Tuesday, February 12, 2008

Wheat is Being Ruined by.... what else... Hedge Funds and Speculators

We've been talking about wheat and the huge surge the past week; as predicted last year once the slowdown happens and people see crops will hold up, strength begets strength and strength means hedge fund computers scanning the globe for any pattern will start chasing each other into the commodity futures markets. While I do expect the trend to remain up, the volatility will increase (thanks hedgies!), and another interesting thing happened - the daily limits were increased so the intraday volatility will sharpen - cool! This allows wider ranges for daytrading for these futures, more fun for the hedge funds. Anyhow, Powershares DB Agriculture Fund (DBA) had (for it) a volatile day - it normally doesn't move more than 1-1.5% a day, so this is how I discovered the new trading limits imposed - I am hoping for another 3-5% drop so I can really load the boat. The pace of increase of late has been unsustainable so a pullback is more than in order. Further wheat had its worst 2 day performance since 2003. This is all part and parcel (unfortunately) that comes with the hordes of computers descending on the commodities markets. So expect a lot more volatility now that they have found a new plaything and the exchanges have been happy to expand the daily band of movement within the futures contracts.

Oh yeh, and the title of this story is "Wheat Falls as Increased Global Planting May Boost Inventories" - of course we need to find a "specific" reason to explain the fall...something like "Global hedge funds playing ping pong with Wheat futures" or "Wheat corrects after Historic Run Fueled by Hedge funds leveraged to the gill by Fed induced liquidity" wouldn't really sound quite so simple. And that huge bumper crop in 2007 really dropped corn prices, didn't it? ;) Remember as they plant more wheat, that makes a shortage somewhere else - creating higher prices, and then next year that crop with high prices will be planted, creating a shortage somewhere else (wheat ?) and so on and so forth. So all this new planting of wheat is just trying to get us back to where we were before the "corn ethanol" boom, pushed farmers into corn (creating shortages in everything else). And on and on we go... rotating from 1 shortage to another. This is why I want to be long an ETF with a good mix of crops - in any 1 year maybe 1 crop falls in production as farmers react to previous years crazy pricing in another crop, or a bumper crop is created but it will create a shortage somewhere else, driving something else up in price. Rising tide lifting all boats and all...

Agflation - it's a beautiful thing for an investor. For a human eating and purchasing food? Not so much. Goldman is now out with a forecast of wheat at $13.50 this year (remember it just broke through $10 last week, and as high as $11.53 early yesterday before falling back!)
  • Wheat fell, capping the biggest two- day loss since 2003, on speculation that farmers will increase planting to take advantage of prices that have doubled to a record in the past year.
  • U.S. growers planted 3.6 percent more acres with winter wheat from September through November, the government said last month. Sowing of spring wheat also may increase, analysts said. Global farmers planted 4 percent more winter wheat, the International Grains Council said in December.
  • ``There's been a lot of wheat planted around the world'' after prices surged, said Tomm Pfitzenmaier, a partner at Summit Commodity Brokerage in Des Moines, Iowa. ``Talk about an economic incentive to plant something.''
  • Wheat futures for March delivery dropped 41 cents, or 3.9 percent, to $10.07 a bushel on the Chicago Board of Trade. The contract reached a record $11.53 yesterday before closing down 45 cents, the first decline this month. Wheat fell 7.9 percent in the past two days, the biggest decline since Nov. 19, 2003.
  • Prices have soared as adverse weather hurt crops globally, and importers increased purchases on concern farmers would fail to produce enough, accelerating food-price inflation.
  • The exchanges in Chicago, Minneapolis and Kansas City doubled daily trading limits for wheat to 60 cents to create more incentives for holders of contracts to sell after futures surged by the maximum every day last week.
  • U.S. growers of soft red-winter wheat, grown mostly in the eastern Great Plains from Missouri to Ohio and used to make cookies and cakes, seeded 21 percent more of the grain in the autumn. Hard red-winter varieties, grown mostly in the southern Plains from Nebraska to Texas and used to make bread, were planted on 1 percent fewer acres.
  • Increased seeding may help boost global supplies expected by the U.S. Department of Agriculture to fall to 109.7 million metric tons in the year ending May 31, a 12 percent drop from the prior year. U.S. stockpiles may fall to 272 million bushels, or 7.4 million metric tons, the lowest since 1948, USDA data show.
  • Winter varieties compose about 70 percent of all wheat grown in the U.S., the largest global exporter of the grain followed by Canada, Russia and Argentina, USDA data show.
  • Egypt, the world's second-biggest wheat importer, canceled a tender for 80,000 tons of the grain, saying the price was too high. Egypt imported 7 million tons of wheat in the most recent marketing year, half its annual consumption of the grain, according to U.S. and Egyptian government statistics. Brazil is the largest importer.

I'm learning so much about agriculture lately - New Zealand is the biggest exporter of dairy [Milk is the New Wheat is the New Corn], Brazil is the largest importer of wheat, followed by Egypt, I learned about hogs last fall, chickens, cows, etc etc - I might be able to talk myself into a farming convention. Ok... well maybe at least a Farm Aid concert. Farm Aid? That's so 1990s. We're going to need City Aid concerts in the '00s. Can you imagine? Bono, Bon Jovi, and Willie Nelson banding together to help those poor city folk and upside down homeowners in Cleveland, Riverside, CA, Las Vegas, San Diego, Detroit. While farmers watching on their 61" plasma TVs across Iowa and Nebraska look on in dismay ... "What did those city folk get themselves into this time?"

"We are the World, We are the Children"....

Long Powershares DB Agriculture Fund in fund and personal account

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