Wednesday, February 27, 2008

What's going on with wheat?

What's going on with wheat? Macro Man generally tends to avoid mention of the soft commodities, because he frankly has no specialist knowledge and only the most basic of general knowledge- which isn't exactly a formula for investment success.

But still- the recent price action in wheat deserves mention. The CBOT contract for May delivery has risen from $900 /bushel at the end of 2007 to $12.50/bushel as of yesterday's close- a pretty stunning rally by any measure.

But even beyond that, yesterday's price action was pretty stunning. The chart below may not look particularly unusual until one observes the price scale on the right- the intraday range was more than 20%!!!!

At first, wheat was ground up by the forces of profit-taking....until someone or something added yeast, at which point it began rising nicely.
All joking aside, the scale of the year-to-date price move, and particularly yesterday's intraday volatility, suggests that something is going on. So Macro Man puts the question out to those who know more than him about wheat, i.e. those that know something:

What the hell is going on with wheat?

23 comments:

Alex said...

http://icga.blogspot.com/2008/02/rubin-afghanistan-its-economy-stupid.html

Alex said...

http://www.latimes.com/news/opinion/la-ed-food26feb26,0,3838970.story

eh, sorry for the double post.... enter key got a bit quick on me.

The global convergence of want/need from the rising ranks of third world peoples consuming more than the staples, the idiocy of an energy policy at home, and an almost decade long drought..... wheat blight has been 20%+ in some places for the past few years.....

Anonymous said...

well morals man it seems the smart money got company from the big money....banks selling get rich quick packages to their well to do customers

Richy Rich said...

I read recently that Fund managers have apparently poured US$ 150 billion into this commodity rally. Now that is NOT end user money. Thats just sponge in the middle between supply and demand, storage
if you will. And everything they buy has to sit unused or hit the mkt at some point. It is not commodities being taken out of the system pemanantly.

And demand MUST be affected by price. I can't believe that someone who has only just progressed from a bowl of rice a day to wheat and meat can afford these products more than me as prices rise? Marginal edge stuff, those that who have pushed demand by now just being able
to afford new products are going to slip back below that threshhold ? Soooo .. despite agreeing that the world is competing for limited resources the supply demand side hasnt changed to mean 20 % prices increases PER DAY. This is turning into a spec bubble that is about to POP ( especially as global growth slows )

what say you MM?

Anonymous said...

Hey MM,

Your P&L statement seems to have lost all of the time period labels in the lower left corner.

As for wheat, the CBOT publishes commentaries on their web site every day. I don't know if they have any value, but:

http://cbot.com/cbot/pub/cont_detail/0,3206,1033+54990,00.html

I guess Iraq bought a half-million tons overnight, but that still doesn't explain the volatility.

KG

Anonymous said...

special situation with corn and wheat in US. russia raising taxes on soft cmdty exports, bad and prolonged winter in china. thats a little background for current momentum. more fundamental staff is what effect solar cycle has on crops, state of soil, govie subsidiaries, growing demand etc. basically when you have food inflation at 60% annualized in some parts of the world combined with declining supply - some talk of famine in few years coming...

Anonymous said...

Two words: la Nina... Granted, the stupidity entering commodity complex, probably signifies the inevitable bust. I am having a hard time believing that we are all of a sudden running out of shite to eat or burn, and that China has a trillion billion gazillion more demand for stuff. It's all going to end up in tears, as usual. - Ivan

vlade said...

There was an article on BBC last week on pig farmers going out of the business in the UK due to wheat prices (wheat being one of the most important pig feed). IIRC it takes about 20-25kg of wheat per useable kg of pig on the market.
So, it's not just less wheat being planted, but also the fact that a lot of China/India increased their meat consumption, which hits wheat/corn/soyabeans etc. much more than having an extra bowl of rice or a loaf of bread.
That of course is a long term thing, and probably doesn't have anything to do with the action yesterday. Technicals are more likely I'd say.

Anonymous said...

A rogue wheat trade as far as i am aware. News coming across that MF Global have helt their hands up for this one to the tune of $141.5m

Bruce said...

My GF reminded me that China recently restricted exports of wheat (presumably to address domestic food price inflation). This was sometime in December and Jan. My guess is that there may be futures contracts expiring that are affected by this and caught some people unawares. But I don't claim to be an expert, just thinking out loud here.

Anonymous said...

Courtesy of PAR (Global-View)

http://www.earthtimes.org/articles/show/mf-global-announces-1415-million-bad-debt-provision,296028.shtml

Anonymous said...

BB is reporting some "Unauthorized" trading in wheat yesterday.

