February 26, 2010

CBOT March wheat deliveries seen at 3,000-5,000 contracts

Large supplies and weak cash prices are expected to encourage heavy deliveries of wheat against the Chicago Board of Trade March wheat futures contract on first notice day Friday (Feb 26).

First notice day is the first day that notices of intention to deliver actual commodities against futures-market positions can be received. Traders expect to see deliveries of 3,000-5,000 contracts.

As of Wednesday (Feb 24), 6,329 wheat contracts were registered for delivery, according to a registrar's report from CME Group, parent company of CBOT. Registration means a commodity is eligible for delivery but does not have to be delivered. Deliverable stocks in CBOT-approved warehouses totalled 61.093 million bushels as of Friday (Feb 26), the exchange said.

Joe Victor, vice president of marketing for Allendale, said the spread between nearby CBOT March wheat and May wheat, the first deferred contract month, would encourage large deliveries. The spread--the difference between the contract prices--on Thursday was trading around 14 cents, which is full carry.

"Carry" is the cost of taking delivery of the grain, including storage, insurance and interest. When a market is at full carry, it can cause firms that own wheat to deliver it, which frees them of storage costs for a period of time. Some firms will then take back ownership of the wheat near the end of the delivery period.

The large registrations indicate deliveries will be heavy, Victor added.

"Am I surprised that we're so heavy on deliverable wheat?" he said. "No, I'm not surprised. The market is telling you it's supposed to be big wheat."

US wheat supplies are large because of strong production and lagging export sales. There is stiff competition for export business, particularly of lower-quality soft red winter wheat, because there is a lot of wheat to go around in the world.

SRW wheat, the variety traded at the CBOT, is used in pastries and snack foods when consumed by humans. It is also used for animal feed when prices make it attractive to livestock producers.

Wheat deliveries in the range of 3,000-5,000 contracts have been normal in recent delivery periods, so it would not be surprising to see that again, a broker said. He expects heavy deliveries, "if not on first notice day then shortly thereafter."