Wheat prices may calm down
With the world likely to reap 45 million tonnes more wheat this year, you would expect prices to calm down a bit.
By Nidhi Nath Srinivas, TNN |
NEW DELHI: With the world likely to reap 45 million tonnes more wheat this year, you would expect prices to calm down a bit. However, in the past couple of days, a mixture of trading hiccups and supply squeezes have pushed wheat prices on Chicago Board of Trade (CBoT) up new peaks. CBoT, the world���s largest grain exchange, is the basis for buying and selling wheat in the world market.
Record prices on CBoT directly affect India and other food trading countries. When wheat crossed $430 per tonne, it pulled up sentiment across the board. CBoT futures for rice climbed to an all-time high while soyaoil and soyameal are rising by the daily trading limit.
The single-biggest push is coming from the export deals Uncle Sam has signed. Since Uncle Sam is the only mega wheat exporter left and his rates have become attractive due to a weak dollar, foreign countries are queuing faster than expected. US has already exported 20 million tonnes between July-December 2007, up 74% from a year earlier. At the end of January, about 8 million tons are still pending shipment. Total exports will cross 30 million tonnes. That is a 12-year record.
This unexpected demand is compelling exporters to rapidly stock up on grain. Hard red spring wheat is in short supply because weather problems in Europe and North America and a second straight drought in Australia sharply limited global wheat output.
The USDA expected spring wheat inventories to drop to 73 million bushels by the end of the 2007-08 season, which ends on May 31, from 117 million a year earlier. These stocks have to last until August, when the harvest of the new spring wheat crop begins.
As a result, exporters and domestic millers have been scrambling to cover their needs, and driving up prices in the physical market. Things have come to such a pass that the market has only buyers left. There are virtually no sellers. Grain firms holding short positions to hedge their cash positions also got hammered by escalating margin calls.
What was appropriate when prices were at $5 per bushel isn���t appropriate when prices are at $10 or at $15 or above. Realising this, exchanges have decided to raise them. From Wednesday, limits go to 90 cents for MGE and KCBT wheat but Chicago stays at 60 cents. At the same time, exchanges have raised initial margins, with CBoT raising it 100% and Kansas 116%.
Meanwhile, the large investment funds are waiting to roll over their long positions to the next month. Goldman Sachs, for instance, was due to roll over on February 7, but could not do so because the market would hit the 30-cent limit too fast. When these funds roll over - or buy fresh long positions - it would further add to the bullish sentiment in an already-boiling market. 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 February 5.
The good news is that this rally may not be too prolonged. CBoT reported on Wednesday a slight drop in prices due to a lack of new buying interest, news of a tender cancellation from Egypt and a sharp break in gold prices. Traders believe a bigger harvest might narrow the old crop/new crop spreads. Good weather in Australia combined with news of potentially higher crops in Europe and Eastern Europe helped to pressure the market. The EU believes the soft wheat crop could be up 12% this season.
Record prices on CBoT directly affect India and other food trading countries. When wheat crossed $430 per tonne, it pulled up sentiment across the board. CBoT futures for rice climbed to an all-time high while soyaoil and soyameal are rising by the daily trading limit.
The single-biggest push is coming from the export deals Uncle Sam has signed. Since Uncle Sam is the only mega wheat exporter left and his rates have become attractive due to a weak dollar, foreign countries are queuing faster than expected. US has already exported 20 million tonnes between July-December 2007, up 74% from a year earlier. At the end of January, about 8 million tons are still pending shipment. Total exports will cross 30 million tonnes. That is a 12-year record.
This unexpected demand is compelling exporters to rapidly stock up on grain. Hard red spring wheat is in short supply because weather problems in Europe and North America and a second straight drought in Australia sharply limited global wheat output.
The USDA expected spring wheat inventories to drop to 73 million bushels by the end of the 2007-08 season, which ends on May 31, from 117 million a year earlier. These stocks have to last until August, when the harvest of the new spring wheat crop begins.
As a result, exporters and domestic millers have been scrambling to cover their needs, and driving up prices in the physical market. Things have come to such a pass that the market has only buyers left. There are virtually no sellers. Grain firms holding short positions to hedge their cash positions also got hammered by escalating margin calls.
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In such a scenario, futures trading came to a virtual halt because of the low upper limits set by the three grain exchanges - Chicago, Kansas and Minneapolis. For five consecutive days last week US wheat futures markets rose the allowable 30-cent limit, freezing trade until the following business day. 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.What was appropriate when prices were at $5 per bushel isn���t appropriate when prices are at $10 or at $15 or above. Realising this, exchanges have decided to raise them. From Wednesday, limits go to 90 cents for MGE and KCBT wheat but Chicago stays at 60 cents. At the same time, exchanges have raised initial margins, with CBoT raising it 100% and Kansas 116%.
Meanwhile, the large investment funds are waiting to roll over their long positions to the next month. Goldman Sachs, for instance, was due to roll over on February 7, but could not do so because the market would hit the 30-cent limit too fast. When these funds roll over - or buy fresh long positions - it would further add to the bullish sentiment in an already-boiling market. 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 February 5.
The good news is that this rally may not be too prolonged. CBoT reported on Wednesday a slight drop in prices due to a lack of new buying interest, news of a tender cancellation from Egypt and a sharp break in gold prices. Traders believe a bigger harvest might narrow the old crop/new crop spreads. Good weather in Australia combined with news of potentially higher crops in Europe and Eastern Europe helped to pressure the market. The EU believes the soft wheat crop could be up 12% this season.
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