August 5, 2010

 

Asia's wheat market in turmoil on price renegotiation

 

 

Asian wheat prices are likely to move higher this month as exporters are insisting on renegotiation of contracts amid a rise in international prices and lower supplies.

 

Traders said deals involving several hundred thousand tonnes of wheat are already being privately renegotiated to adjust with the current prices and some defaults are also expected.

 

"The surge in futures prices is partly driven by fundamentals and also by speculative fund buying but has pushed the physical market into turmoil," said a Singapore-based executive at a global trading company.

 

He said the scale of the rise in prices has been such that the market has now slipped into uncertainty and both buyers and sellers are reluctant to transact any fresh deals.

 

The nearby wheat futures contract on the Chicago Board of Trade Monday (Aug 2) closed at US$6.93 1/4 a bushel, up 62% from a nine-month low of around US$4.25 in June. Prices fell to US$6.80 a bushel Tuesday (Aug 3).

 

Many trading companies that sold at low prices accordingly booked their requirements from origins such as Ukraine and Russia, but suppliers are not prepared to execute contracts at original prices, said a Singapore-based executive.

 

Other companies are still short, having sold to buyers in destination but yet to cover at origins.

 

Cash wheat prices on a delivered basis have risen by around US$90/tonne since early June and it is impossible to supply at old prices because farmers are demanding more money, said a trader in Ukraine.

 

He said buyers may not get a large part of their deliveries unless they agree to revised prices.

 

Suppliers at origin are arguing that original deals were done in anticipation of a bumper harvest, but now with drought and floods reducing the production drastically, farmgate prices have shot up.

 

The rally is exaggerated and prices may decline by around US$30/tonne this month, but they will not return to June levels, said Chris Vanhonacker, a Geneva-based exporter and analyst.

 

He said part of the rally is fuelled by speculation that Russia and Ukraine will not export wheat at all this year.

 

On the contrary, Russian wheat exports in July were sharply higher on year at around 1.5 million tonnes and the country may still end up exporting 10 million tonnes in 2010-11 due to large carryover stocks, Vanhonacker said.

 

He said a major shift in wheat trade towards the US from the Black Sea may also take months.

 

Russian milling wheat is now being offered around US$250/tonne, free-on-board, up from US$165-$170/tonne in June, but is still the cheapest in the world. Despite the surge in prices, Russian wheat is US$20-US$25/tonne cheaper than US Hard Red Winter wheat, on a delivered basis, in Egypt, the world's largest importer, Vanhonacker said.