Grain Outlook : The Great Wheat panic of 2007
By: Mike Woolverton, Extension Grain Economist, Department of Agri. Economics, Kansas State University
9/6/2007 --
After the long Labor Day weekend, wheat price jumped up pulling soybeans along and pushing a reluctant corn market higher. The soybean price, already high in a market attempting to bid more South American hectares into soybean production this fall, closed in on $9 per bushel to keep wheat from taking hectares back. The higher corn price came only days after traders had taken corn price down as harvest began adding bushels to supply. Also, most in the grain trade are expecting the USDA to increase the U.S. national average projected corn yield in next week’s World Agricultural Supply and Demand Estimates report.
Wheat traders ignored other markets in taking wheat prices on all three U.S. wheat exchanges to all time record highs. Major Northern Hemisphere wheat producing and exporting countries harvested smaller than expected crops this summer. Freeze damage in the United States and heavy rain at harvest in the U.S. and Western Europe reduced the output and quality of wheat. Canada’s crop was hurt by dry weather as was wheat in Eastern Europe, the Former Soviet Union, and China. Global wheat stocks were at a 30-year low when market news services reported that continued drought in Australia and dryness in Argentina during the wheat reproductive period in those countries is putting the Southern Hemisphere harvest in doubt. If it doesn’t rain in Australia or Argentina within the next week or so, replenishment of global wheat stocks will have to wait until next June and July.
The world wheat export market had been strong for weeks, as importing countries, such as South Korea, Taiwan, Egypt, and others, rushed, in near-panic, to cover needs from a dwindling global inventory of increasingly more expensive wheat. However, the trigger event which pushed the world wheat trade into full-panic mode was the unexpectedly large purchase by India of 795,000 metric tonnes of wheat at a reported price of $389.45 per tonne. (29.2 million bushels at $10.64 per bushel.) The Indian Empowered Group of Ministers took the action to build the government-owned wheat emergency reserve up to its legislated level. And India may purchase more wheat in the last half of September. The day after news of the Indian trade had been absorbed by the market, European wheat futures rose to 300 Euros per metric tonne. ($11.15 per bushel.) U.S. wheat futures closed limit up two days running.
It was rumored that Russia would place high tariffs on wheat export sales or ban the exportation of wheat entirely to keep bread prices from rising in that country. The government of Kyrgyzstan ordered a release of wheat from the national reserves to stabilize local wheat and flour prices.
Panics always end. The question is…Will this one end badly? Don’t worry, the world will not run out of wheat before the next harvest. High price will ration the available supply to those willing to pay the price. Wheat is one of the major human food grains and demand tends to be price inelastic. That means as price changes, up or down, consumption of products made from wheat doesn’t change much, if at all. Hence, continued wheat purchases by overseas buyers even as wheat price has doubled in the past year. Plus, the cost to produce a loaf of bread; even though the flour cost in making dough doubled this year, has increased only about 10 percent or about 10 cents. The fuel cost of transporting wheat, flour, and baked bread has probably increased more. Because of the price increase, food-grade wheat will not be competitive as livestock feed. However, a great amount of wheat is of such poor quality that it will not be used for human consumption, but will be utilized at a discounted price for livestock feed or to make industrial starch.
The real danger is that this panic will cause the wheat market to collapse on itself. The lifecycle of a panic is this: Price starts to increase as market participants, including speculators, come to the realization that there is a shortage of a commodity. Buyers of the physical commodity start to buy ahead to cover needs, afraid that the commodity will not be available in the future or price will go up to a prohibitively high level. As price reaches a ridiculously high level, commodity users slow purchases as their operating margins shrink to zero, producers announce large production increases, and speculators offset positions to harvest profits or even reverse positions to take advantage of the anticipated downside price slide. As the panic peaks and price starts to fall dramatically, everyone rushes to the exit at once. Speculators try to limit losses, some owners of the physical commodity attempt to sell in the cash market to capture inventory price gains, but most buyers of the physical commodity sit on the sidelines, waiting for price to bottom out. Price run ups can take a long time, but the drop can occur very quickly.
The concern for wheat producers is that the Great Wheat Panic of 2007 will end before they have had a chance to lock in the highest wheat prices of their lifetimes. As this was written, the Kansas City Board of Trade September 07 contract was locked limit up at $7.81. The July 08 contract was $6.205. July 09 was $5.75. The Kansas City cash truck bid was $7.66 for hard red wheat and $7.16 for soft red. Selling at any of those prices with forward contracts, or in the Kansas City cash grain market, or even contracting with a local wheat buyer at a basis-reduced price, would give a producer a price far higher than the long term average farm price for Kansas wheat of about $3.50 per bushel.
That is not to suggest the price of wheat is going to fall to the long term average anytime soon, but if acreage of wheat planted remains the same as last fall in the Great Plains and in the Northern Hemisphere around the world, and if growing conditions are near normal this winter and spring, wheat price will fall from the current, panic-induced level. The futures market is estimating that price will be about $1.60 per bushel lower next harvest (July 08) and perhaps $2.00 lower in two years (July 09) as producers around the world respond to price signals. If a producer knows he is going to plant wheat this fall and next fall, it would be good to lock in price on the amount covered by crop insurance sooner.
