Buying wheat becomes new game with high prices
Because of high wheat prices and market volatility, elevators are changing their strategies in the way they buy and sell wheat.
When wheat doubles and triples the old average of four-dollar wheat, that also doubles and triples the amount of credit an elevator must have to purchase wheat. Even if an elevator sells wheat immediately after buying it, it may not receive payment for up to 30 days.
Because of increased price volatility, many elevators have decided to buy wheat only when Kansas City Board of Trade (KCBT) wheat contracts are trading – 9:30 a.m. to 1:15 p.m. Large changes between close and open prices make establishing a wheat price, when the exchanges are not trading, nearly impossible.
One such operation is the Frenchman Valley Co-op of Nebraska, whose website home page reads: “Due to market volatility, FVC will only be purchasing grain during market hours (until further notice). We will not be purchasing any grain beyond the 2008 crop year.”
According to Kim Anderson of Oklahoma State University, during March 2008 the average absolute (plus or minus) change between the close and the open for the KCBT July wheat contract price was 23 cents. During March 2007, the average change was 2.7 cents. The maximum change in March 2008 was a minus 84.5 cents. During March 2007 the average daily price range was 13 cents. During March 2008 the average daily price range was 33.8 cents.
“With the prices and volatility in the market, there’s a lot higher capital requirement to keep up with the markets as they move because the limits are being expanded with the high prices,” says Wyoming Wheat Marketing Commission Executive Director Keith Kennedy. “There have been moves of 60 cents a day in the wheat market, and sometimes even higher.”
Kennedy says limits went down as volatility decreased slightly last spring, but one contract of 5,000 bushels still contains close to $3,000 dollars in a margin call on a single contract. “That’s the biggest problem,” he says.
Anderson says another change elevator managers are discussing is how to handle forward-contracted wheat in a harvest failure. Elevators that “rolled” forward contracts from 2007 to 2008 have had to make up to $35,000 margin calls per contract. Some elevators had to liquidate assets to generate cash to cover some of the margin calls. Most elevators indicate they’ll not “roll” contracts from 2008 to 2009.
“Early last fall there was some reluctance among domestic buyers who felt they could go hand-to-mouth on wheat and that prices would drop a lot more than they actually did,” says Kennedy. “A lot of that’s affected by the world supply – we’ve just gotten to the place where stocks are low and people can’t float any more to live on by relying on what’s in storage or a cheaper alternative.”
Kennedy says 2008 has brought substitution from other types of wheat, which has raised prices across all classes. “People are now using some higher-protein winter wheats when normally they buy dark northern spring wheat,” he says.
Although Australia expects to harvest a normal crop this year, Kennedy says last year the world used more wheat than was produced. “It looks like the rest of the world is out to maintain that status quo,” he says.
While some areas of the country are experiencing problems with their wheat from too much moisture, Kennedy says too much moisture in Wyoming is just enough.
Kennedy says the price of wheat is tied to the price of corn and soybeans. “Wheat has got to be competitive with corn and soybeans, and if those prices drop from where they are people will switch to those crops. We’ll see wheat prices hang in there, provided corn and soybeans stay high,” he explains.
“Higher prices come with higher volatility and greater risk,” says Anderson. “Greater risk normally provides the opportunity for higher profits.
Christy Hemken is assistant editor of the Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.