On Wednesday, September 26^th, 2001, the May 2002 Chicago Wheat Futures contract closed at $2.88.  This was down ¾ of a cent for the day, still ending up 1-cent above Mrs. B's hypothetical purchase price.  Remember this number, "down ¾ of a cent".

On Wednesday, September 26^th, 2001, the December 2001 Chicago Wheat Futures contract closed at $2.75 ½.  This was up 4 and ¾ of a cent for the day.  The difference between the December 2001 contract advancing 4 ¾ cents and the May 2002 contract declining ¾ of a cent is 5 and ½ cents.  The nearby futures contract (calling for delivery in December of 2001) and the distant futures contract (calling for delivery in May of 2002) thus changed their price relationship by 5 and ½ cents.  December 2001 advanced 4 ¾ cents and May 2002 declined ¾ of a cent.  What happened today to these two futures contracts could be viewed as a "squeeze on the nearby". 

Why, on the same day, would a nearby contract rise 4-cents while, at the same time, a distant contract decline 1-cent?  Generally, the answer could be explained as follows:  The people who bought  cash wheat and wheat futures contracts on September 26th, 2001,  want wheat for immediate needs.  These buyers are willing to bid up the nearby price of cash wheat and the December futures contract, but they are not willing to bid up the distant price of the May 2002 wheat contract.  Why would someone want wheat now and not be worried about the price of wheat not delivered until May of 2002?  The first thought that comes to mind is that wheat is needed in the current cash and futures markets in order to meet a strong nearby demand.  Where could this demand come from?  It is possibly a demand stimulated by the need for wheat supplies to quickly ship to foreign countries. If millions of refugees are starting to assemble on the borders of Pakistan, there may be a plan to feed some of those refugees with wheat available in the current cash markets of the United States. This could explain why you might see the December 2001 wheat futures contract advance 4-cents while the May 2002 wheat futures contract might decline 1-cent.  "A horse, a horse, my Kingdom for a horse" expresses an urgent and immediate need.  A King might need a horse in the middle of a battle; he might not need one seven months from now.  This is known as "a squeeze play on a King".  It is an immediate need for which a King will pay a premium to satisfy.

Did someone buy wheat in the cash markets today in order to have wheat immediately available to ship to foreign countries between now and December?  And if such is the case, what does this mean for wheat prices over the long term (six months to a year)?

The general rule is that when there is long-term major bull market in a commodity, one of the early signs of such a bull market is often the presence of a squeeze play in the nearby futures contract.  The commodity is needed nearby to meet short-term demand and so prices move up short-term.  Then the need may continue.  If it does, prices may continue to move up. What Mrs. B witnessed today appears to be the nearby price "squeeze" of the December 2001 wheat futures contract.  If this nearby demand for wheat continues, then all futures contracts should eventually see price strength.  For now, Mrs. B will simply sit back and watch.   She will watch to see if today's "squeeze play" in the December 2001 wheat futures contracts was a one-day event or the start of a major bull market in all contracts.  Mrs. B knows that her stop/loss order was not hit today.  It is eleven-cents below current prices.  Mrs. B also knows that tomorrow should be an interesting day for spectators like herself.  If today's strong wheat market for the December 2001 contract continues tomorrow, how will this affect the price of the May 2002 contract tomorrow?  By this time on September 27^th, 2001, Mrs. B should know the answer to that question.

Bruce Gould