Wheat Hits New All-Time High

Forbes ^ | 8/23/2007

[bruinbirdman]

Wheat prices climbed for a fifth consecutive session Thursday, and the most heavily traded contract hit a new all-time high on the Chicago Board of Trade as traders continue to price in robust worldwide demand and shrinking supply.

The U.S. Department of Agriculture said Thursday that wheat supplies available for export plummeted in July and said "stocks could be driven down to unprecedented low levels."

Rain, frost and drought in different parts of the European Union ravaged wheat crops this year, leaving the EU with less to export and boosting its import requirements. Poor weather also ruined crops in the Black Sea region, a major supplier of low-cost wheat. That, in turn, has increased demand for U.S. wheat.

The USDA forecasts world ending stocks of 114.8 in the 2007-2008 crop year which runs June through May. That's 8 percent below last year and down 23 percent from two years ago.

December wheat, the most heavily traded contract, jumped 12.75 cents to $7.445 a bushel in early trading. The front-month September wheat contract rose 12.5 cents to $7.31 a bushel.

[bruinbirdman]

Monday my grocery store, Albertsons, discontinued the only loaf of bread under $2.00. The next choices start at $2.59.

[Drago]

Less wheat acreage due to extra corn planting?? Anyone know for sure? Possibly one more unintended consequence of the push for more ethanol auto fuel.

[glorgau]

For some reason, I still think next year’s federal farm subsidies are going to be higher.

[SAJ]

This is, of course, nonsense. In most commercial breads, the cost of wheat represents something on the order of 6-11% of total cost.

However, try explaining that to anyone -- and I mean ANYONE -- in the grocery biz. Even if (big if) they understand the concept, they'll never admit it.

[SAJ]

There's some of that, but the main impetus to wheat prices this year has been lousy crops all over the place, plus -- still a big factor in terms of lost supply, with no replacement -- Australia's major crop failure last year.

Keep in mind, wheat is a grass, and as such can thrive in semi-arid areas, whereas corn in the same areas (absent irrigation) is usually a hopeless prospect. This directly implies that substitution of corn for wheat is not possible, or at least not realistic, in an awful lot (guesstimate: 70+%) of wheat growing areas in the US.

With these prices, wheat farmers this fall/winter are going to plant the h*ll out of wheat, just watch. So, the smart trader is going to wait a bit, perhaps 3 months, perhaps less, and then buy May Corn and sell May Wheat against it, looking for the spread (which is at/near all time highs also) to narrow.

Oh, this will be a volatile trade, bet your life on it, but unless something changes materially in the next 90 days, it rates to be tastily profitable by about February, as a guess.

Good trading to you!

[Vanders9]

Bizarre. I was talking to a farmer friend of mine and he explained that Britain is importing most of its human consumable wheat from the US, but is actually EXPORTING much higher grade wheat to America for use as animal feed.

[bruinbirdman]

"This is, of course, nonsense. In most commercial breads, the cost of wheat represents something on the order of 6-11% of total cost."

At the first hint that ethonol was going to be a strategic commodity, stores jacked up the price of eggs and put a sign on the shelf to the effect that corn for ethonol not chickens was the reason.

Well, maybe the cheap bread guy at my store went out of business. The store manager said he'd check. It was a single item independent local brand bread.

I'm the kind of guy who still drinks tap water. I think of bread like vodka. Colorless, odorless, tasteless. Who pays premium for that? It's what you put in it that counts.

yitbos

[bruinbirdman]

"So, the smart trader is going to wait a bit, perhaps 3 months, perhaps less, and then buy May Corn and sell May Wheat against it, looking for the spread (which is at/near all time highs also) to narrow."

Too late to cash in on that trick, the secrets out.

yitbos

[SAJ]

The egg business is highly cyclical. The ethanol fiasco came along at almost precisely the wrong time for egg producers. The excess cost due to ethanol should wring itself out of the system in a few months.

Or, we **might** do something intelligent for a change, and stop burning our own food to produce an incredibly rotten mass-market ''fuel''.

Wups, excuse me, what am I thinking! ...it's the gov't that ordered huge quantities of corn-based ethanol to be used for fuel. Intelligence played little or no part in the decision.

Jerkoffs.

[SAJ]

True enough, but the number of people who are A) ready, B) able, and C) willing to trade futures in order to take advantage of this gratuitous mispricing is something like 1/2 of 1 per cent of the population.

Don't fret, m'friend, there's plenty of room in this trade for everyone. Entry timing is a bit tricky, and the trader will likely have to stand for some amount of adversity, but this is a good a setup for an inter-market grain spread as I've seen since 1995 (corn went crazy that year...it was just a matter of waiting until it topped out, then a couple more weeks, then buying the wheat and selling the corn).