Wheat price increase mostly due to fund buying
Nov 2, 2009 11:06 AM, By Kim Anderson, Oklahoma State University
Between Oct. 5 and Oct. 22, the KCBT December wheat contract price increased about 90 cents. In the October USDA Wheat Supply and Demand report, the 2009-2010 marketing year ending stocks estimate was increased from 743 million bushels to 864 million — supply increased. During this time period, about the only increase in demand was Kansas City Board of Trade wheat futures contracts bought by index and hedge funds.
Some market analysts associate higher wheat and other grain prices with the decline in the value of the U.S. dollar. On July 1, the dollar index (value of the U.S. dollar compared to other major currencies) was about 81. On Oct. 5, the dollar index was about 77. By Oct. 22, the dollar index had declined to about 75.
While the dollar index was declining 4 points (81 to 77), the KCBT December wheat contract price declined $1.40 ($6 to $4.60). This makes it difficult to associate a two point dollar index decline (77 to 75) to a 90 cent increase in the KCBT December contract price.
Other factors that some analysts are associating with higher prices are delayed wheat planting and the delayed corn and soybean harvests. During the last few weeks, corn prices have increased about $1. Soybean prices have increased about $1.25.
Allendale, Inc. conducted research that showed that there were no significant reductions in corn or soybean production in past years because of delayed harvests. Significant can be interpreted as more than a few hundred thousand bushels. Allendale does predict that yields, quality and production will be slightly lower than expected a few weeks ago.
As for delayed wheat plantings impacting current wheat prices, U.S. and world wheat stocks are such that a few million acres reduction in wheat acres next year will have little impact on current wheat prices.
Nearly every analyst will agree that the lower value of the U.S. dollar, slightly lower corn production, and less planted wheat acres have had a positive impact on wheat prices. However, most analysts will also agree that, given above average stocks, the price impact has been small.
The rub is that wheat prices have increased almost $1 when stocks estimates have increased, and demand is below expectations.
In the October USDA Supply and Demand report, the 2009-2010 wheat marketing year ending stocks estimate was increased to 864 million bushels. This is up from 743 million bushels in the September report.
Wheat exports sales are have been below USDA predictions. For the 2008-2009 marketing year, 1.015 billion bushels of wheat were exported. At this time last year, 67 percent (676 million bushels) had been sold for export.
The USDA projects 2009-2010 wheat marketing year exports to be 900 million bushels, 115 million bushels (11 percent) less than last year. As of this writing, 52 percent of the 900 million bushels (464 million bushels) have been sold for export. Total wheat exports sales are 31 percent lower than last year.
Hard red winter wheat export sales are 51 percent less than last year. Export demand may not explain why wheat prices have increased.
An explanation that may make the most sense is fund buying. Reports indicate that the index and hedge funds have been buying commodities. Not only have CBT corn and KCBT wheat contract prices increased about $1, crude oil prices have increased $14 and gold prices have increased $150.
Reports indicate that commodities may be an investment against inflation and some fund managers are transferring investment funds into commodities.
Agricultural producers that have wheat, corn, or other grains may want to take advantage of this opportunity to sell at prices higher than the supply and demand factors warrant. Staggering sales (dollar cost averaging) normally works well during uncertain times like those being experienced now.
Prices may still go higher. But if the funds sell out, prices for sure will decline.
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