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Panic strikes the wheat market

CHICAGO, Illinois (Agriculture Online)--Panic has struck the wheat market, and it's flowing into the corn and soybean markets, CBOT traders say.

The problem is the traders with long positions (funds for one) are unwilling to sell, which would enable the shorts, or holders of sold positions, to get out of those positions. It's widely believed many commercial traders have been caught short.

Commercials want out of their short positions because they have to pay margin calls as the market goes higher.

A huge hurdle to clear is created when the wheat markets are limit up and no new players come into the market. For instance, with open interest declining at the Minneapolis Grain Exchange, the shorts are actually fueling the rise in wheat prices, traders say.

"It's like a self-fulfilling prophecy," one trader says.

On Friday, Minneapolis wheat traded over $20.00, and Chicago as high as $12.30 per bushel. So, people short March wheat futures, are trying to get out of this position and can't because there are no willing sellers.

Simply put, the commercials caught short are losing money and may find it difficult to finance their margin calls.

Matt Pierce, Futures International Inc. says there is an absolute run on spreads right now. "It's the scariest thing I've ever seen on this floor," Pierce says.

Specifically, on Thursday, the index funds were supposed to start moving their long positions from March to May at the close. They didn't do this because March was limit up and they do not roll when the market is limit either way.

Vic Lespinasse, an Illinois grain floor trader, says many traders were spread the other way, long May and short March and intending to take off this spread against the index funds when the index funds did May/March.

"Since the index funds didn't do any spreading (and won't do any until the wheat is trading freely) some of the traders waiting for the index funds became worried and started bailing out of their May/March spreads, driving March sharply higher vs. May," Lespinasse says.

Lespinasse adds, "The traders were worried because they remember what happened a year or two ago when many wheat spreaders were bear spread ahead of the index fund roll and the bull spreads exploded, costing many traders, especially many big local traders, millions of dollars to get out of their bear spreads."


Pierce, a wheat trader, says people are getting blown out as the March/May carry went from 13 cents yesterday to a 43 cent inverse, overnight.

"There's blood in the water. People are being forced out of major positions. And when you're coming into a market like this, there is nothing there to buy. It's getting out of control."

Because of a lack of sellers in the market, the commercials that got caught short are being forced to bid up the market, Pierce says.

This is a commercial/supply-side issue right now with a few wheat mills in northern Minnesota completely out of supply. They have no wheat and have had to shut down."

Pierce adds, There is no wheat no matter how high the price is getting."

Pierce says he knows of some locals in the wheat futures pit that were blown out of spreads yesterday for losses in the millions of dollars.

"The market is getting so high, no one wants to play with it. As a result, we are losing our liquidity," Pierce says.

Meanwhile, Joe Bedore, FC Stone's CBOT floor manager, says one of the problems is that people have violated a golden rule of the trade.

"You should never be short the lead month," Bedore says. "It seems there are enough short positions in wheat that have narrowed these spreads. The effect has moved over into corn and soybeans now."

Bedore adds, "I've seen panic here before, and this is almost worse."

The solution to get the market back to normalcy would be to get the commercials out of the market, he says.

"Personally, and this is just me talking, the commercials will have to liquidate their position or declare bankruptcy. So, the government is going to have to tap the funds on the shoulder and say it's time to sell."

At that point, the commercial will be able to cut its losses and liquidate.
"When that point is, I don't know," Bedore says.

CHICAGO, Illinois (Agriculture Online)--Panic has struck the wheat market, and it's flowing into the corn and soybean markets, CBOT traders say.

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