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."
juan, Sand-man,
ReplyDeleteI'm not sophisticated in any way that would give me some better understanding of what this means to all of us. Please provide some analysis of what's going on and what might be expected to be a significant result of all this. Is this anything like runaway silver when the Hunt brothers sought to corner that market, what, 15 0r 20 years ago? Are food stuffs suddenly going through the roof?
Jack,
ReplyDeleteI'm afraid I'm going to have to leave us in raw data territory here. Analysis takes time and effort. Instant punditry is worse than worthless because it substitutes pseudo-answers where questions need to be asked. You've highlighted some of those questions, namely are we looking at a possible real hit from food prices?
Sman,
ReplyDeleteUnderstood. It seems obvious that food stuffs that are basd on wheat, that's just about everything, are going to rise. The real question then is why? Bad harvest? Increased costs of farming? Storage costs? Finance costs of the producers? Seed cost?
Ferilizer, gasoline for the tractor, etc? Or, is some group pushing it into the corner?
Jack, I'll try to add more perspective.
ReplyDeleteThe above chart represents the March 2008 futures contract on hard red spring wheat which is, as the highest protein, I believe, the most demanded for bread. The Minneapolis exchange (MGE) is the center for this particular trade which, as you can see from the chart, came under speculative pressures.
From a different angle, prior to the 11th, a price increase of thirty cents was the exchange set limit; should contract price rise by that amount, trade was halted until the following day, i.e. a lock limit up move stopped trading activity, and that's just what began happening day after day. This interferred with index funds' ability to 'roll' holdings and maintain mandated internal weightings, short positions could not be so easily - or at all - offset, margin calls were hitting commercials such as grain elevators.
Nor was this limited to a single exchange but had begun infecting the Chicago and Kansas City exchanges as well, a circumstance which, with CFTC approval, led to a concerted action by all three exchanges. Daily trading limits were raised (by last week the mentioned thirty cent limit on the MGE had been pushed to one dollar and thirty five but has since fallen to sixty cents as pressures diminished) and margin requirements were sharply increased.
The effect of those actions is, perhaps, more evident when looking at wheat futures on the Chicago and KC exchanges, same contract month as above but different wheats:
Chicago WH8: http://charts.marketcenter.com/cis/agweb?cont=WH8&size=760x400
Kansas City KWH8: http://charts.marketcenter.com/cis/agweb?cont=KWH8&size=760x400
Point of above? Not that there's been no fundamental basis for higher wheat prices but that speculative activities exaggerated this (just as has been the case with some other commodities though the wheat mania is more evident).
Looking at the latest USDA and FAO reports for both the U.S. and world production/consumption/forecast ending stocks:
Good prospects for the 2008 wheat crops already in the ground in the northern hemisphere auger well for a significant increase in global wheat output during the year. ... In North America, the winter wheat area in the United States has expanded again for the 2008 harvest although the increase was not as large as had been earlier expected following dry weather in the southern Plains that interrupted planting.
(FAO, Crop Prospects..., February 2008)
Other hand,
Projected U.S. wheat ending stocks for
2007/08 are lowered 20 million bushels this month as a reduction in feed and residual use is more than offset by higher projected exports. At 272 million bushels, this year's ending stocks are the lowest since 1947/48. Ending stocks as a
percentage of use (stocks-to-use) at 12 percent
would be the lowest since 1946/47.
...
Global ending stocks for 2007/08 are lowered 1.2
million tons. At 109.7 million tons, stocks are
projected to reach their lowest level in 30 years.
(USDA, World Agricultural Supply and Demand Estimates, 8 February 2008)
On USDA wheat data, year over year, world area harvested rose slightly over 2 percent; yield per hectare stagnated; production was up marginally less than 2 percent; total 'disappearance' (all uses) rose one half percent; ending stocks fell by 12 percent. Which doesn't seem to add up but there are, I think, five seperate organizations involved in generating the data, projections are included and I haven't attempted checking definitions and methodologies.
Again on USDA data, it's evident that U.S. wheat exports (grain, flour, and products) have been very much higher through December 2007 than had been the case for the same period of prior four market years (June-May). What looks like around a 50% rise is most likely related to weaker dollar though that can't be the only factor.
