February 12, 2008

 

US Wheat Review on Monday: Mostly down after limits, margins raised

 

 

Most U.S. wheat futures closed sharply lower Monday after the exchanges increased margins and daily trading limits and index funds began to roll positions out of nearby contracts, traders and analysts said.

 

Minneapolis Grain Exchange March and May wheat were the exceptions, with the March contract soaring to the new, daily exchange-imposed limit of 60 cents. MGE May wheat ended just a hair below limit up.

 

Chicago Board of Trade March wheat fell 45 cents to US$10.48 per bushel. Kansas City Board of Trade March wheat dropped 56 1/2 cents to US$10.83 3/4, and MGE March wheat surged 60 cents to US$16.13.

 

Activity was volatile after all three exchanges said late Friday they would raise their daily trading limits to 60 cents from 30 cents, effective Sunday. The increases followed a series of limit-up closes last week.

 

CBOT March and May wheat climbed 60 cents at the opening of trading, with the nearby March contract hitting a high of US$11.53 and the May contract soaring to US$11.69 3/4. However, prices tumbled by the close. The CBOT March contract traded to a session low of US$10.40, giving the contract a range of US$1.13.

 

The exchanges also said they were raising minimum margins for wheat futures, which forced some traders out the markets, analysts said. Initial margins for CBOT wheat futures will jump to US$4,050 from US$3,038 at the close of business Monday and to US$6,075 at the close of business Tuesday, the CME Group said.

 

"We're at a point where raising the margin requirements typically impacts the amount of spec and commercial involvement," said Dave Marshall, an independent marketing advisor and commodities broker. "That's where we're at right now."

 

With front-month CBOT wheat trading off limit, index funds were able to begin rolling positions from the March contract into the May. The roll was supposed to have begun last Thursday but was delayed until Monday by limit-up closes, traders said. CBOT May wheat ended down 24 3/4 cents at US$10.85.

 

The roll is expected to last a total of five days, traders said. Moving forward, CBOT wheat will likely come under further pressure as the markets pull back from recent MGE-led rallies to all-time highs, they said.

 

"Wheat tends to be the most trendy of the commodities," Marshall said. "You're straight up and you're straight down. I would not be surprised to see some follow through, but Minneapolis has to play along."

 

 

Kansas City Board of Trade

 

KCBT March and May wheat briefly climbed 60 cents higher. Both contracts topped the landmark price of US$12, with March wheat hitting US$12.00 1/4 and May wheat hitting US$12.10 1/4.

 

Profit-taking and the increased margins then pulled the market lower, traders said. The start of the index fund roll also pressured the nearby contract at the expense of deferred months, they said.

 

KCBT May wheat closed down 12 1/4 cents at US$11.38. KCBT July wheat ended down 12 cents at US$10.78 1/2.

 

The KCBT said it is increasing minimum margins for March and May hard red winter wheat futures contracts, with initial margins set to rise to US$3,750 from US$1,875 at the close of business Monday. The March and May 2008 contracts have a higher margin level than deferred months, starting with July 2008 contract, the exchange said.

 

July 2008 and forward contracts don't have increased margins compared to an adjustment made Oct. 4, the KCBT said. That leaves US$1,875 as the initial margin for July 2008 and forward contracts.

 

Looking at the weather, forecast models indicate a significant storm system forming in the southwestern U.S., and moving eastward into Texas, DTN Meteorlogix said. However, the prospect for soil moisture in the Texas Panhandle wheat region remains very low, the private weather firm said. The region is in need of moisture after a dry winter, the firm said.

 

 

Minneapolis Grain Exchange

 

MGE March wheat was synthetically trading about US$17.30 at the close, a floor trader said. The May contract traded on and off limit up throughout the day session and closed 59 3/4 cents higher.

 

If at least two contracts had finished 60 cents higher, the daily trading limit at the MGE would have expanded to 90 cents Tuesday. There was late selling of May wheat from Newedge USA, one MGE floor trader said.

 

In other news, Canadian spring wheat acres in 2008-2009 should hold steady on the year despite earlier expectations for a decline in seedings, a Canadian Wheat Board analyst said. Spring wheat prices have overtaken oilseed values over the past month, making the crop a little more favorable to western Canadian farmers looking at strong prices for most commodities, he said.

 

Giving a market outlook at the Saskatchewan Crop Production Week in early January, Bruce Burnett of the CWB's weather and crop surveillance department said he thought Canadian spring wheat acres would be down by 2% to 5% from 2007-2008 levels due to competition from higher priced oilseeds. However, U.S. spring wheat futures have increased dramatically over the past month while the rise in canola hasn't been as extreme, tipping the balance back in favor of wheat.