Farmers should manage risk
What a week. The action in U.S. commodity markets has been mesmerizing.
Corn and soft red wheat in Chicago, hard red wheat in Kansas City and dark northern spring wheat futures in Minneapolis all eclipsed all-time high prices.
May wheat in Chicago and Kansas City, broke through the $6 per bushel (U.S.) barrier for the first time since 1974.
Just a couple of weeks ago, commodities analysts were talking about wheat being the “aging bull” of the commodities markets and had focussed their attention on corn.
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Wheat prices have been on a steady uphill trend since last summer and the general consensus was prices would turn lower when new-crop wheat was harvested.
Now, that “when” has turned to “if.”
The United States Department of Agriculture’s winter wheat crop reports released early last week shocked the markets, said Juan Pedraza of Paine Webber securities in Grand Forks, N.D.
Pedraza said parts of the lower winter wheat belt in Texas are into severe drought.
Farmers there and in parts of Oklahoma are ripping up poor winter wheat crops to plant other spring crops, he said.
Unlike the corn market which is trading on old-crop news, Pedraza said the wheat market is being driven by new supply fundamentals.
A second USDA report, also released last week, that pared both wheat and corn stocks, reinforced the rally.
Rob Dzisiak of Linnco Futures Group said the Winnipeg Commodity Exchange has had no choice but to follow.
“World prices are set by Chicago. When they hiccup, we’re going to react,” he said.
Open interest (an indicator of market liquidity) has been strong in canola, flax and western barley, Dzisiak said.
For instance, he said the canola market realizes it has to buy more acres to compete with wheat prices.
Farmers should try not to get caught up in the frenzy, said Dzisiak. “They’re risk managers, not speculators.”
Hedging on the futures market that is bound to be volatile could get expensive, he warned. Instead, farmers may want to use the cash or options market to price no more than one-third of a crop.
For the wary, Dzisiak said buying call options allows farmers to capture higher prices that will inevitably come through weather rallies throughout the growing season.
For the even more wary, put options become less expensive in a rallying market and give farmers the leeway to manage their basis, he said.
Pedraza, too, likes the idea of buying calls.
He said he finds it “amazing”, given the stocks situation, that wheat prices aren’t higher. Converted to nominal dollars, this rally doesn’t compare to past ones, he said.
With the increasing price of inputs, Pedraza thinks $5 (U.S.) wheat is likely a new normal benchmark price.
