November 28, 2008
Ample supplies and weak cash prices are expected to encourage deliveries of 1,000 to 4,500 contracts against the Chicago Board of Trade December wheat futures contract on first notice day Friday (November 28).
First notice day is the first day on which notices of intention to deliver actual commodities against futures-market positions can be received.
As of Tuesday, 7,266 wheat contracts were registered for delivery, according to the CBOT. Registration doesn't guarantee delivery, but wheat contracts must be registered with the exchange in order to be delivered.
Deliverable stocks in CBOT-approved warehouses totalled 39.668 million bushels as of November 21, the exchange said. The CBOT trades soft red winter wheat, used to make pastries and snack foods.
Citigroup estimated deliveries would range from 3,500 to 4,500 contracts, while Allendale pegged deliveries at 3,000 to 4,000 contracts. A cash-connected CBOT floor trader estimated deliveries would total 1,000 to 4,000 contracts, and another floor trader put deliveries at 1,500 to 3,000 contracts.
Weak cash prices and the large number of registrations point to heavy deliveries, said Bryce Knorr, analyst for Farm Futures. Cash SRW wheat on Friday was priced US$1.20 below CBOT December wheat in Toledo and US$1.40 below in Chicago.
"We continue to have extremely weak basis for the soft red winter wheat traded in Chicago," Knorr said. "You have ongoing large registrations, so you have a lot of wheat in position."
The lack of convergence between cash prices and futures makes it tricky to estimate deliveries, a trader said. The markets are supposed to converge, or come together, to facilitate hedging when futures contracts go into delivery, but cash prices have remained well below futures.
Traders and analysts blame different factors for the troublesome gap. Many point to a massive increase in SRW wheat production this year due to expanded plantings, while others complain about the influence of index funds that only take long, or bullish, positions.
"It's always kind of difficult to try to figure out exactly what's going to happen," a trader said. "The economics continue to be all out of whack."
Open interest in CBOT December wheat was 21,876 contracts at the close of business Tuesday. The December/March spread closed Tuesday at 18 3/4 cents and traded near 18 1/4 to 19 1/4 cents around 1:15 p.m. EST Wednesday.
Full carry is about 11 cents, using a Midwestern average of US$4.10 a bushel for cash wheat, said Joe Victor, vice president of marketing for Allendale. CBOT December wheat was trading around US$5.55.
"Carry" is the cost of taking delivery of the grain and includes 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.
"Eleven cents is the cost of carry, and the spread's offering 18 1/4, so that is more than full carry," Victor said. "They're getting good carry out of that market."
Plus, "there's a slew of wheat this year," Victor said. "It would be relatively safe for the commercials to put this wheat out there and not expect anybody to take the physical away from them," he said.
The timing of first notice day could have an impact on deliveries, as it follows the Thanksgiving holiday, Knorr said. The CBOT is closed Thursday for Thanksgiving and has a shortened trading session Friday.
Sometimes deliveries are light after holidays, Knorr said. If that happens Friday, deliveries should come in heavier next week, he said.
At the Kansas City Board of Trade, deliveries against the December futures contract are expected to be about 200 to 400 contracts, a floor trader said. Open interest in KCBT December wheat at the close of business Tuesday was 6,278 contracts, according to the exchange.
Deliverable grade stocks in KCBT-approved warehouses totalled 55.562 million bushels as of November 21, the exchange said. The KCBT trades hard red winter wheat, used to make bread.
For Minneapolis Grain Exchange December wheat, deliveries are seen at 200 to 400 contracts over the course of the delivery period, a floor trader said. Open interest in MGE December wheat at the close of business Tuesday was 2,112 contracts, according to the exchange.
Deliverable grade stocks in MGE-approved warehouses were 14.235 million bushels as of November 21, according to the exchange. The MGE trades hard red spring wheat, used to make bread.