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Wheat roars to 8-month high

05/18/2012 @ 3:16pm

U.S. wheat futures surged to an eight-month high, capping a dramatic rise this week fueled by concerns about dry weather in key global production regions including the Great Plains and the former Soviet Union.

Chicago Board of Trade wheat futures for July delivery soared 37 1/2 cents, or 5.7%, to $6.95 1/4 a bushel, the highest settlement for the front-month contract since Sep. 15. The front-month closing price was up 17.3% for the week.

Kansas City Board of Trade July wheat rose 33 cents, or 4.9%, to $7.05 a bushel. July wheat at the MGEX in Minneapolis rose 24 3/4 cents, or 3.2%, to $7.92 a bushel.

The week's surge came after wheat futures had fallen for about two months, as expectations grew for a large, early harvest of winter wheat in the U.S. beginning this month. Just nine days ago, the front-month CBOT contract had slumped to a five-month closing low.

But expectations changed quickly this week. The U.S. Department of Agriculture on Monday reported reduced health in U.S. wheat crops--especially in Kansas, the country's top producer of hard red winter wheat, which is milled into bread to make flour. Forecasts for dry, hot weather in the southern Great Plains raised worries that yields there could drop sharply.

Forecasts for dry weather then began piling up for other major wheat-producing regions, including Russia, Ukraine, Kazakhstan, parts of Europe, China and Australia.

"Once this thing started rallying, then it's like all this weather just comes out of the woodwork," said Larry Glenn, a broker at Frontier Ag Inc., a commodities brokerage firm in Quinter, northwest Kansas. "We've got a lot of wheat out there in the world, but it's just that sensitive to any production problems."

The price surge highlights how wheat prices can become especially volatile as weather conditions shift. In the U.S., analysts say, the main price driver for wheat futures in the summer is usually weather conditions, which can change quickly. If worries about world weather intensify, U.S. futures could keep rising, analysts said.

"If the hot, dry winds enter and stay in Russia, then this is not over," said Dave Marshall, an independent grain-marketing adviser in Nashville, Ill.

On the other hand, if signs of possible rain return for parched production regions, then prices could pull back sharply, analysts said.

After their rally this week, CBOT futures are still down 21.5% from a closing peak reached in February 2011, which was driven by drought in Russia and excessive rain hurting harvests in Australia and Canada.

Analysts said this week's surge in wheat was driven largely by short-covering, in which market participants buy futures to exit bets that prices will fall. Managed funds, including hedge funds, had a large net short position in CBOT wheat futures as of last week, according to the Commodity Futures Trading Commission.

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