A Bull Market for Wheat

IT SEEMS THAT HISTORY IS MADE AND REMADE on a daily basis at the Minneapolis Grain Exchange, but this Monday was really something else. I would like to call Monday the climax of the great bull market run that we have seen in spring wheat. But if I said that, it would mean that the market has topped out and the bull run is slowing to a halt. I’m not ready to make that claim…not even close

The first thing I saw when I walked onto the floor of the exchange was that the price of one bushel of spring wheat had closed up 89 cents (limits were 90 cents for spring wheat, other than the March contract) in overnight electronic trading. I was looking at $20 wheat for the first time in our history, but it was only just getting started.

Before I continue on, I need to make one thing clear. The March wheat option expired last Friday. An option is simply the underlying right, but not the obligation, to buy a futures contract. At this point, bakers, pizza makers, and other people looking to actually buy wheat via the futures market will begin to hold more and more contracts, while the traders will have less and less of a position. More importantly, this means that the March futures contract will no longer have a limit. This means that the price of wheat for March delivery can trade as high or low as it needs in order to represent a true supply-and-demand scenario.

Once the opening bell sounded, March wheat traded strong to the upside, but this was to be expected. Before long, the pit was a frenzy. All of a sudden, I heard traders yelling, “21 bid, 22 bid, 23 bid,” meaning that the traders were trying to buy wheat at $20 per bushel. In order for a transaction to take place, another trader must be willing to sell at whatever price someone is bidding.

I was second-guessing my own ears. Wheat was ticking up, or being bid up, by the DOLLAR! Now, each futures contract represents 5,000 bushels of wheat. So a $1 move in the price of wheat equates to a $5,000 move per contract.

Before this crazy bull market started, wheat ticked by quarter cents and pennies, with the occasional two-cent tick. These past few weeks had been marked by nickel and dime ticks, which would have seemed ridiculous six months ago. But in the rest of Monday’s trading, wheat was ticking by quarters, 50 cents, and dollars at a time…absolutely remarkable.

The market peaked at $25 per bushel, or a $5.75 rise in price from Friday’s close. We closed at $24 per bushel, a 25% single-day gain, marking the single biggest daily move in any agricultural market in the history of agricultural markets. If you were long, or had bought, 10 contracts at Friday’s close, you could have bought a nice house on the money you would have made in one day of trading. This chart of the March futures contract says it all:

How does a nearly 500% gain in 10 months sound? “Parabolic” is truly an understatement. As consumers, we haven’t seen the true effects of the rise in price, but believe me…we will.

But that’s not even the whole of it. May spring wheat was already $20 bid at $20.20 ask via synthetic trading in the options pit. Let’s say wheat closed last Friday at $18.10 per bushel. The limit is 90 cents. That means that once wheat is $19 per bushel, it can’t go any higher, but options don’t have limits. This means that the futures traders can use options to make bets beyond the limits.

Now, the rest of the 2008 and some of the 2009 contracts locked limit up at 90 cents in Minneapolis. Chicago and Kansas City wheat was locked limit up across the board (all futures contracts were locked limit up)! Chicago oats were locked limit up across the board. Soybeans were up 35 cents, to 40 cents, across the board. Soy oil and meal had huge days. Corn was up 15-20 cents per bushel across the board. All of those ag commodities, minus corn, hit record highs.

Dear readers, this past Monday marked the single most historic trading day in the agricultural commodities, and you can bet your last dollar that this thing is far from over. For years and years, the whole notion of agricultural commodities has been looked over when it comes to your average investor (or commodities investor, for that matter). It just isn’t as sexy as, say, oil, gold, or uranium, but now having exposure to the agricultural markets has become a MUST in every portfolio.

Regards,
Nick Jones
March 6, 2008