Wheat Ownership War Brews Outside Chicago – for Jul. 29, 2010

Wheat is wheat for most people, and judging by the recent buying action in Chicago futures everyone wants to own it lately as worries emerge about the heat-stressed crops of Europe.

However, for commercial users of wheat there is an important difference between the low-quality wheat traded in the Windy City and the protein-rich wheat traded in other U. S. exchanges, setting the stage for a potential ownership tussle in Kansas City and Minneapolis that could see those wheat classes outperform their better-known cousin if global crop quality issues continue to mount.

Chicago wheat prices have moved in sync lately with those of the other major U. S. wheat classes, giving market trackers the impression that Chicago futures act as an effective proxy for wheat prices in general.

BENCHMARKS

After all, Chicago is considered to be the global home for grain trading, and its array of agricultural products are often used as global price benchmarks.

However, when it comes to the wheat market, Chicago’s Soft Red Winter wheat futures are neither the most widely planted wheat crop in the U. S., which is the Kansas City Board of Trade’s Hard Red Winter wheat crop, nor the highest protein crop, which is Hard Red Spring wheat on the Minneapolis Grain Exchange.

Chicago does boast the most actively traded wheat contract, however, and thanks to high levels of liquidity remains the most attractive destination for entities looking to place high-volume transactions without impacting the price.

On paper that applies to both speculators and commercial players, but for end-users such as millers who are dependent on a specific quality of wheat, Kansas City and Minneapolis are often more suitable locations for offsetting the risk tied to the wheat they actually use.

CHICAGO TRENDS MISLEADING

Using the Commitments of Traders reports for details on what type of trader has been buying and selling wheat lately, the latest reports on Chicago wheat futures suggests that commercial entities, commodity index investors and hedge funds have all taken on a long bias in the wheat market as worries unfolded about the state of the emerging crops overseas.

Both commercial users and large commodity index investors have recently amassed their largest net long exposure in more than three years, while hedge funds and other commodities traders have scrambled to turn a hefty short position into a modest long bias as prices rallied.

This overwhelming bullish bias by each of the key non-producer participants in the Chicago wheat market seems to suggest that all the major players want to be long this commodity now that concerns are emerging about the extent of fresh global supplies.

However, a closer look into the goings on in wheat at the other U. S. exchanges reveals that speculators and end-users are far from any consensus regarding the outlook for wheat.

In Kansas, commodity index investors have steadily built up a hefty long stance in KCBT wheat futures and options since the second half of 2009, while more recently there has been an aggressive surge in the net long bias of other speculators such as hedge funds and commodity trading advisers.

At the same time, however, commercial users have seen their collective net short position widen to its largest level since 2007.

SIMILAR THEMES

The same theme has unfolded on the MGE, where again commercials have sharply boosted their net short exposure just as speculators have ramped up their long positions.

The significance of this “long speculator versus short commercial” positioning is that it is the first time commercials and speculators have taken on such positional extremes since wheat prices took off on their historic surge to all-time highs in the summer of 2008.

Further, in the case of the KCBT and Minneapolis wheat especially, much of the price strength seen during the 2008 surge was fuelled by the aggressive unwinding of short positions by commercial traders.

So while the Chicago wheat market may appear to be exhibiting the same behaviour as any other wheat class lately, it is likely that if the gloves come off between speculators and commercial wheat users, the fights will be more intense on the KCBT and MGE than in Chicago.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

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Thesignificanceofthislongspeculatorversusshort commercial”positioningisthatitisthefirsttime commercialsandspeculatorshavetakenonsuchpositional extremessincewheatpricestookoffontheirhistoric surgetoall-timehighsinthesummerof2008.

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