by the Sandwichman
In the comments on Peak Food, Juan shared his observations of activity in the grain markets.
"Led by trade on the Minnesota Grain Exchange (MGEX), there were sequential limit up days that effectively froze the market, part of a short squeeze, unmet margin calls, rumours that the Canadian Wheat Board was stressed, elevator and/or bank failures."
The chart below shows MGEX front month wheat contracts (click on the chart to enlarge):
"From 8 Feb, the big three grain exchanges, with CFTC approval, all raising margin requirements while loosening trading limits, which at least in theory should attenuate or stop the rise.
"There is some real fundamental basis for the price rise but what began a few weeks ago went beyond this and has begun to really hit smaller bakeries as well."
The following commentary is from Karen Ballhagen & Scott Davis's 'Sorting It Out' column at AgWeb from February 8:
"An enormous amount of money continues to change hands in the multiple wheat pits -- primarily linked to the Minneapolis exchange. The focus of supply and demand may have run its course, leaving money as the major player. I say this in part due to the companies which are being squeezed now on the other side of this run-away market. Grain elevators and large grain companies across the U.S. and Canada are facing critical junctures in managing uncomfortable lending situations due to margin calls. Banks have become more prudent with lending in recent months due to the U.S. real estate debacle. If you look closer at the Minneapolis market, you will not only see prices have spiked to above $15/bushel on the futures, but even more serious is the potential for that to go higher yet. The daily price limit on wheat is about to jump another ten cents to 40 cents per day. At this price tag, where does that leave the end users to financially defend hedge positions? It would speak volumes to agriculture if solid grain companies start to fold under pressure due to this money squeeze.
"I can hear it now: the old timer 30 years from now in 2038 will be telling his grandson about the wild and wooly wheat market of '08 when prices defied gravity. But the second half of this tale has yet to be written. Margin calls and forced liquidation are now the primary driver of wheat price action as the "squeeze" in Minneapolis wheat has moved past the point where true fundamentals have much meaning."