Commodities Watch: Glencore Gets Taste of Public Scrutiny; Weather Pushing Corn, Wheat Prices

Today’s commodities news leads off with a revelation on how the world’s largest commodity trader makes some of its profits and follows with a weather report that could push grain prices further skyward.

Swiss-based commodities trader Glencore International PLC has filed for an IPO expected to occur late in May. Glencore’s valuation is set at about $60 billion, and the IPO could raise up to $12 billion. As part of the company’s preparations for its IPO, it revealed a proprietary trade it made last August, just before Russia slapped a ban on wheat exports.

The revelation came in a document reviewed by the Financial Times, and which included the following statement: “[Glencore’s] agricultural team received very timely reports from Russia farm assets that growing conditions were deteriorating aggressively in the spring and summer of 2010, as the Russian drought set in. This put it in a position to make proprietary trades going long wheat and corn.”

On August 3rd, two days before Russia announced its ban on exports, Glencore’s head of the company’s Russian grain unit publicly declared that Russia should stop exporting grain due to fires and drought that were decimating the crop. On August 5th, Russia announced such a ban, sending the price of wheat soaring by 15% in just two days.

Glencore claims that proprietary trades make up just a small fraction of the company’s overall profits. In its agricultural division alone, Glencore reported earnings of $659 million in 2010, about 17% of total 2010 profits of $3.8 billion.

The questions that potential investors should be asking are two. First is how much Glencore actually profits from its proprietary trades. Next is how will being a publicly traded company affect its ability to keep its trading secrets under wraps. The transparency of the public markets, cloudy though it is, stands worlds apart from the private world of commodity trading.

If there’s one place where cloudiness and sunshine combine to make news, it’s agriculture. And the latest news on weather in the US bread basket is not particularly encouraging. Dry conditions are not likely to improve enough to make a difference in this year’s wheat harvest, and wet conditions in the northern and central plains could delay spring planting even more.

Soft red winter wheat (traded on the Chicago Board of Trade), which is grown in Illinois and Missouri, are too wet as a result of the cold, wet weather so far this spring. The wet weather could spawn disease in the soft variety which is used for livestock feed, among other things.

Hard red winter wheat (traded in Kansas City) is suffering from the drought conditions in the southwest, and fears are growing that the crop will be not get any rain in time to help this year’s harvest. The forecast for the first ten days or so of May indicate that rain is coming.

The news from Russia is no more hopeful for wheat. The country’s farmers are expected plant just 2.5 million acres of wheat this spring, down 40% from last year.

Corn planting, too, is getting hammered by cool, wet weather. Last year at this time, the US corn crop was 50% in the ground, more than double the average of 22% at the end of April. This year just 10% of corn is already planted and getting to 50% by the end of the first week in May is problematic given the outlook for more cool, wet weather. Generally speaking, corn planted after May 10th produces a lower yield than corn planted earlier.

Chicago wheat is trading down about -1.75% today, at around $8.46/bushel. Kansas City wheat is down about half as much, at around $9.63/bushel. Corn futures are up about 0.5%, to around $7.73/bushel.

Paul Ausick