( http://www.ers.usda.gov/data/wheat/YBtable21.asp )
So I'll add that EU wheat prices have been driven up by U.S. prices; from beginning of this month, Russia raised wheat export duties from 10 percent to 40 percent in an attempt to fight rising inflation and, it seems, is about to halt wheat exports to Belarus and Kazakhstan until May; Saudi Arabia intends to reduce wheat imports by 12.5 percent/yr; Turkey has dramatically cut import duties; Agentina has imposed a wheat export limit of 400,000 tons/month; Brazil will reduce or end its import tax on wheat; China has placed an export duty on wheat and some other grains; Pakistan has banned wheat exports to Afghanistan + a 35% duty on wheat imports; et cetera.
(Moscow Times, FAO, others)
Causalities are somewhere inside the above combinations but no doubt what appears a chaotic situation will impose higher living costs upon those who will be seeing even greater downwards pressure on wages as this recession kicks into gear.
i always said that one day Safeway (large grocer, land owner) would decide that a better investment than seed would be chinese microchips and that year the people would have no bread.
ReplyDeletethis looks like a fancier version of that scenario. good thing we have free markets and distributed decision makers.
Having done a little more research, I'm afraid my above comment treated the financial side in too kindly a fashion.
ReplyDeleteUntil early 2007, the U.S. Commodity Futures Trading Commission (CFTC) had failed to break out Commodity Index Funds within its weekly Commitment of Traders reports. This failure compounded already extent problems of transperency, especially for commercial hedgers (some producers, big grain elevators, processors, end users) so reduced these latters' hedging efficiency while exposing them to potentially greater financial risk on top of that of their normal business.
Traditional, i.e. commercial hedgers, have most to do with the physical materials while the commodity funds, hedge funds, etc, are not but trading paper for financial gain. Commodity funds have been around 'forever' whereas commodity index funds are of relatively new invention, are almost exclusively long-only with the purpose of gaining commissions through facilitating wealthy investors and institutions portfolio diversification strategies. Diversification, though, can transform into a self-fulfilling allocation/reallocation which inhibits convergence of cash market prices and futures market prices, help drive price in general higher and further squeezes working class and society's ability to deal with the developing constellation of global problems.
Short trip back to 2006, roughly two years after commodity index funds had begun flooding grain, metals, energy markets in search of maximum return:
Total Chicago Board of Trade (CBOT) wheat futures contracts not liquidated via offsetting transactions and not taking delivery of product had risen to 105% of the early 2006 U.S. wheat crop. During the 1995-2004 period, the percentage of this open interest was generally below thirty percent and never over fourty percent.
The 2004-2006 period saw open interest volume for wheat increase two hundred and nineteen percent.
Later in 2006, Rod Clark, risk management chairman at CGB Diversified Services, properly commented that "For some time, the rising open interest on the long side of commercial positions has been misinterpreted as being related to export activity and end user buying [when in fact it has resulted from] nontraditional hedging"
(National Grain and Feed Association, 9/6/06)
At that time, the CFTC had yet to break commodity index funds out of its 'commercials' category but since they finally did this, lets take a look at these funds' positions as of the most recent commitment of traders report (2/19/08):
CBOT Wheat. 25 of the total 39 Index traders were long 220,595 contracts. Since each contract represents 5000 bushels of wheat, these 25 controlled a total 1,102,975,000 bushels or 30,018,568 metric tons.
14 index traders were short 28,184 contracts or 140,920,000 bushels (3,835,279 metric tons).
For the smaller Kansas City Board of Trade 16 index traders were long 30,690 contracts or 153,450,000 bushels.
3 index traders were short 301 contracts (1,505,000 bushels).
It would be interesting to see comparable categories for the Minneapolis exchange but the CFTC does not include that exchange in its reports, just as it does not identify which institutions are involved in the trade.
I should note that same Commission intends to raise speculative position limits, an action that according to the NGFA* will excarbate "The lack of convergence between cash and futures markets during the delivery period [which], in conjunction with rapidly rising commodity values, has created huge borrowing needs and financial risks and exposure for the grain-buying industry..."
