A substantial surge in wheat futures, based on Russia’s drought-induced plans to ban wheat exports for the rest of 2010 starting Aug. 15, offers “potential pricing opportunities” for Prairie grain growers, according to the Canadian Wheat Board.
Wheat futures markets have now posted their largest monthly percentage gains since 1959, with values rising over 50 per cent since the beginning of July to more than US$8 per bushel as of opening on Aug. 5, the CWB said Thursday.
Specifically, opening Aug. 5 Minneapolis futures values (December 2010) were US$8.05, compared to $7.45 the previous week and $5.22 on June 29, the CWB said.
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With futures values now reaching their highest levels since the rally of 2008, Prairie wheat growers will want to consider their pricing choices for wheat through the CWB, including its wheat pool and producer payment options (PPOs), to set their own preferred levels of pricing.
In an unscheduled market update and YouTube video by commodity risk manager David Boyes, the CWB laid out a number of options to consider, including:
- booking a “futures-first” Basis Price Contract through the rally and floating the basis.
- locking in current values through the Fixed Price Contract, and,
- if a grower has already signed up for it, using the FlexPro program as a reflection of the forward market structure, given the CWB’s price pace to date.
“Highly volatile”
Weather-related problems in Russia, Kazakhstan and the European Union, in tandem with current concerns in Canada’s own wheat-growing regions, are fueling the market rise.
Meanwhile, the recent surge in wheat futures is based primarily on Russian drought concerns and the Russian government’s response, while at the same time, basis levels have been “pressured way down,” the CWB said Thursday.
Markets are “highly volatile,” however, and may move up or down very quickly in a short period of time, the CWB warned. For example, Russia’s situation by itself may not be enough to sustain these kinds of futures values.
“In order to sustain current futures levels, unanticipated demand will likely need to emerge — whether from corn or additional wheat crop problems in Argentina or Australia,” the CWB said
“In the interim, wheat futures could begin to be subjected to downward pressure as the North American spring wheat harvest commences.”
Money-market funds are also playing a role beyond supply-and-demand forces, which could keep the markets high for a while, the CWB said. Money floating from equity markets to the commodities can bid wheat beyond the level supportable by current fundamentals.
“This is important to note since a sustained wheat rally is most likely to occur only through a tightening of the U.S. wheat supply-and-demand balance,” the CWB said.
“While U.S. exports are above last year, they have yet to demonstrate the strength necessary to significantly erode the huge U.S. wheat surplus” or even to see U.S. wheat stocks narrowing year-on-year, the board said.
PRO assessment
The CWB, meanwhile, has now priced about 13 per cent of the 2010-11 crop, based on the board’s current production estimates. As a result, its Fixed Price Contract is based mainly on the estimate of current prices available for 2010-11 crop year production, with a small amount of impact from previously priced wheat.
As the CWB advances the level of pricing, the FPC will slow down and will not reflect the full market move, the board said. The CWB said it expects a pricing level of 25 per cent by the end of September, which would result in an FPC that is exposed to only 75 per cent of international price moves.
The board’s next pool return outlook, due out Aug. 26, could see “significant increases” if market prices remain high or continue to rise.
Thus the CWB said it will assess its August PRO to see if an immediate increase in 2010-11 initial payments to wheat growers should be recommended to the federal government, which as the guarantor of initial payments must approve any increases.
It’s important to note that unlike futures or spot prices, the PRO does not capture a price “snapshot in time” for a single market, but projects what returns may be for the entire crop year from all markets where Prairie wheat is sold, the CWB said.
