A look back at an unforgettable year for prices with lessons worth remembering for 2009 and beyond.
For one brief shining moment last winter, the world price of hard red spring wheat touched $22 per bushel. Before long, the price started heading south fast, eventually bottoming out at $6 or so.
When the price of a commodity triples in less than a year, then returns to square one in just months, it’s worth taking a look at the replay and asking why it happened.
To Bill Wilson, professor of Agricultural Economics at North Dakota State University, 2008’s roller-coaster wheat market was caused by three main factors: low stocks coming out of 2007, months of panic buying and the impact of new players in the grain markets.
Low stocks. “Coming out of the 2007 crop, there was a shortage of wheat worldwide, which produced the lowest stocks-to-use ratio in history,” says Wilson. This shortage was the result of poor wheat yields by major producers in 2007, and in the case of drought-ravaged Australia, two straight years of outright disaster.
Panic buying. Emerging from the summer of 2007, the sentiment in the market had gone far beyond mere fretting about the tightness of stocks. By October and November 2007, some of the world’s major wheat processors were genuinely concerned whether they could physically obtain the amount of wheat they needed for day-to-day business. These big players, especially in Japan, began to try to accumulate as much wheat as they could as quickly as they could.
Wilson explains that by early winter 2008, global supply/demand balance sheets for spring wheat were looking grim. With no new crop of hard spring wheat available until August, where would the market find the wheat it needed?
“At that point, many of the larger traders began buying as much cash wheat as they could, off-setting these purchases in the futures markets,” says Wilson. “Then a shortage of wheat in a delivery position caused a ‘classic short squeeze.’ Wheat by this point was fundamentally at about $14 or $15 a bushel, but this short squeeze boosted it up to $22.”
Index funds. Wilson notes that a significant number of open contracts in Chicago are held by index funds – large investment pools seeking to duplicate the financial returns of a physical commodity, in this case wheat. In the heat of the wheat panic early in 2008, close to 60 percent of open contracts were held by these funds.
“They are known as ‘passive longs,’” explains Wilson. “They own large, long positions. The effect is that when these large longs decide to liquidate, you get very damaging pressure on prices.”
By the early spring, spurred by high prices, the world’s producers announced their intention to boost 2008 wheat plantings dramatically in Western Europe, the former Soviet Union and North America’s Northern Plains. After two years of drought, Australian growers were also back in business. In North Africa, wheat was unthreatened by drought for the first time in several years.
The worldwide shortage of wheat suddenly didn’t look so bad. Index funds took the hint and pulled the plug. Next stop for wheat: $6 and change.
Marketing plan, market discipline
What will be the impact of the 2008 bull market in wheat? Errol Anderson, an analyst with Calgary-based Pro Market Communications, begins with the positive by saying that, at the end of the day, and despite the year’s hair-raising volatility, a lot of grain growers booked a very handsome profit.
“This created an immense amount of wealth for producers,” says Anderson. “The lesson coming out of 2008, though, is that producers must be disciplined marketers, and that begins with having a marketing plan.”
It’s said that financial markets operate on a prevailing emotion that see-saws between greed and fear. If that’s true, record high prices for wheat brought out the greed in some players. Producers who would have jumped at $7 wheat in 2006 saw no reason to sell as wheat hit $10, then $15, then $20 during the winter of 2008.
To Anderson, it is precisely in such volatile times that a marketing plan shows its true value.
“When wheat was rallying like crazy, we as brokers had a difficult time getting people to price their grain,” says Anderson. “In my view, the effort to try to pick the top is fruitless. But the ability to sell into a rising market is a marketing skill, and that is what a plan and discipline can do for you.”
A grain marketing plan involves far more than a decision of whether to price grain or not, or deliver grain to an elevator or not. A marketing adviser can put clients in touch with a variety of strategies and financial instruments that increase returns while managing price risk.
Maybe you sold at $20 last winter and haven’t looked back. Maybe you said no-thanks to $15 then sold at $9 on the way down. However you made out in the 2008 wheat market, Anderson believes you’ll do better in the long run with a formal plan and qualified advice.
“Even with the volatility in the market today, there is ample opportunity to make money,” he says. “We don’t know where the bottom is or where the top is, but when some profits are there on the table, it’s important to look at selling.”