(NGFA, 1/23/08)
Just in case it's not clear, yes, I know that farmers, elevators, mills, etc, requires counterparties if they are to effectively hedge price risk but this is no excuse for the dereg facilitated hyper-speculative activities which have been generating not only masses of (ultimately will devalorize to dust) fictitious capital but attacking society in the mean time. Where we are today has less to do with real economy conditions than those created by a class of rentiers.
Beyond a level which we've gone beyond, finance kills.
Addendum:
Bakers Band Together to Demand Relief - ABA Calls for March on Washington
The American Bakers Association is calling upon all bakers to band together in Washington, D.C. for an industry march to stress the urgency of the current wheat [price] situation. We will meet with the White House, USDA and key members of Congress.
On March 12, ABA is arranging for the “Band of Bakers” to meet with newly confirmed Agriculture Secretary Ed Schafer and senior White House officials. In addition, ABA will be arranging meetings with key Senators and Representatives so that bakers can stress the urgency of the current wheat situation...
(ABA, Feb 2008)
Better they march on 'Wall Street'.
*(The National Grain and Feed Association (NGFA), established in 1896, is a grassroots organization comprised of more than 900 companies that operate more than 6,000 facilities and handle more than 70 percent of U.S. grains and oilseeds throughout the 48 continental states and more than 300 congressional districts. NGFA members encompass all sectors of the industry...)
So this could be billed as "bakers versus bankers".
ReplyDeletejuan,
ReplyDeleteWell, thanks for the in depth description of what's going on. Not that it makes a lot of sense to me. A bit too much of the arcane financial manipulations. It certainly seems to be "curiouser and curiouser." Am I wrong to think that some form of market cornering may be going on as a result of the involvement of the paper traders?
Juan,
ReplyDeleteThere could also be actual concerns over the size of the 2008 crop. The weather in the grain belt has been unusually volatile this year. Just as heavy rain/snow/ice followed by extreme cold tears up highways by uplifting asphalt and concrete, so too weather does the same thing to the roots of wheat crops in the ground. There's some real concern out there that the wheat crop may have been damaged by the extreme weather more than previously thought. This was actually a topic on one of the farm market public television shows in the midwest.
Jack, there's no doubt that commercial hedgers in the MGE were being squeezed, were being overwhelmed by buyers, but whether this was orchestrated or not remains a question.
ReplyDeleteTraders comments that I've read run the gamut from 'commodity broker 'xyz', (who's parent company owns the Toronto Stock Exchange), has been purchasing seats on the Minneapolis and Kansas City exchanges at very high prices and now seats nine perecent of the Minneapolis Exchange's members and nearly five percent of Kansas City's Board of Trade. Why have they paid so much for these seats?'
To
'It's strictly a supply and demand situation driven by relatively insufficient supply of hard red spring wheat'.
I'm left to say that the first is definitely true while, given acreage and weather, the second may also be with Montana and North Dakota as question marks.
As I may have mentioned, the hard red spring wheat trade centers on the Minneapolis Exchange which, having the thinest trading of the three major U.S. wheat exchanges, theoretically would make it the most easy to manipulate.
Contrary to hard red wheat, U.S. Wheat Associates report that the area devoted to soft red wheat has risen by twenty one percent while soft white wheat is up seven percent.
Globally, based on 'high international prices and "bullish enthusiasm by the investment community", one of the largest private commodity researchers in the U.S., Allendale, is forecasting a 443 million bushel decline in world wheat consumption this year.
From my perspective and without saying that there is absolutely no fundamental basis, what's been happening with wheat, other grains, tradeable commodities in general over the last few years has had most to do with what a Citi chief commodity trader pointed out in Jan 2006:
"A flood of investment funds is driving... prices much higher than can be supported by fundamental analysis of supply and demand. It’s a bubble which could grow a lot bigger before bursting." And since then it certainly has (grown much larger).
Anon, I don't disagree that there are actual concerns over crop size and, per my first post above, would note that these are not just the U.S. since a few countries are effectively halting exports.
I do, though, think that in the search for returns, speculative finance and long-only funds have financialized commodity prices.