Moscow Urged to Halt Wheat Exports

Posted Aug 4th 2010 12:00PM by Connie Madon
Filed under: International Markets, Rumors, Market Matters, Commodities

Russian flag Trading in the wheat market has become frantic. Russia is suffering the worst drought in 50 years, causing severe damage to their wheat crop.

Traders at Glencore, the world's largest commodities trader, have asked Russia to halt exports. If Moscow imposes an export ban, Glencore could declare a "force majeure," a clause that allows them to cancel deals due of reasons beyond their control.

Here's the rub. You can buy wheat directly from a farmer in Russia. Or you can buy wheat on a commodity exchange and take delivery. The Futures Commission Merchant (FCM) must guarantee delivery. When the market gets frenzied on the upside and trading gets hectic, the FCM may have difficulty matching up longs and shorts at delivery. This has caused investors to lose not only their investment, but often they owe millions of extra dollars to the FCM in margin if they are on the wrong side of a trade. Commodities is a zero-sum game. The shorts must deliver their wheat to the longs when a contract expires. There are zero contracts left.

Food processors need the product to stay in business. They often buy forward contracts to guarantee delivery in next several months. They would be buying December and March 2011 contracts.

Russia maintains that it has ample grain to meet its commitments. The government of Russia sees no reason to halt exports.

The real test will come at the end of this month when the Siberian crop is harvested. It amounts to one-fifth of the Russian wheat crop.

Tags: Glencore, inthenews, Russian drought