Finance

Wheat prices soar on Ukraine fears, but U.S. growers can’t cash in

  • U.S. wheat farmer gross sales seize up throughout Ukraine battle as value spike spooks consumers
  • Bounce in futures costs leaves some grain handlers unable to hedge towards losses
  • Rising fertilizer costs could damage wheat output if farmers use much less

CHICAGO, March 21 (Reuters) – After Russia’s invasion of Ukraine despatched world wheat futures hovering, U.S. farmer Vance Ehmke was wanting to promote his grain.

Native costs shot up roughly 30% to almost $12 a bushel, concerning the highest Ehmke might recall in 45 years of farming close to the western Kansas city of Healy.

As an alternative of reaping a windfall, Ehmke discovered a commodities market turned the wrong way up. He and his spouse Louise instructed Reuters they could not promote a nickel of their upcoming summer season wheat harvest for future supply. Futures costs for corn and wheat had rocketed so abruptly that many alongside the advanced chain of grain dealing with – native farm cooperatives, grain elevators, flour millers and exporters – stopped shopping for for concern they could not resell at a revenue.

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Others could not afford an industry-wide risk-management technique often known as hedging that retains world commodities markets transferring. Missiles falling in Ukraine had rocked that system, sending middlemen scrambling to shore up positions within the futures market that had been costing them tens of millions of {dollars} per day.

“Greater than something, the market is simply in a panic,” Andrew Jackson, a Kentucky grain merchandiser, instructed Reuters.

Many of those gamers proceed to carry again on purchases to see how the Jap European battle shakes out: Russia is the world’s high wheat exporter and Ukraine is a serious world provider of each wheat and corn.

Whereas some North American millers have mentioned they’ve sufficient grain available from previous harvests to proceed producing for a number of months, extended or repeated disruptions to grain buying and selling might finally contribute to already-inflated meals costs. learn extra

In the meantime, the lack to promote a few of their winter wheat – whose harvest begins in June – is placing the squeeze on U.S. farmers. Growers just like the Ehmkes want money now to pay for seed and fertilizer forward of spring planting, in addition to for land hire and tax payments coming due.

Fertilizer payments alone are anticipated to leap 12% this 12 months, after rising 17% final 12 months, in accordance with American Farm Bureau Federation and U.S. Division of Agriculture (USDA) knowledge. If American farmers resolve to chop again, that might curb yields for the autumn harvest at a time when the world could quickly want extra grain.

Creating international locations are significantly susceptible to produce shortages and excessive grain costs, mentioned Don Roose, president of agricultural dealer U.S. Commodities in Iowa.

“Rising markets like Africa might have much less bread to eat,” Roose mentioned.

SHORTS VS LONGS

The weird state of affairs that throttled the Ehmkes stems from the system of hedging that U.S. grain growers and processors have lengthy used to insure themselves towards value swings.

For each bushel of grain they commit to purchase, purchasers promote an equal quantity of bushels within the futures market as a hedge to guard themselves towards losses.

These business gamers are the normal “shorts,” or sellers, within the futures market.

On the opposite aspect are futures consumers, or “longs.” These gamers usually are speculators comparable to hedge funds and funding banks not concerned within the bodily grain-handling enterprise.

Following Russia’s invasion of Ukraine on Feb. 24, which Moscow dubbed a “particular operation,” speculators aggressively purchased wheat and corn futures, particularly the close by Might contracts. The value of Might wheat on the Chicago Board of Commerce (CBOT) jumped 54% in simply 9 buying and selling days, from $8.84-3/4 per bushel on Feb. 23 to $13.63-1/2 on March 8.

Russia and Ukraine collectively provide about 26% of the world’s wheat exports, in accordance with the most recent USDA knowledge. Shipments by means of the Black Sea have already been disrupted.

When futures shoot greater, business grain sellers accrue paper losses on their quick positions. That is not essentially a catastrophe, because the bodily grain they’ve bought is rising in worth too.

However till they will promote the grain and shut their futures positions, they will get squeezed financially. In latest weeks, many have confronted so-called margin calls from their futures brokers, forcing them to inject monumental sums into their commodity buying and selling accounts to cowl their losses.

“It is a huge headache that might flip into an issue if they don’t have their monetary home so as,” mentioned Chad Hart, an agricultural economist at Iowa State College.

CALLING THE BANKER

The wheat rally clobbered consumers of different crops, too.

Landus Cooperative, the biggest agriculture cooperative in Iowa, briefly suspended its money bids to purchase corn and soybeans on March 9. Chief Govt Matt Carstens mentioned Landus additionally tripled its credit score line with CoBank, a high U.S. agricultural lender, to cowl tons of of tens of millions of {dollars} in margin calls throughout the rally and guarantee its enterprise remained wholesome.

CoBank has delivered greater than $4.5 billion in loans and credit score to prospects to cope with margin calls and grain purchases in January and February alone, Eric Itambo, CoBank’s chief banking officer, instructed Reuters.

Although spot CBOT wheat futures have cooled in latest days, slipping again under $11 a bushel, the futures market has not been this unstable since 2008, when meals shortages worldwide sparked riots in some international locations.

Again in Kansas, the Ehmkes are eyeing a worsening drought that’s hurting the winter wheat crop presently within the floor.

Nonetheless, they suppose they could get one other probability to promote wheat at $12 or extra with the Ukraine battle displaying no signal of abating.

“Only a complete bunch of issues are telling us the value of wheat could possibly be considerably greater than what it’s proper now,” Vance Ehmke mentioned.

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Reporting by Julie Ingwersen in Chicago, and P.J. Huffstutter in Chicago and Regular, Illinois; modifying by Caroline Stauffer and Marla Dickerson

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