July 19, 2010

US wheat futures poised for more gains

The weather in Europe and the Midwestern US will once again take centre stage this week-and all eyes will be on wheat, which rallied 12% last week amid concerns over the dry weather in the Black Sea region.

Soft red winter wheat futures Wc1 at the CBOT have surged US$1.62 per bushel, or a whopping 38%, from a June low of US$4.25-1/2, and analysts wonder if it can go higher.

Analysts said a continued bullish run in wheat will depend on how much of the wheat crop in Europe is lost. Russia, a leading wheat exporter that has captured some markets that traditionally bought from the US, is experiencing a severe drought that is decimating the crop.

Agricultural analysts SovEcon late last week cut its forecast for the 2010 Russian grain crop to below 75 million tonnes, from 77 million to 81 million tonnes. It pegged the wheat crop at 49 million to 51 million tonnes, down from 61.7 million tonnes last year.

The Russian Grain Union, an industry lobby, said the drought was the country's worst in 130 years. The sharp rally in CBOT wheat futures was distorting its price spread with CBOT corn and soy, creating a situation that could lead to a correction.

The wheat-corn spread was the widest last week since June 2009, at US$2.03-3/4 cents. The wheat-soy spread was the narrowest last week since March 2009.

Meanwhile, the weather in the Midwest will be a crucial trading factor for CBOT corn and soy futures this week. Nearly half of the corn crop is pollinating, a key development stage when yields are determined. The soy crop goes through its critical pod-setting stage in August.