Ray Grabanski column: Minneapolis contracts trade at highest levels ever seen
Wheat Wheat was mixed with most contract months moving lower, but with front months on the Minneapolis Grain Exchange holding sharp gains. Feb. 11 brought about a raising of the limits on MGEX and Kansas City Board of Trade to 60 cents. This allo...
Wheat was mixed with most contract months moving lower, but with front months on the Minneapolis Grain Exchange holding sharp gains. Feb. 11 brought about a raising of the limits on MGEX and Kansas City Board of Trade to 60 cents. This allowed for front months on MGEX to lock a limit higher, while other months fell lower. MGEX continues to get strong price support from a strong demand for spring wheat and concerns over stocks. While the increase in margins forced some traders out of the market, and that paired with long liquidation pushed the Chicago Board of Trade and KCBT lower. Feb. 12 brought more consolidation and profit taking to all but front months on MGEX. By Feb. 13, limits on MGEX and KCBT were raised to 90 cents with front months locking a limit up once again. While the rest of the wheat market continued negative, losses were limited by spillover strength from MGEX. In addition, USDA announced its 2008 to '09 baseline projections, which predicted 65 million acres of wheat planted with a total production of 2.35 billion bushels. This was up from the 2007 to '08 numbers of 60.4 million acres and a total production of 2.07 billion bushels. Feb. 14 brought about disappointing export sales numbers, but after days of losses, all three exchanges ended sharply higher. Moving into Feb. 15, limits have been expanded once again on MGEX to $1.35.
While this market top might define the wheat market during the coming months, the size of the market definition is large with a high in old crop at $20 or more (in cash markets and synthetic futures/options) and $12 in new crop MGEX months. CBOT and KCBT winter wheat markets are defined at $11 to $12 highs in old crop and $10 to $11 highs in new crop ($1 higher in the KCBT hard wheats). These are still very large ranges, and while they indicate where the market has resistance levels now, it doesn't necessarily mean wheat drops straight down from here. Selling wheat, while it might be the right move long term, doesn't mean in the short term that price can't go up. At this point today, even though the highs are likely in, a hedge today still could mean up to $2 per bushel margin required to hold it in new cropand maybe $3 to $4 or more to hold old crop hedges. For old crop MGEX wheat, the top is $20, which means the May contract still could trade up to $20 yet before it expires. There is still little wheat available until harvest of new crop wheat, and it's likely there will be another spurt where hard spring wheat cash prices could push close to the $20 level they hit last week. After all, there won't be any more hard red spring wheat available in May than there is now; in fact, there is likely to be a lot less as we continue to use up wheat during the next few months. So there still is likely to be a lot of volatility and trade yet to be done in wheat in spite of our potential multiyear tops already being formed.
CornCorn futures were steady with losses early on offset by strong gains on Feb. 14. Corn started the week lower, with little help from lower wheat futures. Also limiting upside was favorable growing conditions in South America. Late in the day, sharp gains in crude oil helped to limit losses. Corn is very much a follower right now with little fresh fundamentals to help it move in its own direction. This was evident as it relied on wheat for direction as well as looking to the outside markets for support. Feb. 14 was moderately lower as well with corn continuing to follow lower wheat futures. Feb. 13 was only marginally lower as CBOT wheat and a stronger U.S. dollar pressured corn prices, but with a recovery near the close as a result of gains in soybeans and strong crude oil.
USDA announced its baseline agricultural projections, which showed corn for 2008 to '09 to be at 88 million acres planted with total production of 12.5 billion bushels. This is a drop from 2007 to '08 with 93.6 million acres and production of 13.074 billion bushels. Feb. 14 brought about sharp gains following soybeans and wheat higher. Corn still is competing for acres this spring so it needs to compete with the prices of neighboring grains to secure acres. Gains also were supported by strong export sales as well as supportive outside markets.
As for corn and soybeans, these two crops still aredrastically undervalued relative to current wheat values - even after a significant price break. Corn prices are only half of spring wheat yet, and this is an extraordinary small value compared to wheat. Its likely corn prices will continue to gain on new crop wheat prices as producers will plant a lot more hard red spring wheat at current levels than corn.
Corn cannot afford to lose a lot of acres to wheat, so ProAg expects corn prices to gain relative to new crop wheat prices. That may not be true for old crop wheat, though, as old crop is in a supply and demand situation all by itself. No more wheat can be produced until harvest, so its unlikely anyone can influence supply until the new crop is harvested. While hard red spring wheat acreage can be increased in North America for 2008 (which would be harvested in fall), there is a set supply left until that crop is harvested. That means old crop wheat relationships to corn and soybeans cannot be used to determine price direction, but new crop hard red spring wheat still can. It will be interesting to see if wheat prices drop to correct the relative price relationship to corn and soybeans, or if corn and soybeans rise (or both). We may have completed our first crop's rally for the 2000's, with ProAg expecting wheat to be the first crop to top in this 1970s-type rally.
