Wheat markets surprisingly spent much of last week in a relatively narrow range, taking a back seat to the volatility in corn and soybeans that grabbed the spotlight. The spreading disease of the credit crunch is hammering home in the agricultural commodities now after wreaking havoc in the financial markets.
There is no shortage of stories about trading funds and hedgers, both large and small, which have had to liquidate their positions because credit lines have dried up, or spooked investors have withdrawn money, or because of their inability to meet margin calls. The US dollar and equities have been under heavy pressure for months, which is why commodities have attracted so much attention in the first place, but now some of the money that had flowed into commodities is abruptly leaving.
It's very hard to get a handle on just how much money is flowing in and out of the commodity marketplace, but we do know it's huge and it creates intense volatility, especially in markets which historically have not been accustomed to such large volumes- like the agricultural markets. Nevertheless, for the foreseeable future, as long as equities continue to suffer we'll continue to see the commodities market attract the attention of both large and small investors, and we'll continue to see a great deal of volatility.
The credit crunch has hit the agricultural gcommodities from the outside as well- in the cash markets. Plenty of stories there, too, about country elevators unable to meet margin calls, or bank credit lines halted, forcing them to liquidate cash and futures positions and pushing the cash supplies to the larger regional terminals. In turn, those terminals have turned to basis only offers in an effort to keep risk to a minimum. Many elevators have gone broke because of the financial strain, which is certainly not a help to the Ag community.
So, while on the surface high prices look like a great thing, these extremes have created a great deal of turmoil and pain among the very participants of those markets. The ever weakening dollar has helped increase grain exports, but it's created much more expensive imports, pushing inputs sharply higher, so are we really any further ahead?
On the wheat fundamental front, weather is taking the lead and weâ€™re still seeing the same story in the US southern and central plains where the far west is still very dry and stressed, but the rest of the plains and Midwest have more than enough moisture. Texas winter wheat ratings continue their dismal start with 63% poor/very poor, most of which stems from the panhandle conditions. Conversely, Kansas is rated 79% good/excellent and Oklahoma 77% good/excellent. I think we have to be careful about getting too wrapped up in the poor condition ratings- one good early rain in western Kansas and the bull story could well be over.
Having said that, the world still needs to produce a crop and we're not off to a stellar start. India will see some production losses due to hot and dry weather in their unirrigated regions. Not a huge area, but it will keep them on the defensive to protect supplies and/or be importers again. We're also hearing stories of dryness in North Africa and disease problems creeping into the Pakistan and Kazakhstan regions, both of which are significant wheat production areas. And of course, we continue to hear rumblings of drought in the North China Plain, not unusual this time of year but grabbing headlines nonetheless.