Viking collapse may see grain price swing more
Viking collapse may see grain price swing more
By Robert Harris
UNCERTAINTY over the nearby futures market caused by Viking Cereals going into receivership could create a volatile end to the marketing season.
Consumers seeking grain to replace lost Viking contracts as well as recent changes in EU import tariffs have also affected the market.
Futures contracts, used to hedge long or short positions, could be in short supply during May and July, forcing more traders into back-to-back deals.
Merchants use futures to hedge purchases of ex-farm grain when there are no consumers in the market, or if they are selling grain when there are no farmers willing to part with it.
If that smoothing process is hampered, some in the trade predict more price peaks and troughs in the weeks ahead.
Viking Cereals was suspended from the list of registered storekeepers of futures grain soon after receivers were called in nearly three weeks ago. It seems it also had wheat warrants for grain stored at other storekeepers premises, according to a briefing notice which the London International Financial Futures and Options Exchange recently sent to the trade.
It appears Viking owed rent for storage of futures grain on many of these warrants. Traders who bought futures and were tendered such a store could have been caught out. Although they did not know rent was due, they are now unable to re-tender them unless they forgo tonnage on each 100t lot equivalent to Viking Cereals outstanding rent.
This is because LIFFE has stated that it will only accept "clean" warrants, which guarantee there is no rent outstanding, for May and July wheat and May barley contracts.
Traders needing futures to hedge grain purchases have already triggered a buying bout, which saw futures prices jump £6/t from last weeks contract lows.
"This has caused a potential problem in the futures market as to what can and cannot be tendered on May and July futures," says Dalgetys Trevor Harriman. "But it is probably more a technical problem than a fundamental one."
Banks Cargills Richard Whitlock believes the move could affect physical trade too. "It blows a hole in the security and liquidity of the futures market. When you buy a warrant of entitlement, it should be absolute. If you cannot be guaranteed that, it becomes a very imperfect hedge. It is not only short-term hiccups that concern me, but the long-term security that the market provides could be jeopardised if the LIFFE proposals are not significantly tightened."
Ex-farm spot grain prices have risen just over £3/t in the past week to average almost £68/t. Consumers who had bought grain from Viking Cereals have apparently come back into the market to cover the shortfall, and Brussels raised import tariffs recently, pushing the soft wheat duty up by 50% to k15.55/t (£9.56/t).
Grain market managers insisted this was a routine move to coincide with the reopening of the Great Lakes in the US after the winter freeze, but it is expected to curb further flows of cheap Black Sea grain into the Mediterranean. At least 1m tonnes of new-crop business has already been done for the Sept-Mar period at a UK ex-farm equivalent of £53-55/t.
"But it is likely that all this will mean is that the central and eastern European countries will target Third country markets more aggressively," says Dalgety. The UK will have to compete in these markets this year if it is to sell all the predicted 4-5m tonne export surplus. "There have also been suggestions that CEEC countries may be able to reduce their prices still further to combat the rise in tariffs," the company adds.