Speculators whipsaw farm commodity futures markets

3-28-08
Capital Press
Regulators probe market volatility...MATTHEW PERRONE (AP)
http://www.capitalpress.info/main.asp?SectionID=67&SubSectionID=790&Arti...
WASHINGTON - Costlier corn flakes, pricier pizzas and painful pump fill-ups share more than top billing among consumers' worries.They're all riding a roller coaster of commodity market prices, where peaks are unusually high. Like oil futures, agricultural futures have experienced dramatic highs and lows in recent months as Wall Street investors flock to commodities for protection from the falling dollar and slumping stocks.
But the ups and downs in futures prices are giving grain sellers and farmers financial vertigo. Instead of finding predictable prices for wheat, corn and other crops in futures markets, they're getting daily price jolts and no refuge from uncertainty.That has prompted government regulators to examine what forces, if any, have thrown the markets off balance.The Commodity Futures Trading Commission said last week it will meet with farmers, traders and grain sellers next month to assess the recent price jumps...
"There has been a huge influx of capital from index funds and pension funds to the point now where futures markets are not reflecting actual supply and demand," said Todd Kemp, spokesman for the National Grain and Feed Association.
As a result, Kemp said grain buyers have had to pay more to hedge themselves against future price shifts. Some of those expenses have been passed on to food processors and then to consumers. The futures volatility is adding to a cocktail of cost-raising factors that have pushed bread, cereal and other staples to record highs.
The price of white bread rose to $1.32 a pound last month, up 28 percent from a year ago, according to government data.
The U.S. wheat crop has been shrinking since the early 1980s as many farmers have decided to plant more profitable crops. President Bush signed energy legislation in December that is expected to encourage farmers to plant more corn, which can be processed into ethanol.
At the same time, poor wheat harvests in Australia and parts of Europe caused China and other Asian countries to buy up more American crops.The combination of real-world demand and turbulent markets has placed farmers in an unusual situation.
"These are very favorable prices for farmers, but they can't benefit from them if they can't sell their futures," said Melvin Brees, an agriculture analyst at the University of Missouri. Turbulence in the market has put financial strain on grain buyers, causing them to scale back spending on futures.
In the latest shift, agriculture futures plummeted last week as a rebounding dollar persuaded many investors to sell their holdings in commodities. Wheat futures closed below $10 a bushel on the Chicago Board of Trade for the first time in more than six weeks...Traditionally, as a futures contract is about to expire, its value converged with the approximate cash price of the commodity. But in recent months there have been increasing gaps between futures and cash prices..."Speculators have probably put some error in the futures market," said Darrell Good, professor of agriculture economics at the University of Illinois..."We do have a lot more speculative money in these markets, but even so the system should be designed so the delivery process works," Good said.
3-27-08
Wall Street Journal
Grain Elevators Caught Between Farm Boom, Credit Crunch...LAUREN ETTER and SCOTT PATTERSON
http://online.wsj.com/article/SB120658304120967539.html?mod=googlenews_wsj
A fault line is emerging in the U.S. farm economy, as rising grain prices and the credit crunch combine to squeeze grain elevators, a crucial business link between farmers and markets.
Grain elevators that collect grains from farmers and sell them up the food chain have seen their costs of doing business balloon as prices of corn, wheat, soybeans and other grains have soared to record levels. At the same time, lenders chastened by the subprime mortgage crisis have grown increasingly reluctant to extend money to tide the elevators over.
Some elevators already have gone out of business. Big agriculture companies such as Cargill Inc. and Archer-Daniels-Midland Co. have altered the way they do business with farmers in some cases. State and federal regulators have begun to take note. If many more elevators fold, there could be a cascading financial impact on banks and financial institutions that manage futures accounts for elevators.
"We could have an explosive problem on our hands," says Diana Klemme, vice president at Grain Service Corp., an agriculture risk-management and brokerage house in Atlanta.
Few sectors of the economy have gone unscathed by the economic downturn, but agriculture has largely fared well as corn, wheat and other grain prices have been driven up by global demand for food and biofuels. In part due to higher prices, U.S. farm income this year is projected to reach a record $92.3 billion, while food prices have jumped by nearly 5% in the past year.
Farmers looking to lock in profits now are entering contracts with elevators to sell grains that won't be harvested for two to three years. To offset their risk that prices will fall, elevators typically then sell a futures contract on an exchange like the Chicago Board of Trade. Whenever the price of the grain goes higher than what is in that contract, the elevator has to make a margin call -- or post an additional amount of money to keep the account current.
These margin calls have become a crushing burden. Before the recent grain boom, a midsize elevator might have had to make a daily margin call of about $200,000 on a day when a grain market rallied. Now, it isn't uncommon for that same elevator to have a daily margin call of $1 million or more. Many elevators, lacking that much cash on hand, then turn to their banks for help. But even though the farm economy is strong, rural and agriculture lenders have stopped lending additional money in some cases as elevators have exhausted their credit limits.
Many grain elevators are "at their ropes' end financially," says Michael Swanson, an agriculture economist at Wells Fargo, a big lender to farm country. But as grain prices continue to rise, "a lot of lending institutions will call into question whether they can write another $50 million check for another margin call. The credit crunch is very real"...Stuart Selinger, bureau chief of the Illinois Department of Agriculture's Bureau of Warehouses, which regulates grain dealers, says he is concerned about a potential wave of defaults by grain elevators. His staff is currently liquidating the assets of a small Illinois grain elevator, The Grain Exchange, based near St. Louis.
