How high can wheat go?
That’s not just a question.
“That’s the number one question,” said Winnipeg analyst David Drozd of Ag-Chieve.
“Where will the top be?”
Wheat prices have stunned all but the most bullish of forecasters in the past few weeks, rocketing past the $7 US per bushel price on U.S. commodity exchanges, past $8 and toward $9 for Kansas City Board of Trade hard red winter wheat contract.
Hard red spring wheat futures were trading for about $8 per bushel on the Minneapolis Grain Exchange Sept. 10.
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These are record prices, meaning extra costs for food processors and others that have to buy wheat, and joy for farmers with unpriced crop.
But prices can’t go up at this rate forever, so analysts and farmer advisers are beginning to make their guesses at where the good times will end.
Drozd, who was virtually alone in predicting that wheat would surpass $7 per bushel this year, has turned medium-term bearish.
“From my perspective, we are in the blow-off period of the bull market,” said Drozd, who expects to see the market turn down soon, as early as this week but not later than the end of November.
“Farmers need to be on their toes looking to price the majority of their crop here when this thing starts turning.”
Errol Anderson is another analyst who expects wheat prices to peak very soon, then slump.
“It doesn’t matter how bullish the market is,” said Anderson.
“It will go into a nosedive when it goes.”
Both Drozd and Ken Ball, of Union Securities, have noticed a disquieting feature of recent trading in the wheat markets: it isn’t being dominated by the producers and commercial users of the crop.
“There is no limit (to how high the price could rise),” said Ball.
“But at some point it will stop being a wheat market and just be a futures game, with one group of traders extracting mammoth amounts of money from another group.”
Once the farmer and commercial interest fades, Ball said, a crucial support of the market disappears, and the market can stall. Already, 2008-09 crop prices appear to have broken step with 2007-08 prices.
Drozd said many recent wheat futures buyers haven’t been trying to develop long positions, but buying their way out of losing positions.
“The move in Chicago and Kansas for the past three weeks or so has had the market going up on short covering,” said Drozd. “It’s not fresh buying.”
A different view is held by market analyst Erica Peterson of the North Dakota Wheat Commission, who said she thinks the present rally is being driven by commercial buying, with offshore export sales of U.S. wheat leading.
“People who didn’t cover their needs are scrambling,” said Peterson.
“The world’s quite anxious about any world concern or issue that comes up. They just seem to jump at it.”
Presently, world buyers are terrified of falling short of wheat, so news of continued dryness in Australia is provoking wheat buying at prices that would normally strangle demand.
“Normally, when we have prices this high, it’s because the market is trying to ration demand and buyers will back off,” said Peterson.
“But we’ve seen buyers continuing to buy and putting out big tenders even though we’re in a bullish market.”
Peterson said wheat consumption doesn’t expand or contract easily: people tend to still buy and eat wheat products like bread, even if they go up a few cents.
Mike Krueger of Fargo, North
Dakota-based The Money Farm said commercial buyers have only a few weeks of supply locked up in advance, so they’ll continue to buy during winter.
All eyes will be on Australia and Argentina to answer the question of how high prices can go, he said.
Drozd, although successful with his $7 forecast, won’t guess at where the present rally will end. But he thinks it will be soon, fast and dramatic.
“Farmers need to be watching this really, really closely for the signs of a top, because true to form, like every other bull market, they die under their own weight, and when it turns it could go back down to $5.50 before it finds any legs,” said Drozd.
He’s urging his clients to use the Canadian Wheat Board’s Fixed Price Contract to lock in the present rally, and reminding them that the Pool Return Outlook price is merely a forecast.
“This is a fully mature, entrenched bull market, and it’s in the blow-off phase,” he said.
