HardAssetsInvestor

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, it’s Mike Norman. Welcome back to HardAssetsInvestor.com. I’m here for the second part of my interview with Shonda Warner from Chess Ag Full Harvest Partners.

Shonda Warner, managing director, Chess Ag Full Harvest Partners (Warner): A mouthful.

Norman: I think I did better the first time around. But in any case, let’s talk a little bit. You’re an expert in the grain markets. It’s what you do. It’s what you’ve done in the past. Let’s talk a little bit about some price trends, starting off with the wheat situation, which recently we’ve seen a very big price increase in wheat, attributable, at least they say, to this Russian drought and the ban on exports from Russia. What’s that all about?

Warner: Well, it’s a weather situation. Maybe we’ll just step back and sort of briefly talk about a couple of little things. In the sense of, what creates price action in soft commodities? Typically, it’s supply and demand, right? China’s buying more, China’s buying less. Someone’s buying more, someone’s buying less. It’s how much grain we grow, or don’t grow. And sometimes we don’t grow grain because of weather. Often it’s small things, but occasionally, like what’s happened recently, it’s a huge, terrible disaster of fairly epic proportion.

Norman: How big is Russia as a wheat producer?

Warner: I don’t know the exact percentages, but it’s an enormous wheat producer. It’s a huge provider of wheat to the rest of the world. The U.S., which used to be the largest wheat producer in the world, has dropped down considerably, as corn and soybeans have taken over. So Russia’s a very meaningful player on the global stage. And the loss of production is significant.

Norman: So obviously, we’ve seen the reaction in the markets.

Warner: Yes.

Norman: And prices have pulled back at least a little bit. How much of it, do you think, is also speculation?

Warner: I think there’s a lot of speculation in the marketplace. The way that you can see that is if you look at what grain is trading for, cash grain is trading for, at physical locations around the United States, that cash grain price, and the futures price, the difference between those two prices is called “the basis.”

And typically the basis for the last couple of years on wheat has been quite high anyway. Maybe 50, 75, a 100 under futures price.

Norman: When you’re talking future – a year out, or how far out? Next nearby from the spot?

Warner: Yes, nearby from spot. So even futures price, the next futures contract and the current cash price might be even a dollar under.

Norman: A dollar.

Warner: But what’s happened in the last three or four weeks is that that cash basis has moved out to almost $2 under in many places.

Norman: It’s doubled.

Warner: It’s doubled. And what that’s telling you is, gee, those buyers who say they need that wheat right now, that there’s this terrible …

Norman: Where are they?

Warner: … disaster; where are they? Because they’re not wanting my wheat. It's sitting in the bins.

Norman: Because if there was a real shortage, you’d see a backwardation, the market would invert.

Warner: Yes you would. And that basis would be tight. You’d see the same price as futures. If there was a real shortage, the basis might be over futures.