Carl German, Extension Crops Marketing Specialist; email@example.com
Markets Awaiting Next Event
Commodity markets appear to be driven by three primary forces this week. First, commodity speculators (non-commercial traders) have been taking profits and stepping to the sidelines before deciding whether or not to re-enter the market. It is likely to take an extended forecast for hot and dry weather before we’d see that occur. Second, the markets appear to be following the general economy, slacking off as the Dow has weakened. Third, the steady rise in crude oil prices slackened this week bearing further pressure on corn and soybean prices.
Next week USDA will release the June 30 Actual Plantings report. We expect to see a reduction in corn and an increase in soybean planted acres from the March 30 planting intentions report. Unless the numbers come in different than anticipated that report is likely to be considered already factored into commodity prices.
This morning’s export sales report was bullish for corn with sales reported at 27 million bushel, well above the 7.4 mb needed to stay on pace with USDA’s 1.75 billion bushel projection for the ’08/’09 marketing year. Shipments for the year are running slightly behind the pace needed, so the jury is still out on whether the U.S. will achieve the 1.75 bb export projection. Corn sales and shipments need to continue this week’s pace or better in order to meet the projection.
Export sales for U.S. soybeans at only 1 mb were on pace for meeting USDA’s 1.24 bb projection for the ’08/’09 marketing year. With 10 weeks left in the marketing year, only 6 mb is needed to meet the projection. Shipments were slightly better than needed to stay on pace. This week’s report for soybeans is bullish.
Wheat exports, reported at 13.5 mb, were behind the pace needed to meet USDA’s 900 mb projection. Shipments of 11.9 mb were also behind the 17.7 mb needed to meet the projection. The wheat report was bearish.
Harvest pressure has hit the wheat market. Uncertainty remains concerning crop development for ’09 row crops (corn and soybeans). Bottom line, the recent sell-off in commodity prices does not bode well for advancing new crop sales at this time. Currently, Dec ’09 corn futures are trading at $4.03; Nov ’09 soybean futures at $9.97; and July ’09 SRW wheat at $5.31 per bushel.
Report: Excessive Speculation in Wheat
Subcommittee Calls for CFTC to Crack Down on Contract Positions
The Commodity Futures Trading Commission should impose tighter position limits on commodity index traders to stop excessive speculation in the wheat markets, a U.S. Senate subcommittee report recommends.
The 247-page report by the Senate Permanent Subcommittee on Investigations examined how commodity index traders “in the aggregate” have made large contract buys on the wheat futures market that “pushed up futures prices, disrupted the normal relationship between futures prices and cash prices for wheat, and caused farmers, grain elevators, grain processors, consumers and others to experience significant unwarranted costs and price risks.”
The subcommittee is chaired by Sen. Carl Levin, D-Mich., and ranking member Sen. Tom Coburn, R-Okla.
The subcommittee staff spent a year examining millions of trading records on the Chicago, Kansas City and Minneapolis exchanges, as well as the CFTC. Noncommercial (speculative) traders such as index funds dramatically increased their contract holdings from about 30,000 wheat contracts in 2004 to 220,000 contracts in 2008.
As DTN has highlighted since last year, the markets have consistently suffered from a lack of convergence in the futures contracts and cash markets. The subcommittee report states there has been an “unprecedented, large and persistent gap between futures and cash wheat prices” in the Chicago market. Basis grew from 13 cents per bushel in 2005 to $1.53 a bushel in 2008.
The subcommittee cites that part of the problem with commodity index money flowing into the wheat market stems from lax restrictions on contract limits that were loosened in 2005. The subcommittee states the CFTC did not restrict wheat traders to the standard 6,500-contract position limit. Instead, some commodity index traders held positions as high as 53,000 contracts at a time, the report states.
The Levin-Coburn report recommends the CFTC begin enforcing the 6,500-contract limit and potentially consider going back to the 2005 limit of 5,000 contracts. The report also recommends the CFTC analyze the impact commodity index trading is having on other commodities, including crude oil, to see if excessive speculation is distorting prices.
The CFTC spearheaded an interagency task force on crude oil prices a year ago that issued a report stating that noncommercial trading in the energy markets did not lead to excess speculation. The interagency report, issued at the height of last year’s crude oil prices, stated that “changes in the positions of swap dealers and noncommercial traders most often followed price changes. This result does not support the hypothesis that the activity of these groups is driving prices higher.” The CFTC has not conducted a similar analysis of wheat.
The Levin-Coburn report also stated that inflated futures prices also affected areas such as crop insurance. Because crop insurance guarantees are pegged to futures contracts, the inflated prices led to higher premiums for farmers and taxpayer subsidies.
The report also noted that market margin calls led to cash flow and credit problems at grain elevators across the country, which translated into affecting farmers served by those elevators as well.
Since 2006, the Senate Permanent Subcommittee on Investigations has issued five reports looking at various aspects of speculation in futures markets, mostly in areas involving energy.
For technical assistance on making grain marketing decisions contact Carl L. German, Extension Crops Marketing Specialist.