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Louise Gartner: Political unrest eyed

It was an interesting week, to say the least. Whether we’re talking about wheat in particular, the grain complex, commodities or the state of all markets around the world, this past week was one of political unrest that began to boil over and the reaction of the broader markets was to move to safety.

Social unrest spread across North African countries and the Middle East and evolved into riots and the collapse of at least one government so far. Skyrocketing food prices was certainly part of the problem, but it also served as a breaking point for long-simmering issues between the people and their governments.

While riots had been reported for the last two weeks in Tunisia, Algeria and Indonesia to name a few, it was the sudden and widespread riots in Egypt that finally caught the financial markets’ attention. The Dow had its biggest drop since mid-November, as investors moved to the safety of the US dollar and precious metals – just in case things would get worse.

The commodities complex of course got caught up in the volatility, with wheat leading the way lower in the grain complex. A higher dollar doesn’t help wheat’s export prospects, although this marketing year will be somewhat immune to the higher dollar since we’ve become one of the few remaining sources of wheat supplies. Indeed, when it comes to milling quality stocks, this week it became clear that we’re probably the only source of supplies as Canada couldn’t even fill a tender of high-pro spring wheat to their most important customer, Japan.

Foreign governments are being much more pro-active in 2011 than they were in 2007 with securing grain stocks. Just in the last two weeks, Tunisia and Algeria have bought 3 MMT of wheat, and have requested accelerated deliveries. Import tariffs are falling with Indonesia and Russia both eliminating their tariffs on a number of grains and food stuffs for the next few months. China continued their talk that they would increase their imports of meat, sugar and other necessities.

The US had another stellar week of export sales, topping the 1 MMT for the second week running. We’re seeing a spate of non-traditional buyers step into our markets as well, like Jordan and Syria who normally buy from their neighbors or the EU. It’s a much longer transport route to take wheat from the US, but just once again speaks to the dwindling supplies of quality stocks around the world.

Russia released their monthly stocks report, showing that as of January 1, grain stocks were 33 MMT, down 24% from last year. This week they also estimated that total wheat production for 2011 would reach record levels, recovering from the 42 MMT of last year’s drought ridden crop, and much higher than the record production the two preceding years of 62-63 MMT. 

Australia is ready to put this year behind them and focus on next year already. Can’t say as I blame them. They project 2011 wheat plantings in excess of 14 million hectares, which would be a record. They obviously have the moisture in the east and if the west continues to see moisture replenished, they could easily be looking at a record crop of 25 MMT plus. Planting will start in April.

With all of the bullish news around, it was a surprise to see wheat stall after setting new 2 ½ year highs. Daily trading ranges were widening on expanding volume, normally the conditions we see when long-term bull markets begin their blow-off stage. But prices then just stalled and retreated somewhat on Friday as the dollar surged and concerns were raised about the fate of sales and shipments to riot-torn Egypt. A major winter storm forecast to move across the central plains with plenty of snow/moisture was also a drag on wheat’s bullish sentiment.  

Weekly charts look a little precarious, with potential spike highs after the early week surge ended with a late week pullback. Chicago closed basically unchanged for the week, with Minneapolis up 24 and Kansas City up 12. The seasonal timing is also a concern, as the late-January/early-February window often sees a high in the wheat complex before heading lower through the ‘February Break’. The technical formations could easily argue for that type of price action. 

Once we get past February, the market’s attention will shift to new crop development as the winter wheat breaks dormancy. That begins a whole new ball game…. But make no mistake, the political unrest around the world cannot be ignored by any market, and if investors continue to shift to the safety of the US dollar, it could create some problems for the wheat trade, especially longer term if the Northern Hemisphere comes in with a good crop and the world’s exportable supplies become more balanced.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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