The 15-year-old company faced a sharp run-up in margin calls that it couldn't meet -- to $5 million this year from $2 million last year -- as grain prices soared, says owner John Kniepmann. Its license to buy and store grains was suspended March 3. "My life and business have been turned upside-down," says Mr. Kniepmann, who doesn't plan to restart his business...Even big companies are feeling the effects. Cargill's grain-merchandising unit, AgHorizons, recently stopped offering grain contracts to farmers in some areas unless they could deliver grain to the elevator within 60 days, eliminating an important tool for farmers to hedge their risks against grain prices plummeting. Cargill spokesman David Feider, says, "We have made some changes given the market conditions."
Rival Archer-Daniels-Midland also has limited some of its contracts to farmers. Company spokesman David Weintraub says ADM doesn't comment on its hedging strategies.
Moves like those have crimped farmers' ability to manage risk in volatile grain markets. "I never really saw this coming," says John Phipps, a farmer in Chrisman, Ill., who learned recently that his largest customer, Cargill, would no longer take his grain under previous terms. "Forward contracting is such a basic, fundamental and routine exercise." Now, "My entire marketing plan fell apart."
One potential contributing factor is that new investors like index funds have flooded into agriculture commodities -- along with gold, oil and other commodities -- as a shelter from fizzling stock markets and other investments. Total index-fund investment in corn, soybeans, wheat, cattle and hogs has increased to about $42 billion, up from just over $10 billion in 2006, according to AgResource Co., a Chicago-based agriculture research firm.
The added trading activity by these institutions has helped drive up grain prices to levels unsupported by underlying fundamentals, some farmers say.
Government regulators are monitoring the role that these new investors are playing in commodity markets to ensure they aren't "the gorilla in the room breaking all the china," says Jeff Harris, chief economist at the Commodity Futures Trading Commission, the government agency that regulates commodity futures and option markets.
It is a delicate balance, though. If regulators were to restrict index funds' investment activity too much, grain prices could tumble...Ms. Klemme, the grain broker, takes solace in the Federal Reserve's recent action rescuing Bear Stearns Cos. That "gives me hope," she says. "If there is a liquidity crisis it's good to know there can be money made available for the banking system."
3-13-08
Cattlenetwork
Grain Outlook: Financial Woes Fail To Corral The Bulls
http://www.cattlenetwork.com/content.asp?contentid=205080
Absent fresh fundamental supply and demand news, the grain and oilseed markets have been whipsawed by factors from outside of agriculture lately. The falling value of the dollar against other major currencies has boosted commodity prices. But the turmoil in the financial markets has had the greatest effect on the commodity markets in recent weeks.
Since last fall, growing global demand, tight supplies, and the weak U.S. dollar have pushed prices of most commodities up. Institutional investors, including the so called hedge funds, sensed opportunities to benefit from inflation as well as to earn sizable profits and shifted money out of real estate and stocks into commodities, sending prices to historic high levels. Firms of this type tend to be highly leveraged, meaning they multiply the returns to their own equity by also investing large amounts of borrowed money.
The subprime mortgage mess was supposed to be just a bump in the road for the financial community. It has turned out to be more severe than first thought and has sent ripples far beyond banks and other financial firms. Lenders are revaluing risk and stiffening criteria for borrowers to qualify for loans. Losses have lowered their financial reserves reducing their ability to make new loans. The resulting credit crunch is impacting a broad range of industries.
High commodity prices and increased commodity exchange margin requirements have been stretching the financial resources of all agribusiness firms including those in the grain and oilseed trades and speculators. Hedge funds and other speculators have had difficulty in coming up with cash when faced with margins calls. Rather than go to lenders, many of which are having liquidity problems of their own, the speculators have resorted to raising money by cashing out of profitable commodity positions causing temporary, but sometimes wide, price fluctuations.
Hedgers such as country elevators and even large grain trading companies, which have on-going business reasons to buy and sell futures contracts, are bumping up against their borrowing limits. The financial community credit woes are making lenders wary of extending more credit. At the same time, wide daily price fluctuations and the unwillingness to expose themselves to further price risk have caused grain buyers to make grain basis bids only.
These developments have had the effect of reducing cash forward contracting opportunities for grain and oilseed producers unless they are willing to use futures forward contracts, and put up the margin money themselves, or buy options. But it hasn’t had much effect on the bullish tendencies of the markets.
The March World Agricultural Supply and Demand Estimates report released this morning by the USDA contained some surprises in estimated production and carryover supplies. Though small, the surprises could have a major impact on markets super-sensitive to even small changes in supply or demand as the spring planting Battle for Acres is about to play out.
Traders, who had been engaged in pre-report position jockeying for several trading sessions, guessed wrong on corn and were a little too conservative on soybean and wheat carryovers.
There were absolutely no changes in the USDA numbers for corn from last month’s WASDE report. Strong U.S. corn exports had traders convinced the USDA would lower corn carryover. At 11% of usage, the corn carryover this year is even tighter than last year when it was 12%. Traders still expect the USDA to lower corn carryover after the release of the quarterly stocks and planting intentions report at the end of the month. The global coarse grain supply was increased in the report, mostly due to increased Brazilian corn production. Ample rain improved yield prospects for the summer crop and high corn price is expected to stimulate an increase in winter corn plantings in Northern Brazil.
The USDA dropped U.S. wheat carryover by 30 million bushels, 23 million bushels more than the average trade estimate. At ten percent of usage, that will leave the U.S. a little more than a one month supply at the end of the marketing year for wheat on May 31st. The last time the U.S. had a wheat carryover that low was in the 1946/47 marketing year. The global carryover supply of wheat remained at a 30 year low despite slightly better than anticipated crops in India, Brazil, and Australia...