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Russian wheat, drought and speculation

On Thursday, wheat futures hovered around $7.85, the commodity’s highest price in several years. The sharp price rise was driven by several things including fears that massive drought would lead the Russian government to keep home-raised wheat and not honor export commitments.

By Friday, the wheat frenzy had calmed a bit. While many marketers scrambled for reliable information out of Russia, Delta Farm Press spoke with Dan Basse about the current situation and his advice to U.S. farmers. Basse is president of AgResource Co. based in Chicago. Among his comments:

What’s the latest wheat news?

“The big debate today is the uncertainty surrounding the Russian ban. We’re hearing from some of our clients — export-related — that, indeed, Russia will allow existing wheat contracts to ship. That would be about 5 million tons and is a lot different than (what was expected) yesterday.

“We know the Egyptians are saying they’ll get the wheat they originally purchased through September. That amounts to around 600,000 tons.

“And if the Russians are willing to honor their existing sales contracts that means Russia will probably export 7 million metric tons through the end of the year. That would mean the ‘ban’ wouldn’t have as many teeth as it did before.”

Can you comment on the Russian drought — have you been tracking the drought for a while?

“The Russian drought began in late June. It was obvious as temperatures started to warm. By the July 4 weekend, they had some record highs and you could see the high pressure ridge above them.

“You always take (such things) week-by-week and ask, ‘will it last or break down?’ Normally, when such a hot, dry pattern is established, it’s difficult to move it until the jet-stream migrates south. That doesn’t usually happen until the last half of August.”

On the run-up of wheat prices…

“We’ve seen a tremendous amount of speculative money coming into the wheat market from a lot of sectors. Of course, hedge funds and others aren’t having such a great year. When they see an investable story like the one out of Russia — drought, the wildfires — they thought the wheat market was worth an investment. We saw a lot of capital come into the market in a short period of time.

“That’s why open interest in wheat is almost back to the record highs.

“Last night, the rumor was — and I don’t have confirmation of this — some people were taken out of their positions because of an inability to meet margin. That gave us the active trade last night.

“Today, prices have collapsed on the latest twist with Russian talk about allowing existing contracts to go forward.

“Probably the biggest question going forward will be if Russia gets the rain it needs by the end of August and into September. If they do, we can probably look back and say the reversal — the $1.10 range — we’ve had today is a lasting market high.”

Any comments aimed specifically at U.S. farmers about this?

“It’s a tough spot for the U.S. farmer. As the wheat futures market has rallied, cash basis has imploded.

“Unfortunately, the wheat market is providing a signal that every farmer should be planting more wheat next year. The problem is that, when you look at the basis relationship — because all commercials learned what happened in 2007 and 2008 — it’s pretty poor.

“Our recommendation is if you’re a farmer planting wheat next year, you need to have at least a third of your crop sold. But you also need a good banker because you’ve got to do it in futures, not the cash market because of the basis.”

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