I can not lie. Well I could, but I won’t. This morning’s confession is simple – some things cannot be explained. That’s what I think of as I try to understand some of the recent moves in the grain futures markets.
Perhaps the most glaring example is wheat. Last week, Chicago wheat futures lost $1.05 on the Chicago Stock Exchange. You can talk about it, but you can’t explain it.
what is known
How do you explain that the price of wheat is now below the level we had when the Russians invaded Ukraine? The facts are simple and well known. Ukraine is one of the largest exporters of wheat and in the world. So it made sense that we saw an immediate reaction to the war in wheat prices.
The Russians are known to have taken over most of the major Black Sea ports that were so crucial to their export capabilities. The exception is Odessa, where the waters are reportedly heavily mined to render the port unusable. The Russians have blithely proclaimed that Ukraine can export freely, but the reality is that this is impossible.
Even if the wheat survived the war and the farmers’ means of transport survived and the ship loading facilities still existed in working order, freedom of movement is still an issue.
So with all of this, it’s understandable that wheat prices shot over the moon. The Russians invaded on February 24th. On that day, wheat futures exploded.
September futures, which I currently watch as our lead month, gained nearly 40 cents to close at $9.243⁄4. There were days of ups and downs, but by May 11th we had deposited the amazing prize of $12.85. This is the price we used to dream of for soybeans.
Even more incredible, the farmers didn’t sell everything they could sell at that price.
The crash followed and by mid-July we were back at $7.653⁄4. We were up 20 cents for a while on July 18th and I heard a commenter say that seeing price action like this used to be a big deal, but it didn’t mean much when we lost over a dollar last week.
We actually finished almost 40 cents but we were trading at just $8.051⁄2 on July 19th. That alone would be an amazing historic high, considering what we’ve just been through.
Just excuses
So how do we explain the decline? We can not. We can only apologize for the relatively low prices.
A few days ago a farmer called me to ask if he had overlooked the wheat price. “Yes, you missed it!” was the reply. We always sell on the way up when we can. It’s easy to preach, hard to achieve. I myself have always sold too early.
No one could have foreseen teenage wheat, but everyone could see that it was a selling opportunity. However, no one could believe how deep we could go in response. So what are the excuses?
Blame it on a lack of news. We are now used to the debacle in Ukraine. How much worse can it get? After destroying the ability to export a crop that may not exist anyway, what news do we have to keep the hysteria going? Blame the market for overreacting and pricing us improperly. Blame the computer trade that drove the price down when everyone and their computer saw the beginning of a decline. The lunar phase is to blame as far as I know.
What I do know is that the basics of wheat cannot justify what we have seen. We will not get any exports from Ukraine and this will drastically affect the supply. Grain prices are inelastic, meaning that a 10 percent reduction in wheat available for export could result in a 30 to 40 percent price increase.
At the same time, we are losing global supplies from Ukraine, which feeds Europe; the European crop itself is in trouble. Europe is too hot and soil moisture is depleted. Conditions are said to be the worst in 200 years.
Harvest continues and we don’t have results yet, but we expect the harvest to shrink. I literally can’t imagine right now what it must be like to be a Ukrainian farmer.
Bad times for farmers
At the same time, I’m glad I’m no longer an American farmer. I don’t know what I would do now. The prices of every crop we grow have plummeted, but the price we paid to grow it was the highest ever. We have every reason to believe that these production costs will be even higher next year.
We have been told that high natural gas prices in Europe will wipe out any nitrogen production for the next year. How do we transport contract grain when there are high prices if we don’t know what we’re going to pay to produce it?
The risk per hectare in grain production is higher than ever and it remains to be seen if our record prices will return. The hot and dry summer is right ahead of us and our production from this year’s harvest could be reduced even if this pillar is digested.
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