The hottest run-up in the wheat market since 2008 prompted the Canadian Wheat Board to issue a special market advisory last week to alert farmers to potential pricing opportunities.
David Boyes, the board’s commodity risk manager, said two market fundamentals – severe drought in Russia and excessive moisture cutting production in Western Canada – were fuelling the rally, although there was a widely held view the effects of those events on global supplies have been exaggerated.
“These two factors combined have created an enormous amount of interest in wheat futures values and a lot of speculative buying of those futures,” Boyes said in a YouTube broadcast.
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“So we’ve seen futures values in Minneapolis, Kansas and Chicago increase by 50 per cent over the past month,” he said.
Wheat futures markets have now posted their largest monthly percentage gains since 1959, with values shooting to more than US$8 per bushel as of opening on Aug. 5 – the highest levels since the rally of 2008.
PRICING OPPORTUNITIES
That’s creating an opportunity for farmers who choose to use the board’s Producer Payment Options, Boyes noted.
However, farmers who prefer to leave their sales in the wheat pool will also benefit, as the higher prices will be incorporated into the overall sales. Based on projected production, the board has now priced about 13 per cent of this year’s crop.
Among the options to consider through the CWB are:
Booking a “futures-first” Basis Price Contract through the rally and floating the basis.
Locking in current values through the Fixed Price Contract.
Using the FlexPro program (if the producer has already signed up) as a reflection of the forward market structure, given the CWB’s price pace to date.
The board stressed the market situation is highly volatile and the run-up in prices may not last long.
“The Russian situation in isolation may not be sufficient to sustain futures values. In order to sustain current futures levels, unanticipated demand will likely need to emerge – whether from corn or additional wheat crop problems in Argentina or Australia,” the market advisory said.
“Money floating from equity markets to the commodities can bid wheat beyond the level supportable by current fundamentals. This is important to note since a sustained wheat rally is most likely to occur only through a tightening of the U.S. wheat supply-and-demand balance.”
LACKING STRENGTH
The board said that while U.S. exports are above last year, they have yet to demonstrate the strength necessary to significantly erode the huge U.S. wheat surplus (or even to see U.S. wheat stocks narrowing year on year).
“Wheat futures could begin to be subjected to downward pressure as the North American spring wheat harvest commences.”
The Western Canadian Wheat Growers Association complained in a release the board’s monopoly is hampering farmers’ ability to take advantage of the market gains.
“Farmers in Ontario, Australia and everywhere else in the world have the opportunity to cash in on this rally,” said Alberta vice-president Stephen Vandervalk. “Only in Western Canada are we stuck on an island of low prices.”
The association also said farmers are missing out on the opportunity to lock in good prices on next year’s crop because there is no mechanism for doing that under the CWB system.
Even as the board’s advisory was hitting the airwaves, there were signs the speculative bubble was about to burst.
On Aug. 6, some of the estimated $10 billion in futures positions taken on corn, wheat and soybean markets in recent weeks were pulled out, causing markets to drop their limit to close at US$7.25. Trading continued to be volatile in Monday’s session, prompting a spirited debate among analysts as to whether the rally had run out of steam.
EXPERTS SPLIT
Wheat market experts were split over whether prices would recapture their nearly two-year high after Friday’s limit-down slide, which followed the steepest rise for wheat futures in 37 years.
A Reuters straw poll of traders, brokers and analysts across Europe and the United States was conducted as September Chicago Board of Trade futures were plunging the maximum 60-cent limit or 7.6 per cent for the day, a sharp reversal from the previous session when futures set a contract high of $8.41 a bushel.
Fifteen of 30 market participants surveyed predicted that September wheat would rise above its contract high of $8.41 ahead of expiration on Sept. 14; the others disagreed.
Wheat futures have surged as the Russian wheat harvest has been decimated by the worst drought in 130 years, leading to a ban on exports.
But many traders believe prices have risen far enough to reflect the drought’s effect. Now they are struggling to predict the behaviour of the financial funds that have piled into the market since June, causing prices to nearly double.
For weeks, surging wheat futures prices have vexed veteran analysts, who have pointed to swollen global grain stockpiles as an adequate buffer for the Russian shock.
“We didn’t think it should have been this high anyway,” said Joe Victor, analyst for Illinois-based research and advisory firm Allendale Inc.[email protected]
