Funds Reenter Wheat Market

September 27, 2010 05:24 AM

Kim Anderson, Oklahoma State University

Reports indicated the outside purchases (code for funds) came back into the market today. Wheat prices gained back some of the week's price losses. The question is, "Why have the funds increased the long (bought) wheat futures contracts by 90,000 contracts (about 450 million bushels (mb))?" The Index funds and Managed funds control about 210,000 long wheat contracts (1.05 billion bushels (bb)). Why?
Are the funds betting on reduced production in Canada, Argentina, and Australia? Are the funds betting on the value of the dollar to continue to decline and wheat exports increase? Are the funds betting that tight corn stocks will result in the corn market raising corn prices to buy land away from soybeans and wheat? Or, are the funds betting on a combination of these events?
Facts are that there is an excess of U.S. wheat and more than adequate world wheat supplies. U.S. wheat ending stocks average about 600 mb. Current U.S. 2010/11 marketing year wheat ending stocks are projected to be about 900 mb. To reach ending stocks of 600 mb, 2010/11 marketing year exports would have to be 1.55 bb compared to USDA's projected 1.25 bb. The odds of this are relatively small.
My best guess based on the supply and demand information available, the KCBT December wheat contract price should be about $6.50 rather than $7.50. This implies that Oklahoma/Texas wheat prices should be about $5.40 rather than about $6.40. Don't get me wrong, I like higher prices. My point is, "Wheat prices are probably a dollar or so higher because of outside (fund) futures wheat contract buyers."

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