The remaining questions to be answered by the market: "When will corn top?" and "When will soybeans top?" Many analysts believe both have occurred with the wheat market, but ProAg believes the jury is still out on this verdict. USDA's long-term projections this week indicate all grains are at levels higher than the coming years are likely to be, but then this year we need to ensure that supplies build - meaning price has to get high enough to reverse our shrinking supplies. So prices in 2008 have to get quite high to do so - have they been high enough?
SoybeansSoybean futures ran to new highs although price trends remained highly volatile. Early in the week, soybeans saw moderate pressure from a huge sell-off in wheat as well as weakness in outside markets. By Feb. 14, traders found their footing once again with help from renewed inflations worries as well as news that China has experienced serious damage to its rapeseed crop. As we have been saying, soybean fundamentals have remained very friendly this winter, particularly with USDA decreasing projected carry-out amounts once again. It is only February, and already there is serious concern surrounding how low carry-outs could get by this summer. To pacify some of those concerns, markets have to trade high enough to buy acres for 2008 and shed some demand this summer. USDA baseline reports earlier in the week estimated potential soybean acres at 71 million acres, up from the 63.6 million acres planted in 2007. Still, we are far enough ahead of planting where a drop in price now still would cause some producers to change plans.
The Chinese remain a huge buyer of U.S. product, with exports for the month of January 41.5 percent ahead of what was sold a year ago. Producers are right to be concerned about the potential downside risk. Once prices get this high, it can be very stressful to realize that only a year ago, prices were nearly half of what is being seen now. One way producers can minimize this stress is to buy put options on old crop grain to secure a floor. In general, however, Pro Ag remains comfortable with this risk. For one thing, the fundamental situation of old crop beans is 180 degrees from last year at this time. In 2007, U.S. soybeans were looking at an average South American crop as well as a potential U.S. carry-out of around 600 million bushels. In the past 12 months, we have worked that down to only 160 million bushels or 25 percent of starting stocks. In addition, inflation fears of the U.S. economy continue to strengthen with Fed Chairman Ben Bernanke stating that the Fed is very comfortable lowering interest rates if it will keep the economy out of recession.
ProAg currently is not recommending any sales of new crop soybeans as we continue to allow this market to continue buying acres. Old crop soybeans are currently 50 percent sold. Producers are advised to make catch-up sales to this level if they cannot or will not store this crop past April. Any producers able and willing to store to late spring or early summer can expect a better basis.
Small grainsNew crop prices on both durum and barley contracts moved higher in some areas, finally reflecting the recent strength in hard red spring wheat. Current bids have been as high as $15.50 for durum, although many of the higher level bids do not contain an act-of-God clause. For that reason, producers likely will want to be conservative about the amount they sell. MGEX malt barley prices were up as well, now posted at $7.10 with feed at $5. As we have said several times before, specialty crops such as barley and durum have a fair amount of work to do to gain and/or maintain acres for 2008. Demand remains strong, and this will remain a supportive feature for those still holding onto old crop supplies in particular. Hard red spring wheat prices for 2008, however, did decline this past week, so it may be advisable for producers to look at contracting at least a portion of planned production.
Dry beansDry bean prices moved higher once again as buyers Continue to have a tough time securing production in 2008. Pinto quotes are now at $33, navies at $34 and pinks at $35. However, at least for the navies, we would like to see a larger premium to pintos as well as something closer to three times the price of soybeans. As with the small grain contracts, these offers typically do not include an act-of-God clause. Demand remains stable, so old crop prices should remain high, if not appreciate, in the coming months. OilseedsPrices on oilseeds of all types rose with support from strong soybean oil prices as well as reports out of China that the rapeseed crop there has experienced severe damage (up to 40 percent loss). Demand for vegetable oils remains very strong, and consequently, ProAg still is friendly about the outlook for both old and new crop prices. This latest burst higher in the wheat market has really done quite a job in attracting acres for 2008, particularly in those borderline to outside the Corn Belt areas where corn is not a viable option. Because of that, buyers will have a lot of work to do in the next few months if they do not want to end up in a similar or worse situation for 2009. We look for canola trade to head sharply higher with flax and sunflower contracts following.