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Louise Gartner: Quality wheat shortage

01/03/2011 @ 1:02pm

Last week, the year ended with wheat markets continuing in their steady upward trend, reaching new contract highs in the deferred months and approaching the summer highs in the front months. There has been very little selling to get in the way of strong fundamentals and relentless hedge fund buying.

It certainly was an interesting year in 2010. We saw wheat increase 46% in price, initially pushed higher by major drought in Russia, and then devastating floods in Australia. Both weather events have had lingering effects. Russia shut down all grain exports and had winter wheat plantings drop as dryness persisted in the southern regions. Australia continues to fight heavy rains and widespread flooding.

In Australia, the rains were welcomed at first during the growing season as yields soared and producers expected bumper crops. However, the rains just didn’t stop and quality losses piled up as sprout and disease became a huge problem. Now recently, even though the harvest has resumed in most areas of Australia, the flooding has blocked transportation routes and producers can’t get grain to export facilities.

Wheat prices have shot higher in response to the continued woes in Australia and on concerns of possible winter kill in the western plains of the US where extremely cold weather settled in on fields with very little snow cover. Most weather forecasters suggest that it was not cold enough to kill even the already stressed wheat plants, but the market saw plenty of buying anyway.

As we begin the New Year, there are expectations of volatile price action in the first few weeks. The hedge funds have been very bullish commodities for a long time, and recently they’ve focused their buying on the agricultural sector. That looks to continue as new highs in the grains will only add to their buy signals and they should have a fresh allocation of money available after the first of the year.

For index funds, the expectation has been a bit different. They are expected to move away from the grain and livestock complex slightly and focus more of their portfolios to the energy complex.

Most likely, we would see the hedge funds be the first to make their move with their buying strategies in the first week of January, and then see the index funds do their selling in the second week of January. We’ll see how that plays out. 

As we begin a fresh year, I see no reason why volatility and/or volume would decline for the grain complex and wheat seems to be the leader as of late. Quality wheat supplies will continue to be the headline story for wheat until the new crop comes in. The corn and bean crops in South America are getting plenty of attention, but recent rains in the dry areas of Argentina should keep those markets in check. For wheat, however, there won’t be a new crop from a major exporter for several months, and certainly not an exporter who will have quality supplies.

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