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Wheat Prices Driven by CME Policy

July 5, 2010

We have ample supplies of wheat, with 1 billion bushels carried over this year and possibly next year, notes Jerry Gulke of the Gulke Group. “Yet prices were up 25¢ one day and 20¢ the next and lo and behold it’s up 2¢ to 8¢ today. Just about anyone you talked to was short this market given the big supplies—large speculators, millers, some of the best in the business.”

Part of the reason is the Chicago Mercantile Exchange’s scheme to cause convergence of cash and futures prices, put in place after industry uproar when basis widened to more than $1/bu. “No matter what prices are doing in June, if they aren’t 100% carry, then they’re going to raise the implied storage rate by 3¢ then 6¢ then it could go to 8¢ and 10¢. So anybody with soft red winter wheat could store it on the farm or in an elevator and hedge it off a year out and then another year out and make roughly $2.50/bu. on their wheat. So now you’ve got an artificial market that has nothing to do with supply and demand, with supplies off the market and producers saying “Sooner or later you have to pay me—either futures fall and I make money there or cash has to rise.

So, he says, “Suddenly, then, we found good cash wheat was hard to find and guys are paying 20¢ to 30¢ over in the same town where they were paying $1.20 under before.”

“Now we’ve got weather issues in Canada, the Dakotas and the Black Sea Region,” he says. “So we’re going to want to watch what USDA says in its Friday report about both U.S. and world stocks—in both corn and wheat. It could be the wheat isn’t there to take up any slack in feeding for short corn supplies.”

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