Wheat prices have the potential to explode in the coming year, say some market analysts.
“With world stocks at record tight levels and U.S. stocks starting to come down, it’s kind of
like a powder keg with a match beside it,” said Glenn Lennox of Agriculture Canada. “At
some point it’s going to blow u-10-P. The question is when.”
Unfortunately there is not much that cash-strapped farmers can do now to take advantage of
such bullish thinking.
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But analysts say if the market still hasn’t taken off by spring, producers would be well
advised to take a close look at forward pricing their 2001 wheat cro-10-P.
The main tool, they say, will be the Canadian Wheat Board’s basis contracts, which will be
offered to producers in April. The board’s basis contract is the difference between the wheat
board’s fixed price contract (which is based on the pool return outlook) and the Minneapolis
futures price.
The basis contract allows the buyer to benefit if the Minneapolis market rallies.
“If prices still haven’t rallied by that time, I would say definitely lock in a basis contract
because it’s going to go up,” said Lennox.
Don Bousquet, of Resource News International, gave similar advice to farmers during a
recent series of meetings across Saskatchewan sponsored by the provincial department of
agriculture.
“I would look at those contracts when the board starts offering them in the spring,” he said
in an interview. “Everything points to a much better scenario in that time frame.”
Bousquet added any price rally likely wouldn’t happen until June or July, which would be
too late to trigger any big increase in wheat acreage this spring.
The board offered its inaugural fixed price and basis contracts last spring, with 125
producers taking out basis contracts and 85 signing up for the fixed price option. The
contracts are based on the PRO.
Those contracts were limited to Canada Western red spring wheat, but the board is
considering expanding it to other classes next year.
Paul Cassidy, of Mitcon Inc., said the CWB basis contract might be a good strategy, but
he’s not yet ready to say so.
“I’d reserve my answer on that depending on what happens in the next two or three months
with the U.S. wheat crop,” he said.
It is possible to buy call options on the Minneapolis or Chicago wheat markets now, but
Cassidy said simply selling high quality wheat to the board is probably the best course of
action.
“If the board is doing its job and selling into a rising market, then the pool is rising with it.”
There’s not much point buying a call. If a farmer buys a call and the market goes up, the
value of the call rises but so does the board’s PRO. If the market goes down, the farmer is
guaranteed the initial price and is protected by pooling, but the call becomes worthless.
Lennox said market watchers have been waiting months for the price to take off, but nothing
seems able to lift the market out of the doldrums.
Recent news of problems with the Australian crop and fairly bullish world supply and
demand numbers from the U.S. Department of Agriculture should have prompted some
positive movement, but “the market looked at it and yawned,” said Lennox.
The problem, as it has been for some time, is that most of the world’s wheat inventory is
held by the major exporters, particularly the Unites States and European Union.
The stocks-to-use ratio is similar to mid-1990 levels, when prices rose historically high, yet
today’s prices languish, leaving many analysts shaking their heads.
“The wheat market is grossly undervalued,” said Bousquet, adding that any significant
change in the production or demand outlook could trigger a major rally.
