Houston wheat futures lead the year of the supply problem in 2008.
The Russian invasion of Ukraine and ongoing conflict in the key Black Sea export region has sharply ramped up concerns about global supply, sending wheat futures prices soaring to 14-year highs and compelling the hard red winter basis Kansas City to post “no bid” for the first time in recent memory.
Kansas City wheat futures had been trading in a comparatively narrow range before Russia invaded Ukraine on Feb. 24 in the largest conventional attack on a sovereign state since World War II ended 77 years earlier. The Kansas City May future traded in a range from $8.04¾ and $8.46¾ a bu between Jan. 2 and mid-February when it became apparent Russian president Vladimir Putin intended to launch a military action in Ukraine. KC May shot up 51¢ a bu in the week ended Feb. 25, a day after Russian troops invaded and kicked off a full-scale war in Ukraine. At the same time, Chicago soft wheat futures soared to 14-year highs, topping futures prices seen in 2008, a marketing year that featured production disasters and extremely tight supplies.
Wheat prices were volatile the next week as the violence continued, with traders speculating about how long the war may endure and how long Black Sea exports might be hampered. Futures for wheat showed increased volatility. During the first four trading days of the week, the KC May future went limit up, which meant that the only way to purchase the contract was in a bull spread. In the week ending March 4, KC May increased by 323½¢ per bu.
Spot market arrivals on that particular day received very few offers that were so much below the going rate as to be deemed absurd. Sellers withdrew spot supplies with the intention of using them against contracts when practical and reselling the remaining inventory at a later time. Back then, offers were still figuratively on the table. However, the basis committee decided not to publish any bids or proposals during their daily teleconference.
An experienced wheat trader remarked, “We’ve never been through this before—not in 1973, not after September 11, 2001, and not in 2008 when we had the production disasters.”The negative effects of sharp market movements, which effectively turned into a massive stress test for the US agriculture hedging system, were already on the minds of many market watchers.
In his weekly update on March 4, Kansas Wheat CEO Justin Gilpin stated, “Twelve-dollar wheat futures do more harm than good for the wheat industry, especially farmers.” Similar to what we have seen this week, we saw that in 2008 when futures markets disconnected from actual cash pricing.
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The following Monday, March 7, saw no bids or offers filed, and the basis remained intact. The majority of offers were by then withdrawn as well since they were deemed excessive. Elevators informed farmers that while they would not be accepting bids for fresh crops, they would still be purchasing wheat in some places. Some others switched to the September or perhaps the December future as their basis. No wheat would be accepted until further notice, according to a significant mill located in the central Mississippi River basin.
Hard red winter export bids to the Texas Gulf were withdrawn starting on March 1. Rumors circulated that exporters, along with the rest of the market, were attempting to process the potential that war may permanently cut off Black Sea wheat exports, which account for around 30% of the global market. For several trading days, soft red winter quotes at the Gulf saw just offers and no bids. However, on March 8, they posted a 45¢ increase, trading between 70¢ and 90¢ over Chicago May. The same day, hard red winter wheat bids at the Gulf were reopened with April-May prices at 110¢ above KC July and March prices on 12% protein at 110¢ over KC March.As the market was upended, the to-arrive market was largely silent.
According to traders, that was primarily viewed as an emotional response, and few producers really pulled out supply. “A few days to see if calmer heads prevail or if (Russian president Vladimir) Putin is really going to call a ceasefire,” one analyst observed, was what the market needed.
The No. 2 hard red winter basis Kansas City on March 8 contained quotes for the first time since March 3, taking the shape of a flat 90¢ to 100¢ a bu over KC May from 11.4% protein to 14% protein, for over $1 a bu cheaper than a week earlier, despite the absence of any reports of a truce in Eastern Europe. However, one dealer clarified that rather than reflecting supply loaded domestically, the stated pricing represented loadouts in Kansas City.