With the Russian invasion of Ukraine driving up global wheat futures, Vance Ehmke, a U.S. farmer, was eager to sell his grain.
Local prices surged by nearly 30% to around $12 a bushel, the highest Ehmke could recall in 45 years.
While trying to reap in a windfall profit, Ehmke found that the commodities market has turned upside down. He was unable to sell even a nickel of their upcoming summer wheat harvest for future delivery.
Futures prices for corn and wheat had rocketed so abruptly that many along the complex chain of grain handling – local farm cooperatives, grain elevators, flour millers and exporters – stopped buying for fear they couldn’t resell at a profit.
Others could not afford an industry-wide risk-management strategy known as hedging that keeps global commodities markets moving. The Ukraine Russia conflict has rocked the system, sending middlemen scrambling to shore up positions in the futures market that were costing them millions of dollars per day.
“More than anything, the market is just in a panic,” said Andrew Jackson, a Kentucky grain merchandiser.
Many players continue to hold back on purchases to see how the conflict shakes out since Russia is the world’s biggest wheat exporter and Ukraine is a major global supplier of both wheat and corn.
While North American millers have said they have sufficient grains on hand, from past harvests, to continue producing for several months, a prolonged or repeated disruptions to grain trading could add fuel to heightened food prices.
The inability to sell some of the winter wheat, whose harvest starts in June, is applying pressure on U.S. farmers. Wheat growers need to sell now, so that they can pay for seeds and fertilizer ahead of planting during spring, as well as pay for land rent and tax bills, etc.
This year, fertilizer bills alone are expected to rise by 12%, after rising 17% in 2021, according to American Farm Bureau Federation and U.S. Department of Agriculture (USDA).
If American farmers decide to cut back, that could curb yields for the fall harvest at a time when the world may soon need more grain.
“Developing countries are particularly vulnerable to supply shortages and high grain prices,” said Don Roose, president of agricultural broker U.S. Commodities. “Emerging markets like Africa could have less bread to eat,” said Roose.
Hedging
This peculiar situation that the Ehmkes faces stems from a system known as hedging.
For every bushel of grain they commit to buy, purchasers sell an equal amount of bushels in the futures market as a hedge to protect themselves against losses. These players are the traditional “shorts,” or sellers, in the futures market.
On the other hand, players who go long are speculators, such as hedge funds and investment banks that are not involved in the physical grain-handling business.
With the Russian invasion of Ukraine, speculators have aggressively purchased wheat and corn futures, especially the nearby May contracts. As a result, the price of May wheat on the Chicago Board of Trade (CBOT) has jumped 54% in just nine trading days; whereas they were trading at $8.84-3/4 per bushel on February 23, it jumped to $13.63-1/2 on March 8.
Together, Russia and Ukraine supply around 26% of the world’s wheat exports. Shipments through the Black Sea have been disrupted.
When futures shoot higher, commercial grain sellers accrue losses on their short positions, which by itself may not be a disaster since the price of the physical grain they have purchased is rising in value too. They however get squeezed until they are able to sell the grain and close their futures positions.
In recent weeks, many players have faced margin calls from their futures brokers, forcing them to inject enormous sums into their commodity trading accounts to cover their losses.
“It’s a massive headache that could turn into a problem if they do not have their financial house in order,” said Chad Hart, an agricultural economist at Iowa State University.
The rally in wheat has hammered players for other crops as well.
On March 9, Landus Cooperative, the largest agriculture cooperative in Iowa, was forced to briefly suspend its cash bids to buy corn and soybeans with CEO Matt Carstens saying Landus had to tripled its credit line with CoBank to cover hundreds of millions of dollars in margin calls during the rally and ensure its business remained healthy.
So far, CoBank has delivered more than $4.5 billion in loans and credit to customers to deal with margin calls and grain purchases in January and February alone, said Eric Itambo, CoBank’s chief banking officer.
“Just a whole bunch of things are telling us the price of wheat could be substantially higher than what it is right now,” said Vance Ehmke.
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