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Wheat reaches $7 per bushel on Russian drought

08/01/2010 @ 11:00pm

DJ Scorching Wheat Prices Breach $7 A Bushel On Russia Drought

Tom Polansek - DJ - Mon Aug 02, 1:54PM EDT

CHICAGO (Dow Jones)--The worsening drought in Russia has set wheat prices on fire.

Wheat futures surged past $7 a bushel on Monday, taking the grain 67% above June's nine-month low.

The fields of Russia's traditionally fertile Volga River region are strewn with withered wheat stalks. The heat and lack of rain have killed half of the crops in the worst-hit areas, while the surviving crops are expected to yield half as much as in previous years.

Before the drought and subsequent wildfires that have killed dozens, Russia and the Ukraine were expected to supply almost 18% of the wheat volumes that trade between nations. Not only has the drought grabbed headlines, it's reawakened fears of the kind of global supply shortage that sparked riots in 2008. China and India are already digging in their heels, taking steps to ensure adequate supplies.

But wheat prices are climbing against a dramatically different backdrop this time around, lessening the likelihood of a run on food supplies and another scorching run past $13 a bushel, analysts say.

"Although wheat has seen a stellar monthly performance, fundamentals do not seem to support the rally, with inventories, especially in the U.S., abundant--and poised to increase with the arrival of a good spring wheat crop," said Hussein Allidina, head of commodity research at Morgan Stanley.

Nearby wheat futures in July posted their largest monthly percentage gain in at least 51 years. Recently, wheat for September delivery was 4.5% higher at $6.92 a bushel after rising as high as $7.11 1/4 on the Chicago Board of Trade.

The U.S. Department of Agriculture estimates that there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. The 2007-08 marketing year was marked by droughts in both Australia and the Black Sea region that were compounded by the U.S.'s shift to corn planting to feed ethanol production. U.S. inventories that year dropped to an all-time low of 8.3 million tons.

World supplies also are more comfortable at 187 million tons. In 2007-08, they were a third less at 124 million.

Speculative buyers, those who aren't looking to hedge parts of their business against moves in grains prices, have flocked to wheat over the past weeks. The number of bets speculators have made on falling prices plunged to 15,432 contracts as of July 27 compared with 22,191 the week before.

"People want to catch on to the next strong rally, so they blindly come in and start putting these positions on," said Shawn McCambridge, a senior grains analyst at Prudential Bache. "The market's make-up is much different than it was in 2008."

But officials in China and India aren't taking any chances. China's top economic policy planning agency warned last week that it will bar businesses found guilty of hoarding grains from state grain purchases. As grain prices have risen sharply alongside the rally in wheat, the adequacy of China's harvest has come into focus.

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