By: Mike Woolverton, Extension Grain Economist, Department of Agri. Economics, Kansas State University
9/6/2007 --
After the long Labor Day weekend, wheat price jumped up pulling soybeans along and pushing a reluctant corn market higher. The soybean price, already high in a market attempting to bid more South American hectares into soybean production this fall, closed in on $9 per bushel to keep wheat from taking hectares back. The higher corn price came only days after traders had taken corn price down as harvest began adding bushels to supply. Also, most in the grain trade are expecting the USDA to increase the U.S. national average projected corn yield in next week’s World Agricultural Supply and Demand Estimates report.
Wheat traders ignored other markets in taking wheat prices on all three U.S. wheat exchanges to all time record highs. Major Northern Hemisphere wheat producing and exporting countries harvested smaller than expected crops this summer. Freeze damage in the United States and heavy rain at harvest in the U.S. and Western Europe reduced the output and quality of wheat. Canada’s crop was hurt by dry weather as was wheat in Eastern Europe, the Former Soviet Union, and China. Global wheat stocks were at a 30-year low when market news services reported that continued drought in Australia and dryness in Argentina during the wheat reproductive period in those countries is putting the Southern Hemisphere harvest in doubt. If it doesn’t rain in Australia or Argentina within the next week or so, replenishment of global wheat stocks will have to wait until next June and July.
The world wheat export market had been strong for weeks, as importing countries, such as South Korea, Taiwan, Egypt, and others, rushed, in near-panic, to cover needs from a dwindling global inventory of increasingly more expensive wheat. However, the trigger event which pushed the world wheat trade into full-panic mode was the unexpectedly large purchase by India of 795,000 metric tonnes of wheat at a reported price of $389.45 per tonne. (29.2 million bushels at $10.64 per bushel.) The Indian Empowered Group of Ministers took the action to build the government-owned wheat emergency reserve up to its legislated level. And India may purchase more wheat in the last half of September. The day after news of the Indian trade had been absorbed by the market, European wheat futures rose to 300 Euros per metric tonne. ($11.15 per bushel.) U.S. wheat futures closed limit up two days running.
It was rumored that Russia would place high tariffs on wheat export sales or ban the exportation of wheat entirely to keep bread prices from rising in that country. The government of Kyrgyzstan ordered a release of wheat from the national reserves to stabilize local wheat and flour prices.
Panics always end. The question is…Will this one end badly? Don’t worry, the world will not run out of wheat before the next harvest. High price will ration the available supply to those willing to pay the price. Wheat is one of the major human food grains and demand tends to be price inelastic. That means as price changes, up or down, consumption of products made from wheat doesn’t change much, if at all. Hence, continued wheat purchases by overseas buyers even as wheat price has doubled in the past year. Plus, the cost to produce a loaf of bread; even though the flour cost in making dough doubled this year, has increased only about 10 percent or about 10 cents. The fuel cost of transporting wheat, flour, and baked bread has probably increased more. Because of the price increase, food-grade wheat will not be competitive as livestock feed. However, a great amount of wheat is of such poor quality that it will not be used for human consumption, but will be utilized at a discounted price for livestock feed or to make industrial starch.
The real danger is that this panic will cause the wheat market to collapse on itself. The lifecycle of a panic is this: Price starts to increase as market participants, including speculators, come to the realization that there is a shortage of a commodity. Buyers of the physical commodity start to buy ahead to cover needs, afraid that the commodity will not be available in the future or price will go up to a prohibitively high level. As price reaches a ridiculously high level, commodity users slow purchases as their operating margins shrink to zero, producers announce large production increases, and speculators offset positions to harvest profits or even reverse positions to take advantage of the anticipated downside price slide. As the panic peaks and price starts to fall dramatically, everyone rushes to the exit at once. Speculators try to limit losses, some owners of the physical commodity attempt to sell in the cash market to capture inventory price gains, but most buyers of the physical commodity sit on the sidelines, waiting for price to bottom out. Price run ups can take a long time, but the drop can occur very quickly.
The concern for wheat producers is that the Great Wheat Panic of 2007 will end before they have had a chance to lock in the highest wheat prices of their lifetimes. As this was written, the Kansas City Board of Trade September 07 contract was locked limit up at $7.81. The July 08 contract was $6.205. July 09 was $5.75. The Kansas City cash truck bid was $7.66 for hard red wheat and $7.16 for soft red. Selling at any of those prices with forward contracts, or in the Kansas City cash grain market, or even contracting with a local wheat buyer at a basis-reduced price, would give a producer a price far higher than the long term average farm price for Kansas wheat of about $3.50 per bushel.
That is not to suggest the price of wheat is going to fall to the long term average anytime soon, but if acreage of wheat planted remains the same as last fall in the Great Plains and in the Northern Hemisphere around the world, and if growing conditions are near normal this winter and spring, wheat price will fall from the current, panic-induced level. The futures market is estimating that price will be about $1.60 per bushel lower next harvest (July 08) and perhaps $2.00 lower in two years (July 09) as producers around the world respond to price signals. If a producer knows he is going to plant wheat this fall and next fall, it would be good to lock in price on the amount covered by crop insurance sooner.
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