Vance Ehmke, a U.S. farmer, was eager to sell his wheat after Russia invaded Ukraine. The local prices rose by 30% to almost $12 per bushel, which is the highest Ehmke could remember in his 45-years of farming near Healy, Kansas.
Ehmke discovered a market that was completely upside-down and instead of making a profit, he found a way to make a fortune in commodities. Louise, his wife, told Reuters that they couldn’t sell a penny of their upcoming summer harvest to future deliveries. The corn and wheat futures had soared so quickly that many in the complex chain of grain handling, including local farm cooperatives and flour millers, stopped buying because they could not resell at a profit.
Others couldn’t afford a comprehensive industry-wide risk management strategy called hedging, which keeps global commodities markets moving. The system was shaken by the fall of missiles in Ukraine, which sent middlemen scrambling for positions in the futures markets that would cost them millions of dollars each day.
A Kentucky grain merchant, Andrew Jackson said to Reuters that “more than anything, the market is just in a panic.”
These players are still holding back purchases as they wait to see how the Eastern European conflict plays out. Russia is the top exporter of wheat in the world, while Ukraine is a major global source of both wheat and maize.
Although some North American millers claim they have enough grain leftover from previous harvests to produce for several months, repeated or prolonged disruptions in grain trading could lead to higher food prices.
U.S. farmers are being squeezed by the inability of selling some of their winter wheat, whose harvest begins in June. Growers such as the Ehmkes require cash immediately to pay for fertilizer and seed before spring planting. Land rent and tax bills are also due.
According to data from the American Farm Bureau Federation (USDA), fertilizer bills are expected to rise 12% after rising 17% last year. American farmers could reduce their yields in the fall harvest, at a time when the world might soon require more grain.
Don Roose, president of U.S. Commodities in Iowa, stated that developing countries are especially vulnerable to shortages and high prices for grain.
Roose stated that emerging markets like Africa might have less bread to eat.
LONGS VS SHORTS
The Ehmkes’ unusual situation stemmed from the system of hedging U.S. grain processors and growers use to protect themselves against price swings.
As a hedge against losses, buyers sell the same amount in the futures markets for every bushel they promise to buy of grain.
These “shorts” or sellers are the traditional commercial players in the futures markets.
The other side is the futures buyers or “longs”. These are typically speculators like hedge funds or investment banks that are not involved in the actual grain-handling industry.
Moscow’s February 24 invasion of Ukraine, which Moscow called a “special operation”, saw speculators buy wheat and corn futures aggressively, particularly the May contracts. In just nine trading days the price of May wheat on the Chicago Board of Trade (CBOT), rose 54% from $8.84-3/4 per Bushel on February 23 to $13.63-1/4 on March 8.
According to USDA data, Russia and Ukraine supply approximately 26% of the world’s wheat exports. Already, shipping through the Black Sea has been disrupted.
Commercial grain sellers suffer paper losses when futures rise. This is not always a problem, since the physical grain they purchased is also increasing in value.
They can be financially squeezed if they are unable to sell their grain or close futures positions. Many have been subject to so-called margin calls by their futures brokers in recent weeks. This forced them to inject huge sums into commodity trading accounts to compensate for their losses.
Chad Hart, Iowa State University’s agricultural economist, said that “it’s a huge headache that could become a problem if their financial house is not in order.”
CALL THE BANKER
Buyers of other crops were also affected by the wheat rally.
The largest Iowa agriculture cooperative, Landus Cooperative suspended temporarily its cash bids for soybeans and corn on March 9. Matt Carstens, Chief Executive, stated that Landus Cooperative, the largest Iowa agriculture cooperative, temporarily suspended its cash bids to buy corn and soybeans on March 9.
Eric Itambo, chief banking officer at CoBank, stated that CoBank delivered over $4.5 billion in loans to customers to cover margin calls and grain purchases.
Although spot CBOT Wheat futures have dropped below $11 per bushel in recent days, they remain volatile. This is not the case since 2008 when there were food shortages all over the world, which sparked riots across some countries.
The Ehmke’s in Kansas are worried about a worsening drought, which is threatening the winter wheat crop.
They believe they may still be able to sell wheat at $12-plus with the Ukraine conflict continuing apace.
Vance Ehmke stated that there are many things that indicate that the wheat price could be significantly higher than it is now.
Reporting by Julie Ingwersen, Chicago, and P.J. Huffstutter in Chicago, Normal, Illinois; editing done by Caroline Stauffer & Marla Dickerson