February 4, 2006

 

US Wheat Review on Friday: Ends higher on funds,US drought;iraq eyed

 

 

U.S. wheat futures ended higher Friday, led by a rally to new contract highs in Kansas City Board of Trade hard red winter wheat on fund buying and supply concerns amid a lingering U.S. Southern Plains drought, brokers said.

 

Expectations that Iraq would open bids Sunday in a buy tender for 1 million metric tonnes of hard wheat were also supportive Friday. However, it was technical buying after strong settlements this week and record open interest that mostly fueled the rally, wheat brokers said.

 

CBOT March wheat ended Friday up 9 1/4 cents at US$3.56 1/2 per bushel after setting a near four-month high of US$3.61 1/2; while May closed up 9 1/4 cents at US$3.67 3/4 per bushel.

 

Commodity funds had bought about 14,000 CBOT wheat futures, brokers said. ABN Amro bought a net 1,000 March and 400 December; Calyon Financial sold 500 March; and JP Morgan bought 1,000 March, they noted.

 

Fimat Futures sold 1,500 March and 500 July while buying 1,500 March corn and 500 July corn; Man Financial and Prudential Financial each bought about 1,000 March; while R.J. O'Brien and Tenco each spread 1,000 May/March ahead of next week's expected Goldman roll. The final fund purchase tally wasn't available as of publication time.

 

This week's speculative buying in U.S. wheat futures preceded Friday's much-publicized American Stock Exchange launch of the Deutsche Bank AG's DB Commodity Index Tracking Fund, touted as the first commodity index-linked fund to be listed on a U.S. stock exchange.

 

The fund is designed to give investors exposure to six commodities; the grain weightings include 11.25% corn and 11.25% wheat.

 

The launch of other commodity fund indexes that include grains is expected; moreover traders note that it has been accompanied by a surge in U.S. wheat open interest.

 

Total U.S. wheat futures open interest at the three U.S. exchanges is about 500,000 contracts, or 2.5 billion bushels, exceeding the size of the U.S. total wheat crop, said Bill Nelson, a grain analyst at AG Edwards & Sons, in a report Friday.

 

"Even a million corn contracts is 5 billion bushels, or less than half the corn crop," he said. "Perhaps there is some precedence for total open interest to exceed production of a crop, but we can't recall when or what that was. For trading purposes, our take is that the expanding open interest in the long commercial accounts has supported crop prices above levels that during previous recent years would have resulted in lower futures prices.

 

"Buying reaches to the back months, propping up those values, pushing spreads closer to carry," Nelson said. "The long positions also disrupt intermarket spreads. A natural concern for market bulls must be what happens if the money stops flowing in, or were to retreat. Our opinion is that it would be a bearish development. It would not appear to be an imminent threat, however. All the published statistics would suggest that moneys are continuing to flow into the commodity markets, not out."

 

 

Kansas City Board of Trade

 

KCBT March wheat closed Friday up 8 3/4 cents at US$4.11 1/2 per bushel after setting a contract high of US$4.16; and May ended up 8 cents at US$4.16 after making a new contract high of US$4.19. All other traded contracts set new highs.

 

The KCBT/CBOT March wheat spread settled Friday at 55 cents, premium KCBT, after closing Thursday at 55 1/2 cents, premium KCBT.

 

Kansas City spot cash railcar basis bids for 11% wheat fell 3 cents Friday; bids for 12%-14% protein wheat were unchanged, according to the KCBT.

 

Concerns about the U.S. hard red winter wheat crop were noted. No precipitation relief was expected during the next week to 10 days for the chronically dry Southern Plains winter wheat region. Moreover temperatures were expected to drop after a record mild January, brokers noted.

 

"If we get a rapid drop in temperature, we could lose a portion the crop in (top grower) Kansas," said Jim Shroyer, Kansas State University agronomist. "I'm also concerned about the water use; that puts the crop at peril as well.

 

"We've still got a long way to go" in the crop-growing season, Shroyer told Dow Jones Newswires Friday. "Farmers are starting to get uneasy, knowing that the wheat is much greener than it should be."

 

The National Oceanic and Atmospheric Administration's Climate Prediction Center published a grim longer-term outlook for this region Thursday. Forecasts called for La Nina conditions in the eastern Pacific (very cool water in the eastern Pacific Ocean) to result in continued drought the rest of this growing season.

 

 

Minneapolis Grain Exchange

 

MGE March closed Friday up 4 1/2 cents at US$4.04 1/2; and May closed up 6 cents at US$4.11. All traded months set contract highs.

 

Cash U.S. spring wheat basis bids were steady Friday, cash sources said.

 

Minneapolis rail receipts of wheat on Friday totaled 74 cars versus last year's 248 cars. Durum receipts totaled 32 cars versus last year's 28 cars.