James said...

MAN financial had a blowout! whoops

vlade said...

@james
Can you be more specific?

t said...

Beginnings of a crack-up boom?

James said...

A trader from Man lost 148 million in some fat finger error yesterday.

He was fired.

ward said...

5000 lots != 500 lots. doh...

trader walt said...

According to a "local" options trader (this person trades in the wheat options pit), before the pit opened yesterday, multiple 500 lots of wheat futures where being sold electronically. Apparently when the trade was discovered by the risk managers, the position was unwound (liquidated) driving prices over $2.00 per bushel higher above their lows.

"Cassandra" said...

Wheat is but a straw-man for questions regarding leveraged speculation more generally.

Inflation is God's way of teaching American's parsimony. (with apologies to the late Ambrose Bierce)

Charles Longfellow said...

Or..., Elliott's waves have once again been mysteriously confirmed. More to the point, what was wheat's previous "Large Bottom" index? Given that wheat is low in calories, helping to contribute to contra-large bottoms, or more precisely, tiny bottoms, such bullish sentiment was inevitable.

More about large bottom investment indicator at:
www.tradingwellandliving.blogspot.com

Yaser Anwar said...

Rogue Trading MM, Rogue Trading. Don't you know 'ts the season for it? ;)

http://ftalphaville.ft.com/blog/2008/02/29/11266/rogue-wheat-trader-rocks-mf-global/

Gregor said...

Modern, industrialized agriculture--int its ability to produce enormous harvests with the aid of machines--is nothing more than the transformation of fossil fuels, into food. Wheat is the beneficiary of a cycle that began two years ago with corn. Corn dislodged Wheat at the margin in advance of the new ethanol standard slated for Spring of 2006. That put into play a structural factor for the next two Wheat harvests. Then something else happened. One weak harvest, and then one very poor harvest, from Australia. Concurrently, E.M. diet(s) ever tilting towards meat continued to work its way through the system. And voila: now we get something that approaches a crack-up in Wheat, in similar crack-up boom fashion that we've seen with both coal and Oil. Following on of course is NG, a key ingredient in fertilizer.

What's next? Probably the largest Wheat planting the world has ever seen. Unlike fossil fuels, you can actually grow more of this stuff if you want to--even if the structural price is rising (again( due to higher farm-fuel costs.

I would roll out of Wheat at this point, and buy the dips in NG.

Finally, the direct answer to your question "What is going on with Wheat?" is this: nothing quirky, ephemeral, or mysterious. It's all part of the same large trend, still ignored by Wall Street because no one who went to B-School during the 30 year bull market in bonds ever learned about any of this stuff.

You sort of have to have made a choice to be odd-man out, to "get it."

Best,

Gregor

Anonymous said...

from "chartwatch", a gentleman who's been trading wheat from the floor of the CBOT since '71.
Cheers,
Nikkei225 Trader

Feb 29, 2008
Long time readers of CHARTWATCH's Wheat Research might remember a comment made several times concerning the fact that CHARTWATCH remembered living thru a limit-up, limit-down, and then limit-up move all within one trading session back in the runaway Wheat market of 1973 / 74.This almost happened again on Wednesday Feb 27. The difference was that although the May Wheat closed higher, it did not lock limit up. Not that this should automatically be construed as a sign of weakness - it did mean that nobody was trapped. And all the resting orders were cleaned out.


Amazing was the million bushel volume that trading session. The size of the entire Soft Red Winter Wheat Crop in the US in 2007 was 'only' 358 million bushels. It was definitely blowoff volume again.

The recent price volatility caused one fundamental trader to remark that the Wheat market "has largely disconnected with all phases of the industry". This means that technical analysis becomes much more important.

The price move up to a new life-of-contract high removed the possibility that a Symmetrical Triangle (or Falling Wedge) was forming. The only comment CHARTWATCH could make following the Wednesday Feb 27 close was where underlying support resided. This was the former price high at 1169 3/4. The conclusion was that May Wheat residing above 1169 3/4 was bullish, below it was neutral to possibly bearish. Look at the settlement price the next trading session: 1165. You can't say that the market was not aware of the former price high. Being the only benchmark around - the market gravitated to that price.

The big drop to close well below 1169 3/4 on Friday Feb 28 means the back of the Wheat bull has been broken - again.

The all time high is a reversal of the minor price trend that should stand for some time.

The daily May Wheat chart is now in a condition where a Head & Shoulder Top could form.

The price level to watch is the 990 ½ low (Feb 13). This is where a neckline would begin.

CHARTWATCH is simply watching.