The squeeze in the March wheat contract in Minneapolis may have long-term consequences for the grain trade, say U.S. market analysts.
“You’re going to have some country grain elevators that are really, really going to get hurt,” said Duane Lowry, a market commentator and analyst based in Maynard, Indiana.
“It’s a black eye to the exchange, whether it’s justified or not. The perception in the country is that the exchange didn’t do all it could have done … and that perception will cause the black eye.”
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In six weeks the March futures contract for hard red spring wheat at the Minneapolis Grain Exchange increased to $19.35 US per bushel at the close Feb. 15 from $10.50 Jan. 2. In the second week of February, rumours of a squeeze became gospel, as market watchers were convinced that traders holding long positions were refusing to let shorts get out of the March contract, which went up the daily limit every day from Feb. 1-14.
As the March madness drove the contract to record levels on the Minneapolis exchange, wheat futures for the same month in Chicago and Kansas City settled in the $10-$11 range. The discrepancy hardened suspicions that the Minneapolis market was not based only on tight wheat stocks.
Lowry said that synthetic market doesn’t reflect the true value of wheat and will likely cause financial damage throughout the industry.
“I suspect the biggest casualty is going to be the elevator, the grain merchandiser trying to lay off his risk as he’s been taught to do … and some will say the exchange has let him down,” he said.
Lowry didn’t say what the exchange could have done to protect elevators, but added fingers are pointed when people are badly hurt.
Market watchers have estimated that a typical North Dakota elevator that held 2,000 tonnes of wheat would have been faced with a $500,000 margin call during the March contract run-up. Although the value of its wheat in storage may be skyrocketing, the elevator only receives that value when a customer pays for the wheat. Until then, the elevator must cover its losses in the futures market, adding to the financial crunch.
A Minnesota trader with a commodity brokerage firm said the damage caused by this wheat run has greatly outweighed the benefits.
“The damage could be pretty dire. We don’t know what the long-term effects could be,” the trader said. “I think it’s had a negative impact, not just on the Minneapolis exchange but on the industry as a whole.”
Lowry said he doesn’t know how the March contract will play out, but he’s confident there will be an inquiry.
“The odds of getting an investigation, or at minimum a call for an investigation, is very high probability,” he said.
While Lowry and others view this market as unhealthy and unprecedented, a Winnipeg analyst doesn’t believe the situation is that dire or unusual.
“I don’t think it’s unheard of,” said Brenda Tjaden-Lepp, co-owner of FarmLink Marketing Solutions.
“In these bull markets, somebody always gets squeezed at the end of it. Somebody just gets caught short before it blows.”
A persistent rumour over the last two weeks is that the Canadian Wheat Board is the main victim of the squeeze. Many market commentators have written that the board holds a large chunk of the short position in the March Minneapolis contract.
Curt Denisuik, the board’s director of commodity risk management, told Reuters that “we’re comfortable with our share of the open interest.”
