Recent financial uncertainty plagues commodity markets

By MARK CONLON, Editor
Friday, October 10, 2008 2:33 PM CDT

Financial uncertainty on Wall Street and in credit markets continue to plague the various commodity markets, including spring wheat.

“There's still a bearish psychology to all the markets in general,” said Jim Peterson, marketing director for the North Dakota Wheat Commission.

Peterson explained that when buyers purchase wheat and other commodities it's usually a pretty high dollar amount, but with the tightening financial situation it may become difficult to find credit for those purchases.

“They usually have local financing and credit in their home country, or there is some U.S. credit to finance these purchases,” he said. “We haven't seen a freeze on credit where buyers couldn't get credit, but the level of credit may be trimmed back a bit just to limit the exposure. We're starting to get some concern from buyers that it will tighten and that lower consumer demand and consumption may also slow things down overall.”

The U.S. dollar has also strengthened in relation to international currency. A stronger dollar tends to make U.S. wheat a little more expensive in the world market, according to Peterson.

“Those things, along with the record world wheat crop that has continued to get larger all the way through September, have really contributed to the pressure on the market.” he said. “Once you're at a record level, does a little more really make a difference?”

The European Union, the former Soviet Union and Canada all had larger crops this year, and those are the main competitors for a lot of the different U.S. wheat classes.

Peterson said it was “a different ball game” for U.S. wheat exports this year. To date U.S. export sales for all wheat classes stand at 603 million bushels compared to 821 million a year ago at this time. That's a decrease of 27 percent. USDA had projected export sales at 1 billion bushels vs the 1.26 billion bushels in the last marketing year.

“USDA's projection is only down 21 percent from last year, so we're slipping a little behind those projections,” Peterson said.

With the current cheaper wheat prices we have now and with government bailout packages for the U.S. in the financial markets, Peterson hopes that will provide some stability in the commodity markets which will give buyers more confidence to resume their normal buying pace, enabling exports to pick up.

Looking at each class of wheat, all classes are behind last year's sales pace, although soft red winter wheat is performing best at only 14 percent behind last year. Hard red winter is down 18 percent.

Hard red spring wheat, on the other hand, is down 40 percent on the year. USDA had projected HRSW to be down only 20 percent so, Peterson said, there is certainly more ground to make up compared to the other classes in the next 8 months.

One of the factors contributing to the slow sales is Canada's big crop. usda is projecting their overall crop to be 933 mb this year compared to 735 mb last year. However, Stats Canada came out with its new estimate on Oct 2 which projected production at over 1 billion bushels, so it's a bit larger than expected. For spring wheat, production in 2008 is 643 million bushels compared to only 492 mb last year.

“The overall quality of their crop is still uncertain, however. We still don't know where their protein will be, but it will likely be low just because of the cooler summer they had and relatively strong yields,” Peterson said. “There were also fusarium problems in Manitoba and that will likely hinder their ability to export to Europe to meet DON levels there.

“There was also sprout damage and reduced falling numbers,” he added. “We'll have to wait and see how the Canadian Wheat Board markets their crop and what the grade distributions are.”

Spring wheat, Peterson said, has held its premium to HRWW and SRWW quite remarkably through August and September, but that has faded in recent weeks.

“Soft red winter is always one of the cheapest classes, trading below $5 for some time now, and hard red winter is also well below $6, but hard red spring has been $7 or higher up until just recently when pressure on the market has taken it to as low as $6.25 in some markets in the region,” he said. “Most bids for 14 protein spring wheat range from $6.25 to $7 with an average of $6.60.

Looking at the futures market, Minneapolis December has fallen below $7. Back in mid September those prices were up in the $8.10-$8.15 level. Kansas City futures have also started to fall below $6.50 and Chicago, which has more speculative money involved, is below $6.

“Some of the bearish prognosticators still feel there is a lot more room to the downside, that wheat prices could fall back to the levels we saw a few years ago,” Peterson said. “And in the case of corn, some have it going to that $3.50 level.

“But that's just one segment of the market,” he continued. “It all hinges on the downturn in the world economy which could lead to less consumption and lower demand.”

Peterson, like most producers, hopes the world world economy won't slip like some think, and that the market will get back to fundamentals.

“There are still some positives out there to help strengthen local prices,” he said. “I think we'll see cash basis levels strengthen simply because buyers don't have a lot of coverage, and we'll see a pick up in hard red spring wheat exports as they assess the quality and value of the Canadian crop compared to the value and quality of the U.S. crop.”

Peterson said the U.S. still has a good story to tell potential buyers because the overall grade is a No.1. There is some debate on what the average protein level of the crop is with some parts of region reporting low protein at 13-13.5 percent while other regions are still above 15 percent.

“This year the average probably does not mean as much given the wide range in protein, and the trade will hopefully focus more on the fact that we have a pretty good range that can fit the needs of a lot of different buyers,” Peterson said. “Even though U.S. wheat is still priced at a premium, there is still very good value in the crop we have this year.

“With that said, there is some optimism that if we can get back to fundamentals we'll see a pick-up in demand.” 

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