Washington, DC
January 8, 2009
Source:
U.S. Wheat Associates (USW)
Wheat Letter - January 8, 2009
by Ian Flagg, USW Market Analyst
The second half of calendar year 2008 saw remarkably sharp
declines in nearly all global markets. Wheat prices declined 50
percent from their highs, freight indices dropped more than 90
percent, crude oil fell over $100 per barrel and the S&P 500
dropped 36 percent to a multi-year low. Looking ahead to 2009,
here are a few key variables wheat buyers will want to monitor.
Global wheat stocks are down considerably after production
deficits in seven of the last ten years. In fact, even though
carry-over stocks are projected significantly higher this year,
the stocks-to-use ratio is up only slightly from last year’s
record low and is well below the ten-year average. The current
stocks-to-use level provides a very small cushion for marketing
year 2009/10 should production problems arise. This leaves wheat
prices susceptible to evolving production developments through
the planting and harvest cycle, which could result in continued
price volatility – and that will affect planting decisions.
Investment capital in wheat futures declined significantly in
2008 as investor redemptions forced index funds to liquidate
futures. However, the Commodity Futures Trading Commission
reports that index funds still hold 47 percent of open interest
long positions in Chicago Board of Trade wheat contracts
compared to only 22 percent for corn and 27 percent for
soybeans. As a result, wheat prices are vulnerable if speculator
liquidation continues in 2009.
As a response to a loud call to improve convergence (the
expected narrowing of cash and futures prices leading up to
contract delivery months) by commercial risk managers – in part
because of the growing influence of index funds – the CME Group
initiated specification changes to their soft red winter (SRW)
wheat contract. The initial response adjusts the storage rate;
adds delivery points; and tightens the vomitoxin specification.
The CME recently announced plans to limit the number of grain
shipping certificates and warehouse receipts that noncommercial
firms might hold in an effort to improve the effectiveness of
hedging and other risk management strategies.
Exploding biofuel demand has dramatically altered the
relationship between energy and crop prices. The sharp rise in
crude oil prices over the past few years, in part, favored
ethanol production, which in turn expanded demand for corn in
the U.S. Corn competes for planted area with wheat and other
crops and that strengthens the price link between crude oil and
grain. Current U.S. government biofuels mandates suggest the
demand for corn will stay strong at least in the near-term.
Interestingly, just this week, Monsanto filed its U.S.
regulatory data package for drought-tolerant corn seed, a
technology that has the potential to expand the corn/wheat
battleground to dryland fields where wheat is the dominant crop.
After declining for nearly six years amid record low interest
rates and a growing trade deficit, the U.S. dollar started to
rebound in late 2008. A rising dollar makes U.S. commodities
less price-competitive in the export market. No one can
accurately predict how the expected, but still unspecified, U.S.
economic stimulus effort might affect the dollar’s value. More
clear is the need for wheat buyers to carefully watch the
results unfold. |
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