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Wild, little changed wheat week

11/04/2011 @ 3:41pm

It’s been one wild week. The news of MF Global’s meltdown and the chaos created by their bankruptcy had a widespread affect, from the individual customers who were locked out of their accounts to the pall it created on the markets because of the huge drop in volume. In light of all the uncertainty, it was encouraging to see the grains markets little changed for the week.

While the courts finally allowed MF Global customer positions to be transferred, only a portion of their funds was allowed to follow. The fear in the marketplace is that for customers who can’t meet the new margin calls at their new broker, they will be forced to liquidate, which could create a wave of volume and volatility Monday morning. 

As if the MF Global debacle wasn’t enough for the market to absorb, this week brought more volatility to the financial markets as the ongoing Greek debt fiasco became more mired. The announcement that the people of Greece would vote on a referendum to say if they even wanted the bailout money caught the market by surprise, and sent the Dow sharply lower. By the end of the week, they had decided not to hold the vote. However, there was yet more uncertainty as the G20 met and the outcome of that meeting was anything but clear. 

If we focus on wheat, however, the fundamentals there haven’t changed much. The world’s wheat crop continues to get bigger as the Northern Hemisphere fine tunes the production numbers. The Southern Hemisphere is in the beginning stages of wheat harvest with few issues so far. 

The United Nation’s Food and Ag Organization issued a report about the world wheat situation; it looks like the wheat shortage is certainly over and food prices hit an 11-month low in October. They estimated that total world grain production would reach a record 2.3 billion tons. World wheat production was projected to be up 6%, with ending stocks up 3% over last year and at a 10-year high. Much of the production increase is coming from Russia bouncing back from last year’s severe drought. Russia’s wheat production is estimated to be up 37% over last year. They also expect total world winter wheat plantings to be about equal to last year. 

While the market has been well aware of the big crops this year, the report was a reminder that there is plenty of wheat in the world, both feed and milling. For countries depending on exports, that means intense competition for the entire marketing year – which we pretty much already knew, too. The US is already seeing export sales fall off in the last two weeks; and so far this marketing year, we have to sell any wheat to Egypt, usually the world’s largest importer. Most of that business has gone to Russia and Ukraine. US prices are much above the Black Sea offers, so much so that the US doesn’t even put out an offer when Egypt tenders.

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Why no comment on demand/consumption? 11/05/2011 @ 9:59pm Without a comparison the commentary reveals very little. Ending stocks up only 3% is fairly important considering the issue of production that I think is overplayed in comparison. It is a diversion from future developments. Regarding Egypt purchasing Black Sea wheat vs US wheat. The pattern has been established that as long as Black Sea wheat is available at minimally acceptable standards that is what Egypt buys. It is a completely rational outcome considering proximity and the fact that US wheat is generally a quite different quality than what the Black Sea sells to Egypt. In reducing it to the idea of competition the real issues are discounted. In fact competition is not really the dynamic. The essential view considers that when prices are high the US generally exports more. Understanding why this is results in a better analysis of what is going on now. 'Competing' implies we are not selling cheap enough, but in fact, if we sold for less now - so would the 'competition' - resulting in no net gain for US farmers.

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