Wheat futures upside down

Inversion strikes | Phenomenon occurs when supply can’t reach demand

Choked railways are causing grief for U.S. millers and North American grain elevator companies, and the pain can be seen in spring wheat futures price spreads.

Analysts and traders say millers are scrambling to find hard red spring wheat before they run out, which is causing a big inversion between March and May futures.

“I think a lot of the mills are running on bin bottoms,” said Mike Krueger of the Money Farm, a farmer advisory service and risk management firm from Fargo, North Dakota.

“We have U.S. flour mills that are at times desperate to get shipments.”

Futures markets usually have “carry” within a single crop year, which means each futures contract later into the year will have a slightly higher price, representing the cost to the farmer of keeping crops in the bin longer.

Carry “inverts,” or disappears, in unusual situations, which generally represents strong nearby commercial demand but less demand in the longer run.

However, sometimes it represents a separation between supplies in the production region and demand in the delivery zone of the futures contract, which creates two separate market prices.

In that case, the nearby futures price can shoot higher because supplies can’t get to the demand and the local demand market begins setting the price based on the local shortage.

Some analysts say that has been happening with Minneapolis hard red spring wheat futures.

March spring wheat futures were trading at $6.66 per bushel Feb. 14, an almost 20 cent premium to the May futures at $6.47.

In mid-December, the May contract had a 10 cent premium over March.

The May premium suddenly disappeared at the beginning of January. March futures then began trading at a premium to May at the beginning of February.

Krueger said millers bid nearby prices up high when they discovered that grain they had ordered wasn’t going to arrive on time.

An elevator manager he knows had to pay a more than $1 per bushel penalty to a miller who he couldn’t get wheat to, forcing the miller to find grain elsewhere.

“That’s $400,000 on one train.”

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