Market Volatility Influenced by World Factors

MANHATTAN, Kan. - During the 2010 wheat harvest, the cash price of wheat at local grain elevators in Kansas was mired in the $3.50 per bushel range and basis was at historic wide levels. On farms across Kansas, the price outlook for wheat looked bleak.  
 
In the rest of the world, however, market forces were beginning to rumble. While Kansas farmers were finishing the 2010 wheat harvest, farmers in the Canadian Plains were unable to plant spring wheat due to flooding. In Russia, meanwhile, news of a widespread drought was just breaking.

Six weeks later, Russia’s drought has exacerbated and wildfires are ravaging huge areas of that country’s Wheat Belt. And despite higher than anticipated wheat yields throughout North America, a reduction in harvested acreage has had a bullish effect on the wheat market. These are just a few reasons that wheat futures in Kansas City soared past $7.50 per bushel on August 4 – the highest level in three years.

So goes the ever-volatile wheat market, says Justin Gilpin, chief executive officer of Kansas Wheat.

“Almost overnight, the market was shocked by planting concerns in Canada, topped off with drought and weather concerns in Russia,” Gilpin says. “Even though we were dealing with a nearly 50% stocks to use ratio in the U.S. and a billion bushel carryout, on the world scene, things changed overnight.”

By the time the market reached its Aug.4 high, the opportunity to sell 2010 wheat had already passed for many Kansas producers. On average, half the wheat crop in Kansas is sold within 60 days after harvest. However, farmers still have an opportunity to lock in above average prices on the 2011 wheat crop; an opportunity that could lead to more wheat being planted in the U.S. this fall. Gary Millershaski, a Kansas Association of Wheat Growers board member from Lakin, told the Wall Street Journal that, as an “opportunist,” he would look long and hard at increasing wheat acres.

Collectively, farmers’ response to the wheat price hike could have a massive impact on the world grain market. An increase in wheat acreage, for example, comes at the expense of acres sown to other crops.

“One thing is for sure, there will be volatility,” Gilpin says. “This volatility highlights the fact that there is not a lot of room for error in the world market, whether it is wheat, corn or soybeans. Demand and consumption continue to increase and producers need to rise to the challenge of meeting that increase in demand.”

The dramatic increase in the wheat market emphasizes the global nature of the wheat market.

“We need to be cognizant of what’s going on in the world situation and how volatile things can change and change on a dime,” Gilpin says. “That’s what happened the last three weeks with wheat.”