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A look back at an unforgettable year for prices with lessons worth remembering for 2009 and beyond.
For one brief shining moment last winter, the world price of hard red spring wheat touched $22 per bushel. Before long, the price started heading south fast, eventually bottoming out at $6 or so.
When the price of a commodity triples in less than a year, then returns to square one in just months, it’s worth taking a look at the replay and asking why it happened.
To Bill Wilson, professor of Agricultural Economics at North Dakota State University, 2008’s roller-coaster wheat market was caused by three main factors: low stocks coming out of 2007, months of panic buying and the impact of new players in the grain markets.
Low stocks. “Coming out of the 2007 crop, there was a shortage of wheat worldwide, which produced the lowest stocks-to-use ratio in history,” says Wilson. This shortage was the result of poor wheat yields by major producers in 2007, and in the case of drought-ravaged Australia, two straight years of outright disaster.
Panic buying. Emerging from the summer of 2007, the sentiment in the market had gone far beyond mere fretting about the tightness of stocks. By October and November 2007, some of the world’s major wheat processors were genuinely concerned whether they could physically obtain the amount of wheat they needed for day-to-day business. These big players, especially in Japan, began to try to accumulate as much wheat as they could as quickly as they could.
Wilson explains that by early winter 2008, global supply/demand balance sheets for spring wheat were looking grim. With no new crop of hard spring wheat available until August, where would the market find the wheat it needed?
“At that point, many of the larger traders began buying as much cash wheat as they could, off-setting these purchases in the futures markets,” says Wilson. “Then a shortage of wheat in a delivery position caused a ‘classic short squeeze.’ Wheat by this point was fundamentally at about $14 or $15 a bushel, but this short squeeze boosted it up to $22.”
Index funds. Wilson notes that a significant number of open contracts in Chicago are held by index funds – large investment pools seeking to duplicate the financial returns of a physical commodity, in this case wheat. In the heat of the wheat panic early in 2008, close to 60 percent of open contracts were held by these funds.
“They are known as ‘passive longs,’” explains Wilson. “They own large, long positions. The effect is that when these large longs decide to liquidate, you get very damaging pressure on prices.”
By the early spring, spurred by high prices, the world’s producers announced their intention to boost 2008 wheat plantings dramatically in Western Europe, the former Soviet Union and North America’s Northern Plains. After two years of drought, Australian growers were also back in business. In North Africa, wheat was unthreatened by drought for the first time in several years.
The worldwide shortage of wheat suddenly didn’t look so bad. Index funds took the hint and pulled the plug. Next stop for wheat: $6 and change.
Marketing plan, market discipline
What will be the impact of the 2008 bull market in wheat? Errol Anderson, an analyst with Calgary-based Pro Market Communications, begins with the positive by saying that, at the end of the day, and despite the year’s hair-raising volatility, a lot of grain growers booked a very handsome profit.
“This created an immense amount of wealth for producers,” says Anderson. “The lesson coming out of 2008, though, is that producers must be disciplined marketers, and that begins with having a marketing plan.”
It’s said that financial markets operate on a prevailing emotion that see-saws between greed and fear. If that’s true, record high prices for wheat brought out the greed in some players. Producers who would have jumped at $7 wheat in 2006 saw no reason to sell as wheat hit $10, then $15, then $20 during the winter of 2008.
To Anderson, it is precisely in such volatile times that a marketing plan shows its true value.
“When wheat was rallying like crazy, we as brokers had a difficult time getting people to price their grain,” says Anderson. “In my view, the effort to try to pick the top is fruitless. But the ability to sell into a rising market is a marketing skill, and that is what a plan and discipline can do for you.”
A grain marketing plan involves far more than a decision of whether to price grain or not, or deliver grain to an elevator or not. A marketing adviser can put clients in touch with a variety of strategies and financial instruments that increase returns while managing price risk.
Maybe you sold at $20 last winter and haven’t looked back. Maybe you said no-thanks to $15 then sold at $9 on the way down. However you made out in the 2008 wheat market, Anderson believes you’ll do better in the long run with a formal plan and qualified advice.
“Even with the volatility in the market today, there is ample opportunity to make money,” he says. “We don’t know where the bottom is or where the top is, but when some profits are there on the table, it’s important to look at selling.”
Back to Top Back to Table of ContentsWrite a comment
- Required fields are marked with *.