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Bulls seen lining up for wheat

10/22/2012 @ 7:42am

Reduced availability of wheat from the drought-hit Black Sea region will likely push prices higher, prompting buyers to turn to suppliers in other regions, including the U.S., India, Australia and France, as well as to substitutes, such as corn, trade participants and government officials said Monday.

Russia and Ukraine dominated the global wheat market over the past three months, despite a dry summer that cut production by around a third. Earlier in the season, buyers who recalled that both Russia and Ukraine imposed severe export restrictions the last time drought hit, in 2010, were worried about more such restrictions. No bans or limits have been announced--yet--but supplies are dwindling at a much faster rate than usual. In most years, the two former Soviet nations are able to continue exporting wheat well into the new year, often as late as March.

Ukraine's government said Friday that it may run out of wheat supplies for export next month. The country has contracted exports of around 5.4 million tons in the crop year that started July. 1, it said. Industry participants have said that the country still has more than 2 millions that has yet to be shipped, and which may be canceled if restrictions are imposed.

Ukraine and Russia "won't have much to ship out beyond December," Paul Deane, a senior agriculture economist at ANZ Banking Group in Melbourne, told Dow Jones Newswires.

Egypt, the world's largest wheat importer, along with other buyers in the Middle East, will buy more U.S. and French wheat in the next quarter, said Kaname Gokon, deputy general manager at Tokyo-based brokerage Okato Shoji.

Last month, Egypt bought more than a million tons of wheat, mostly from the Black Sea region, but in recent tenders it has been buying the grain from France, Argentina and Romania.

This is adding to costs. Earlier this month, Egypt bought French wheat around $342-$345/ton, free on board. A year ago, when Russia had a large wheat crop, sales in the Middle East were made at much lower prices--even below $250/ton, FOB. At the start of this year's harvest, in July, Black Sea region wheat prices were around $290-$300/ton, FOB.

Near-month wheat futures on the Chicago Board of Trade hit a four-year high of $9.4725/bushel in July. Importers and analysts expect the level to be tested again in the next few months. The news from Ukraine has helped to push the benchmark 0.9% higher so far Monday, to $8.8025, equivalent to $323.40/ton.

The London-based International Grains Council has estimated Russia and Ukraine's wheat output in 2012-13 at 39 million and 13.5 million tons, down 30% and 39%, respectively.

Australia will take up some of the slack, Paul Morris, executive director of the Australian Bureau of Agricultural and Resource Economics and Sciences, told Dow Jones Newswires.

Australia's own output has also been affected by dry weather in recent months, however, and exports will fall 28% to around 18 million tons in the marketing year started Oct. 1, ANZ Banking Group's Mr. Deane said.

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