Friday, May 20, 2011

European Wheat Weakness

Any strength in bullish prices can be tempered by the seasonal weakness in associated equity markets. In a POMO liquidity driven world, computer trading has followed into commodities to push prices higher.

European Wheat Prices To Revisit 3-Year Highs On Drought-Analysts
Forecasters and traders said wheat prices could hit the three-year highs touched in February if drought in Europe and the U.S. continues to stress next year's wheat crop.

New-crop wheat prices have gained sharply this week, hitting three-month peaks of EUR251.50 a metric ton on the November Paris milling wheat contract on Thursday, driven by concerns next season's harvest could be irreparably damaged.

But now analysts say the current bull run may continue, taking futures above the near-record highs of EUR281/ton touched in February as the worst drought in decades tightens its grip on Europe's fecund farmland.

"I think there are still significant risks that wheat prices could push back to the highs we saw in February if weather doesn't improve in the coming weeks," said Erin Fitzpatrick, an analyst at Rabobank.

Production expectations for next season are falling by the day as drought across key growing regions of France, Germany, the U.K. and Poland--which account for 65% of EU-27 output--wilts the young crops in the fields.

Parts of Europe received less than 40% of their average rainfall between February and April and analysts now say up to 12% of France and Germany's crop will be lost even if rain does arrive.

"If we do not get the right mix of rain and sun in the coming 8-10 weeks, then later this year we will see record price levels," said Charles Robertson of Renaissance Capital.

Concerns about crops in the U.S., Australia, Canada and Russia are also keeping the market nervous. Last year's rally was sparked when an historic drought in Russia prompted the Kremlin to ban exports and take tens of millions of tons of the world's cheapest wheat out of the international market.

Although initially delayed by poor weather, at the end of last week Russian farmers had planted spring crops on 18.921 million hectares, only 4.5% less than on the same date last year, the Agriculture Ministry reported.

In forecast generally regarded as over-optimistic by the trade, the U.S. Department of Agriculture last week forecast that wheat exports from the Black Sea region, including Russia, Ukraine and Kazakhstan could double to more than 26 million tons in 2011-12.

But Eugen Weinberg, analyst at Commerzbank, said with weather so unpredictable at this stage, any production estimates are very much uncertain until the grain is in the storage bins.

"We're still in the development stage," he said. "The troubles last year only came in June to July.

"EUR280/ton is definitely on the cards at the moment."

Source: CME News for Tomorrow
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