Views on commodities and energy
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.
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.”
At 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 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.
Statistics published by the government for years have been disappearing since the Agriculture Secretariat ceded control of the country’s multibillion-dollar grains and beef trade to another state agency, the ONCCA, earlier this year.
For farmer Dennis Shields, the fate of his new wheat crop is largely out of his control. In this first week of May – some 45-60 days from harvest – whether or not Shields makes a tidy profit or suffers a painful loss this summer is all up to the weather.
“It all depends on June,” said the 67-year-old Shields, who has been farming near Lindsborg, Kansas, more than 40 years.
Every time it looks like relations between Argentine farmers and the government have hit rock bottom, they get worse.
Exasperated farmers have blocked ports, parked tractors across highways and refused to send their cattle to market in protest at a string of government measures.
They even held a mass prayer rally, hoping the nation’s patron saint might help them resolve the three-year-old row.
This time they have called a two-day strike in protest at an export tax hike that targets their most lucrative crops, soybeans and sunflowers.
Officials say everyone should benefit from the grains bonanza, not just the countryside, which has historically fought with the government in Buenos Aires over the spoils of the country’s farming riches.
They say there will still be an ample profit margin even with the new tax increases.
But farmers say the government has gone too far, and will end up shooting itself in the foot by discouraging the production of the very goods that are swelling state coffers.
Argentina has recovered some of its former fame as the bread basket of the world in recent years, but the rapid rise in export duties that has accompanied soaring global prices means few farmers are celebrating in the famous Pampas plains.
“The worst thing about all this despondency, is that we’re losing a culture.” one farmer told daily La Nacion. “I honestly don’t know if there’s any future in farming for my children.”