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Index fund trading did not cause low wheat prices

Oklahoma and Texas wheat prices were about $12.60 on March 12, 2008. The monthly average June 2008 wheat price was $7.93. The monthly average June 2009 wheat price was $5.75. At this writing, Oklahoma and Texas Panhandle wheat prices range from $3.74 to $4.05.

Some people are saying, “get a rope, and let's get the index funds out of our markets.” Wheat marketing supply and demand information may point a finger at different groups. Weathermen (favorable weather) and wheat producers together produced more wheat than the world could use. Neither of these groups needs rope burns, nor do the funds.

The questions to answer are: “What caused prices to increase to $12.60?”, and “What caused wheat prices to decline to below $4?” An $8.60 price decline in prices creates questions that need answers.

Looking back 10 years from March 2008, U.S. wheat ending stocks were about 950 million bushels, and world ending stocks were about 6.6 billion bushels. The U.S. average annual price was $2.65.

In March 2008, the five-year average U.S. wheat ending stocks was 585 million bushels, and average world ending stocks was 4.8 billion bushels. The five-year average annual price was $3.61.

The USDA March 2008 Wheat Supply and Demand report projected 2007-2008 wheat marketing-year ending stocks to be 242 million bushels and world ending stocks 4.06 billion bushels. United States ending stocks were projected to be 343 million bushels (59 percent) below average and over 700 million bushels less than in 1998.

United States wheat stocks had not been this low since before 1950. World wheat stocks had not been this low since the 1989-1990 wheat marketing year. Economic theory would say, “Record low stocks (ending stocks divided by consumption) should result in record high prices.”

The 2008-2009 wheat marketing year was a year of record and near record yields. World wheat yields averaged a record 45.1 bushels per acre. United States yields averaged a record 44.9 bushels per acre.

During the 2008-2009 wheat marketing year, wheat stocks increased from 306 million bushels to 667 million bushels (118 percent increase), and world wheat stocks increased from 4.5 billion bushels to 6.2 billion bushels (38 percent increase). Wheat prices declined from $7.93 to $5.75 (28 percent decline).

In the September 2009, USDA wheat supply and demand report, U.S. wheat ending stocks were projected to be 743 million bushels (207 percent higher than March 2008). World wheat ending stocks were projected to be 6.86 billion bushels (69 percent higher than March 2008).

The supply and demand data clearly show that the reason that wheat prices are below $4 is because wheat stocks are excessive. Because prices were high, wheat producers increased wheat planted acres. Weather cooperated, resulting in record yields and higher production than was and is needed. The result is above-average stocks and below-average prices.

Research shows that fund trading in commodities (corn, soybeans, wheat, etc.) did add to the price volatility. The data also shows that fund trading gave producers the opportunity to sell wheat at higher prices than if the funds had not been trading wheat.

Research does not show that the current relatively low price is the result of fund trading. Current prices can be explained by the supply and demand situation.

Research also shows that trading rules needed to be changed to restrict some aspects of fund trading. The rule changes should make the market more efficient.

Important points are that, in the long-run, supply and demand determines price, and the U.S. marketing systems work relatively well to find prices that are fair (not necessarily profitable) for both producers and consumers.

TAGS: Corn
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