When we wrote our last wheat market update in the fall of 2007 we were eying the end of the year as a possible break in the relentless rise of US wheat prices. In fact, at the time we were advising people who could, to book their flour needs through the end of the year. The end of the year has come and gone and with it any possible break in wheat’s bull market run.

The situation remains largely unchanged, and in fact, the first two days of wheat trading in the US have resulted in limit up conditions both days at the Minneapolis Grain Exchange. The situation could really be described as a text-book ‘supply and demand’ with supplies being tight and demand world-wide being very strong. This situation is exacerbated in the US by the weakening US Dollar which has the effect of making US wheat very competitive on the world market. The graphs that follow server to illustrate the supply-demand characteristics of this market. Bellow you can see the price of a bushel of US Hard Red Spring Wheat has undergone significant appreciation over the last 9 months.
The supply of US wheat, as indicated by the ‘ending stocks’ chart bellow, is not only low in terms of our present needs but is also at an historic low. And finally the ‘stocks-to-use’ ratio chart which is a combination of the price parameters: supply (‘wheat stocks’) and demand (‘use’) and is a great graphical representation of how these two forces combine can be seen bellow.

In all the picture does not look good for those seeking relief from the high price of US wheat. Up until a month ago there was a fairly good spread in pricing between old and new crop wheat with Kansas City March and July futures trading with a $1.15 per bushel differential. Unfortunately, not only has the wheat market continued to appreciate that spread is also shrinking and now it is at $0.84/bu (KC Mar:.923 KC July:.841.)

In addition to the above market moving fundamentals are a couple of ominous signs. Buried deep with the section 2 of the Financial Times was an article about the rapid pace of hiring of experienced commodity traders at financial institutions. What does that have to do with anything? One of the features of the commodity markets of the last few years has been the presence of large institutional investment funds. These funds play the commodity markets in a speculative capacity only. This is in contrast to those who are seeking to actually purchase and take delivery of the commodity. The net effect has been a marked increase in the volatility of these markets as the speculative investors move huge sums of money in and out of the trading pits. Certainly the forces of supply and demand still hold sway but the net effect of this money is to increase the magnitude of these swings. With financial institutions looking to higher more traders one can only draw the conclusion that they feel there is still much more money to be made in these markets. And this will come at the expense of those needing these commodities for their operations.

Another story recently (also in the Financial Times) is the prospect of China imposing export duties on its on their domestic wheat stocks. Firstly, this is somewhat the reverse of the usual practice of imposing taxes on imports. The reasons for China’s actions is its desire to curb high levels of inflation in food prices. By imposing export duties on grains leaving China they, in effect, make the Chinese grains less competitive on the world market and thus the incentive to sell domestically at a lower price is increased, thus driving down food costs. For those grain consumers outside of China this will reduce the amount grain available in the world wide pool thus increasing the cost of that grain. Especially in these time of already tight supplies.