August 2, 2010

High wheat prices expected to sustain in Asia

 

 

As supply from the Black Sea region slows, Asian wheat prices are likely to maintain higher levels in August, according to trading executives.

 

They said a crippling drought in Russia, floods in Ukraine and Canada and lower-than-expected wheat production in the EU are pushing up prices and the trend is likely to continue despite ample global inventories.

 

It is just the beginning of the global wheat marketing season, but investors and traders are panicking, as they expect supplies to fall later in the year, said a Singapore-based executive at a global trading company.

 

Many investors are covering short positions, pushing futures prices on the Chicago Board of Trade higher, said Koname Gokon, deputy general manager at commodity brokerage Okato Shoji Co.'s research division. He said CBOT September wheat futures may rise to US$6.60/bushel and the December contract to US$6.90/bushel next month before profit-taking sets in.

 

The nearby September wheat futures contract at CBOT settled 12 cents, or 1.9%, higher Thursday (Jul 29) at US$6.27 1/2 a bushel after hitting a fresh 13-month high of US$6.32.

 

Investors had set up a large portfolio of short positions on CBOT during the first half of this year in anticipation of a bumper wheat crop in Europe, Russia and Ukraine. Panic short covering set in when the market moved the wrong way, analysts said. As prices continued to rise, traders scrambled to cut losses.

 

US wheat prices have surged nearly 49% since a nine-month low in June due to the drought in Russia, floods in Ukraine and Canada and a smaller-than-expected crop in the EU.

 

The United Nations' Food and Agriculture Organisation (FAO) plans to slash its wheat production estimate for 2010 by at least 10 million-15 million tonnes, a top FAO official for grains said.

 

"Both production and ending stocks may be at least 10 million-15 million tonnes lower if not more, than the estimates arrived at in June," FAO's secretary of the Intergovernmental Group for Grains, Abdolreza Abbassian said.

 

Lower-than-expected production may sustain current high prices - or even propel them higher over the next few weeks, he said but added that they are unlikely to reach the 2008 record.

 

Reports that Egypt is planning to buy US wheat have augmented the uptrend, said a grains trader in Tokyo. For the last few years, Egypt has increasingly sourced its needs from Russia and France. As demand for US wheat increases, Asian buyers, who usually source food-grade wheat from North America and Australia, will have to shell out more money to meet their requirements, he said.

 

Russia is reeling under drought, but it has ample stocks to meet export commitments. However, this has not stopped speculation that the country could ban or restrict exports later this year.

 

Many traders are now reluctant to risk significant exposure to Black Sea Region wheat.