When the soft red wheat basis weakened at Mississippi River elevators last spring, many Mid-South producers got heartburn. Farmers were looking at high July futures, but cash bids at local elevators were 40 to 80 cents per bushel lower.
Back then, grain analysts said the weak basis, unusually wide even for harvest, was a marketing signal. For a variety of reasons, including transportation problems left over from Hurricane Katrina, grain elevators were telling producers they didn't want their wheat just yet.
Now the National Grain and Feed Association, which represents about 900 country elevators and other grain-related firms, has thrown another wrinkle into the wheat basis debate.
The NGFA recently asked the Commodity Futures Trading Commission to modify its weekly “commitments of traders” report to create a separate category for the futures market activity of fund traders, swap dealers and other noncommercial interests.
The association is seeking the change so “more traditional commercial agricultural hedgers and producers can discern the degree to which futures market volume and prices are reflecting supply/demand fundamentals and market conditions when making business and marketing decisions.”
It cited the “historically high spread” between futures and cash market values — which grew to as much as 80 cents a bushel in June — as another reason for the new category.
“Currently, the futures market activity of nontraditional participants is embedded in the commercial category of the report, but market users have no way of knowing how much,” the NGFA said. “Traditionally, the commercial category has reported the activity generated by grain elevators, processors and other commercial users.”
Total open interest — the number of futures contracts not yet liquidated by an offsetting transaction or fulfilled by delivery — of Chicago Board of Trade wheat futures represented nearly 105 percent of the size of the U.S. wheat crop in early 2006 vs. 40 percent of U.S. wheat production in 1995-2004.
Higher transportation costs, changes in domestic markets, revisions to the CBOT's soft wheat futures contract and Katrina have contributed to the lower cash prices, the NGFA said. “But we believe the influx of investment capital from nontraditional sources that tend to be long-term and less responsive to market prices also had a significant impact on soft wheat basis levels.”
The lack of transparency over which segment is influencing futures price movements can lead to faulty and uneconomic business decisions, according to the NGFA. Grain elevator managers who mistakenly assume a futures flat price rally is being driven by increased demand may underestimate commercial storage requirements.
Producers, meanwhile, may miss sales opportunities, incur increased basis risk or, in the case of the current wheat futures market, be misled to believe the market is signaling a need for more acres to be planted to wheat.
The latter is bound to give Mid-South producers pause. With wheat being one of the few crops offering hedging opportunities, growers need all the market transparency they can get over the next few months.