-old bid to join. But other grain exporters, such as Ukraine, which is also considering export curbs, are part of the global trade referee.

WTO rules are quite clear that members cannot interfere with imports and exports in a way that disrupts trade or discriminates against other members. But in practice most WTO rules aim to stop countries blocking imports – shutting out competitor’s goods to give their own domestic producers an unfair advantage.

from MacroScope:

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat's rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world's top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

Investors are taking note.

RBC analysts are advising their clients to buy the Argentine peso against the dollar. The peso is trading at 3.933 at present but currency forwards markets are pricing in a 2.1 percent fall in the peso's value over the next three months. RBC reckons they could be wrong and sees "very strong grain commodity prices supporting higher FX export inflows."  That it hopes, will keep the peso stable to the dollar. Buying the peso now would mean a 2.1 percent gain over 3 months or almost 9 percent in annual terms.

Nick Chamie, strategist at RBC, now expects Argentina's economy to grow 6.5 percent this year -- more than the 5 percent he originally predicted. He points out the stronger wheat price has had a knock-on effect on other grains -- prices for soy and corn, of which Argentina is a top exporter, are up 11-13 percent over past month.

Arentina has a bad reputation with investors -- it defaulted on $100 billion in debt in 2002, a record for any sovereign. It only recently finished restructuring defaulted debt and is hoping to come back to bond markets soon. The grain price bonanza could make its job easier. Strong grain export revenues have already boosted central bank coffers to a record $51 billion.

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

                                                    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.