Thursday, February 28, 2008

Markets on Tear: Wheat, Oil, Euro; Grain Trading Explodes In the Minneapolis Pits; Speculators Flood In

By Lauren Etter
Wall Street Journal
February 27, 2008

The little-known Minneapolis Grain Exchange is suddenly one of the hottest spots in the global financial markets as the price of its flagship commodity -- the wheat used to make bread and pizza crust -- shatters records, enriching farmers and fueling fears about shortages.

"We're up here doing things in the wheat market we've never done before," says Rich Feltes, senior vice president and director of commodity research at MF Global. "It's absolutely mind-boggling."

Yesterday, wheat closed at $22.40 a bushel on the Minneapolis Grain Exchange, up from about $5 a year ago. Monday, the price of the hard red spring wheat that trades in Minneapolis closed at a record $24 a bushel, touching $25 during intraday trade.

Ordinarily, the Chicago Board of Trade dominates the wheat market, but that changed in January when the U.S. Department of Agriculture said winter-wheat plantings were less than expected. That put pressure on the next wheat crop in the ground, the hard red spring wheat that trades on the 126-year-old Minneapolis exchange.

So Minneapolis has become ground zero for the global wheat shortage, which has been caused by drought in Australia and poor weather in other grain-producing countries. Global stocks are projected to reach 30-year lows this year, while U.S. stocks will reach 60-year lows, according to figures from the Agriculture Department.

In the trading pit, floor traders say they are in disbelief as records get tested daily. The worry among traders is that prices have gone up too far and the market could collapse.

Average daily trading volume on the Minneapolis exchange soared to about 9,600 contracts traded this year, from about 6,800 a year earlier, according to the exchange. The contracts include spring wheat futures, options and indexes, but are primarily spring wheat futures, according to the exchange. The relatively limited trading in Minneapolis (on average, more than 123,000 contracts trade daily in Chicago) may have helped drive up prices.

"This is unprecedented volatility that we're seeing," says Mark Bagan, chief executive of the Minneapolis Grain Exchange. "With the volatility, there are more opportunities than ever...but people are very cautious about what they're doing."

As one of the last independent futures exchanges, the Minneapolis exchange's seat prices have risen sharply over the past two years. Investors have been snapping up seats, thinking the exchange is a takeover candidate.

Higher prices are likely to entice farmers to plant more wheat, along with corn and soybeans. Prices for those commodities are up in part because of demand for biofuels, and those higher prices led to more planting. Already, farmers are ramping up acreage in all of the major crops. Corn, soybean and wheat combined will reach 225 million acres this year, the highest since 1984, according to the USDA.

World wheat production could reach a record high this year, assuming weather is amenable. In the U.S., wheat acreage is expected to increase to 64 million acres, up from about 60 million aces last year. Still, the increased supply isn't expected to allow carry-over stocks to recover much, because supply has been drained so low.

"The market's doing its job trying to ensure that supplies are being built back up," says Jim Peterson, marketing director at the North Dakota Wheat Commission. "Sometimes, it takes awhile."

Dean Stoskopf, chairman of the Kansas Wheat Commission, grows about 1,000 acres of wheat in central Kansas. He said the surge in wheat prices last year came after most producers had sold their crops. This year, he is hoping to take advantage of the soaring prices to pay off debt and buy equipment such as a combine and a sprayer.

The rising wheat prices have "given us tremendous opportunity here for the next year," Mr. Stoskopf said.

The rise in agricultural prices, combined with high oil prices (crude futures closed above $100 a barrel yesterday) have contributed to higher food inflation in the U.S. and around the world. Last year, U.S. food prices increased 4% from the year before level, the highest level since 1990.

Helping drive up grain prices are speculators flooding the market, looking to park their money in places not tied to the stock market. Traditionally, agriculture commodities have a low correlation with interest rates, stocks and foreign-exchange markets.

Another byproduct of the rally by wheat and other grains is that food is becoming more politicized as countries dependent on food imports fear they will be left at the mercy of volatile markets and shrinking supplies. Such a development could exacerbate hunger while generating food riots or political problems at home.

To cope with high prices, countries have been rationing supplies by leveling tariffs or taxes on grain exports. Kazakhstan said Monday that it would impose custom duties on its exports. Jordan has been scouring world markets for wheat so it can build its domestic grain reserves to a six-month supply. Syria recently canceled some of its wheat export contracts. In turn, an Egyptian newspaper editorial accused Syria of "using wheat as a weapon" in diplomatic talks. Pakistan recently stopped exporting some of its wheat flour to Afghanistan.

Five of the world's wheat-producing nations -- Russia, Kazakhstan, Ukraine, Argentina and China -- have taken some wheat off the world market to address supply shortfalls at home. Those countries account for about a third of the global wheat trade, according to MF Global's Mr. Feltes.


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