Monday, August 9, 2010

Wheat Speculators Slow Bets on Gain After Best Month Since 1973

Bloomberg news reports that wheat speculators slowed their bets on higher prices after the biggest monthly gain in Chicago Board of Trade futures in 37 years, a sign the rally may be peaking, according to Grain Service Corp.

Speculators including hedge funds raised their net-long positions in futures and options by 5.3 percent in the week ended Aug. 3, the smallest increase since they turned bullish last month, U.S. Commodity Futures Trading Commission data on Aug. 6 show. Prices that had as much as doubled to $8.68 a bushel since June 9 fell 20.75 cents, or 2.9 percent, to $7.05 a bushel as of 11:08 a.m. London time.

“If we haven’t seen the top, we’re probably very close,” said Diana Klemme, director of the grain division of Grain Service Corp., a consultant and broker in Atlanta. Klemme worked in the cash-grain industry in the 1970s and sits on the risk- management committee of the National Grain & Feed Association, whose members handle 70 percent of U.S. grains and oilseeds.

Wheat prices surged as a lack of rain in Russia, Kazakhstan and the European Union and flooding in Canada ruined crops. Russia, the world’s third-biggest producer, declared drought emergencies in at least 27 regions by Aug. 3 and last week imposed an export ban through the end of the year. It also said neighbors including Kazakhstan and Belarus should join the ban.

Prices jumped to a 23-month high of $8.68 on Aug. 6 before closing down 7.4 percent, the biggest drop since June 2009.

Speculators shifted to a net-long position in wheat during the week that ended July 13, after betting all year that prices would fall. They have increased that bullish holding in the past three weeks. Index funds that doubled their holdings since March 2009 cut their net-long positions in two of the past three weeks, CFTC data show.

Long Positions

Long positions outnumbered shorts, or bets prices will fall, by 36,118 futures and options contracts on Aug. 3, the data show. The net-long position rose 37 percent a week earlier and more than doubled in each of the previous two weeks.

Commodity index funds had a net-long position of 197,401 contracts, down 252 from the previous week, or 0.1 percent, CFTC data show. Before then, the position had jumped 35 percent this year and in May reached 197,713 contracts, the highest level since at least June 2006, the earliest data available.

Wheat futures for delivery in September, the closest to expiration, may sink as low as $6.25 “pretty rapidly,” said Roy Huckabay, the executive vice president of the Linn Group, a commodity trading adviser in Chicago. That would be 11 percent below current prices.

Speculator Holdings

The slowing pace of speculator holdings may signal traders “are shifting attention now out of wheat and into corn,” where demand is increasing from end users including livestock producers, Grain Service Corp.’s Klemme said.

Last year, world livestock producers used 18 percent of the wheat crop for animal feed, and the surge in prices last week will force some to use corn, a cheaper alternative, Huckabay said.

Cash wheat prices in Kansas City, Kansas, rose to a premium of $1.7662 a bushel over corn on Aug. 5, the highest since July 2009, USDA data show. Wheat futures for December delivery on the CBOT were almost twice the value of December corn futures, the highest spread since March 2008. In the past two years, wheat averaged about 1.43 times more than corn, exchange data show.

Speculators may shift away from wheat because corn has better prospects for a rise in prices. Corn gained 3.3 percent to $4.20 a bushel last week, trailing the rally in wheat, partly because U.S. farmers boosted sales of inventory from last year’s corn crop. Corn for December delivery rose another 0.1 percent today to $4.205 a bushel.

Commercial Hedgers

Farmers and other commercial hedgers were short 740,264 corn contracts as of Aug. 3, the most since August 2008, according to the CFTC. That’s a sign that farmers already have sold most of what they have available until the next harvest, Klemme said.

“Any farmer who wanted to sell 2010-crop corn has probably sold it already,” Klemme said. “To get him to sell more, either he has to be panicked or he has to see the price go higher than what he already sold it. I don’t think they’re afraid for the moment” that prices will fall.

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