Volatile commodities market squeezing elevators

WICHITA, Kan. (AP)--A volatile grain futures market that has seen record-high wheat prices at the nation's major commodity exchanges is making many grain elevators leery of forward contracting with farmers on their 2008 winter wheat crop, Kansas Agricultural Secretary Adrian Polansky said Feb. 12.

Grain elevators, as well as many farmers, have been caught having to come up with large amounts of cash to cover margin calls over the last few weeks as grain prices soared, Polansky said.

"This is a challenge for the grain industry far beyond Kansas," he said. "It is certainly a national issue and one that people are struggling with as we deal with this volatile marketplace."

Polansky--who had just returned from a meeting of the National Association of State Departments of Agriculture in Washington, D.C.--said quite a number of states have expressed the same kinds of fears about the impacts on their grain elevators.

"I have a good level of confidence our elevators are in good shape," he said. "I don't think there is any reason to be fearful, but it is a time to monitor and be aware of the challenges."

The short grain supplies that are driving the high wheat prices also have affected revenues for elevators because in times of low supplies, grain moves to market more quickly. That means elevators are losing revenue they would normally get from storing grain.

Some elevators were harder hit than others because of wheat crop losses caused by a late spring freeze and flooding last year, Polansky said.

Typically, elevators have been willing to buy farmer's wheat for the upcoming crop before harvest, said Michael Woolverton, a grain marketing economist at Kansas State University. Elevators then usually hedge the price they contract with farmers by buying a future's contract on the commodity's exchange--a common risk-management tool.

But these are not typical times.

Wheat prices have been regularly setting records at the nation's major commodity exchanges in Kansas City, Minneapolis and Chicago amid a shortage of good-quality milling wheat. Some grain elevators and speculators have been caught on the losing side of margin calls made before wheat prices skyrocketed.

"It is a scary situation out there," Woolverton said, adding that it doesn't take much wheat for a small rural elevator to have to pay a $500,000 margin call.

Many small-town banks are unwilling because of the credit crunch to lend money to elevators to cover those margin calls, he said.

"Farmers are saying country elevators are no longer doing forward contracts," Woolverton said. "So farmers are sitting here seeing high prices and cannot act upon it. They aren't able to sell wheat to the country elevators. So if they want to lock in the prices, they have to buy futures contracts."

But some farmers afraid to play the futures market on their upcoming 2008 crop because they also do not want to take the risk that wheat prices may go down at harvest.

"This really has the whole grain industry in a real quandary because they can't conduct business as usual," Woolverton said.

Many elevators have had to double their line of credit, said Tom Tunnell, executive director of the Kansas Grain and Feed Association, the industry trade group for the state's grain elevators.

"One thing we are seeing is a huge demand for cash with these high grain prices and high fertilizer prices," Tunnell said. "The relationship between our guys and the banks has grown considerably."

Tunnell was in western Kansas for a Feb. 12 meeting with elevator operators.

"They are all aware of what their exposure is," Tunnell said. "Everybody I talked to just shakes their heads about the volatility. I talk to these guys before the market opens and after it closes--they can't concentrate when the market is open."

2/25/08
1 Star WK\5-B

Date: 2/21/08

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