Call to Decision

Wheat hits $20 in North Dakota and Minnesota

Stephen J. Lee

Grand Forks Herald - 02/10/2008

GRAND FORKS, N.D. - The wheat market moved into historic ground Friday in North Dakota and Minnesota, as short-term demand from mills pushed prices up to $20 a bushel at one elevator in an after-hours scramble.

Most elevators in northeast North Dakota and northwest Minnesota posted prices of $16.70 to $17.30 Friday, according to an Agweek survey; that's four times as high as a year ago and the highest figures ever seen.

Dave Lokken, manager of AGP Elevator in Valley City, N.D., posted a bid of $18.25 Friday. But the market was much hotter than that.

"After the close, we bought 50,000 bushels of wheat at 20 bucks," Lokken said. "That's a million dollars worth of wheat."

The AGP buyer on the "floor," in the Minneapolis Grain Exchange told him late Friday, "Just see what it would take to buy X amount of bushels of wheat," Lokken said. "So, we went to a few guys and asked, what would you sell wheat at? They said 20 bucks. So we said, if we paid you 20 bucks, would you sell? Some of them did. Amazingly, some of them said they wanted 30."

One sign of how immediate and red-hot the demand is: The basis, or the difference between what a local elevator in North Dakota will pay for wheat, and the cash price in Minneapolis or the nearby futures price in Minneapolis, is now at "575 over," Lokken said. That is, $5.75 a bushel higher at the elevator than at the terminal market, instead of the more typical 60- to 80-cent discount of local prices to Minneapolis prices, indicating transportation and time costs.

"They are so short of wheat right now," he said. "The millers are on the floor in Minneapolis, and they are seeing no cars of wheat coming in."

'Fun money'

This is the highest "over" basis Lokken has ever seen. "The most I've ever seen was back in the 1990s, when it went to 300 over."

The few bushels of wheat left out on farms are "unencumbered," Lokken said. "The farmer has paid all his bills, and he's got this bin of wheat standing there, call it fun money, house money, whatever they are going to use it for. They don't need to sell it, and they want as much as they can get for it."

One of his longtime farm customers sold him 3,500 bushels of wheat Friday, after the close, enough to fill one rail car. "That's $70,000," he said.

It took the farmer maybe only 80 acres to grow the wheat, at typical yields in Barnes County. That would mean the farmer grossed $875 an acre on that field, an amazing figure, given that wheat typically grosses $200 or less per acre.

Farmers already have been spending extra money earned by this year's high prices in all crops, Lokken said. Soybean prices are at record levels of about $12 a bushel at area elevators and barley is higher than wheat usually is, at $6 a bushel at many elevators.

"There are whole new lines of machinery on some of these farms," Lokken said. "New tractors, new combines, new planting equipment."

But much of the wheat this year was sold between $5.50 and $7, Lokken and other elevator managers say.

"The guys who don't have any wheat left, it just demoralizes them to see that $20 price. To think, if they had been sitting on 10,000, 20,000, 30,000 bushels of wheat, how much money that is."

Historic highest price of $20 a bushel for spring wheat is a record, by far, in nominal terms.

But if the historic highs reached in 1973, after the Soviet Union's first big forays into the world market, are adjusted for inflation, the $5 per-bushel price would be roughly $22 a bushel in today's dollars.

For the past six months or more, the world wheat market has been steadily pushing prices up, as supplies are at historic lows, and demand continues to grow. Several large producing nations had bad crops two years in a row, and new wealth in places such as China and India, combined with the weakness of the U.S. dollar, which makes American wheat a better buy worldwide have contributed to the unslaked demand.

The record prices in many commodities have attracted big-money investors, including hedge funds, especially in light of a stock market that is more down than up, and a real estate market in severe correction from record highs the past three years.

Lokken said one large hedge fund has bought up big grain elevator properties, including a former Cargill terminal in Duluth. "We are trying to figure out why did this fund wants to buy up elevator properties?"

Now, the big question is what this shockingly high wheat market will mean in the bigger picture, Lokken said.

"Well, there are going to be headlines, I'm telling you," Lokken said. "I don't know what's going to happen at the grocery store."

The food price inflation rate more than doubled last year, to a 17-year-high of 4.8 percent and some experts think it will almost double again this year, the St. Paul Pioneer Press reported this week.

"We're projecting that food inflation in the U.S. is going to be 8 percent," Mark Palmquist, executive vice president for the ag businesses of CHS, a farmer-owned cooperative based in Inver Grove Heights, Minn., told the Pioneer Press. "Demand is so interesting this time around. It seems to be very insensitive to the price rises."

All the spring wheat futures contracts closed up the limit of 30 cents a bushel on Friday, to $15.53 for March, the highest price ever seen at the century-old Exchange. The price Friday for the September contract, or next season's crop, was $11.45, also up 30 cents on the day.

Lokken said he was told by buyers in Minneapolis on Friday that the Minneapolis Grain Exchange, the only futures market for hard red spring wheat in the world, will raise its daily trading limits from 30 cents a bushel to 60 cents a bushel Monday.

"They had been talking about raising it to 40 cents just a few days ago," Lokken said. "Now, they are going up to 60 cents."

Farmers are likely to put more acres into spring wheat this spring, rather than corn, which is priced at about $4.60 a bushel, Lokken said. "But they are really scared," he said. "Last year, they did all the contracting early." That meant many missed out on higher prices.

"Now, we are at twice the level, about $10.90 for new crop," Lokken said. "But inputs are going through the ceiling. Fertilizer prices have doubled since harvest. You could buy nitrogen-phosphate mix for $350 or $400 a ton this past fall, now it's 700-some bucks. That's the scary thing, what's going to happen here."

Land prices are reaching record levels, too.

A parcel sold for $1,700 an acre Friday near Valley City, Lokken said. The best black soil in the Red River Valley has seen sales of $4,000 to as high as $5,700 an acre in recent weeks.

Just buying seed will be costly.

It looks like farmers will have to pay $23 to $25 a bushel to get wheat to plant their crop this spring, Lokken said.

The wheat he bought Friday will be delivered in late February or early March because he's got so much corn and soybeans to move now he can't take it yet, Lokken said.

He doesn't think the market has hit the top yet.

"We will see what happens," Lokken said. "I bet you that on Monday, we won't be the only elevator out there bidding $18, $20."

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