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Hedge funds, wheat speculators raise net-long positions in futures and options as rally in wheat prices may be peaking

Monday, August 09, 2010
Opalesque Industry Update – Wheat speculators, including hedge funds, increased their net-long positions in futures and options by 5.3% last week, turning bullish on the grain after prices reached their highest level in 37 years.

However, Diana Klemme, director of the grain division of Grain Service Corp., a consultant and broker in Atlanta, told Bloomberg, that the rally in wheat prices may be peaking. “If we haven’t seen the top, we’re probably very close,” Klemme said.

The lack of rain in Russia, Kazakhstan and the European Union, along with flooding in Canada are pushing the prices up. Wheat prices rose to $8.68 per bushel on 06-Aug, before closing down 7.4%, the biggest drop since June 2009. Bloomberg said speculators are now movings towards net-long positions in wheat, abandoning their earlier position that prices would fall.

Prices of bread, cereals, pasta and others, to rise too
On Thursday, Russia, the third world’s largest wheat producer, declared drought emergencies in 27 regions and imposed an export ban on the grain until the end of the year. It also encouraged neighboring Kazakhstan and Belarus to join the move.

The announcement of Russian President Vladimir Putin sent shockwaves into the market and triggered panic, according to the Guardian. The newspaper said Russia’s decision would have an adverse impact on British consumers as this would raise the prices of bread and other wheat-dependent products.

Neil Saunders of London-based retail analysts Verdict, told the Guardian that during the 1973 wheat crisis, the price of an 800 gram loaf bread in the British supermarkets rose by 87% from 10.1 pence to 18.9p the following year. "There is not nearly as much inflation in the system now as there was in the 1970s, but it is realistic to expect the average price of a value loaf to rise from 74p to 77p by the end of the year, and possibly to 83p by the end of 2011. Other items, such as pasta, animal feed – and therefore chicken and meat – are likely to be affected to a lesser extent,” Saunders explained.

Abdolreza Abbassian, an economist at the United Nations Food and Agriculture Organization in Rome, blamed governments for failing to enforce mitigating measures against the impact of events like droughts or heavy rains that affect wheat production.

Egypt calls on Russia to delay delivery of what after ban ends
The world’s biggest net importer of wheat is Egypt, and that country has appealed to the Russian government to honor and reschedule the delivery of at least 540,000 tons of wheat at prices agreed upon by the governments of Egypt and Russia before the ban. Egyptian Trade Minister Rachid Mohamed Rachid said in a statement that the two governments signed the deal before Putin’s announcement of an export ban from 15-Aug to 31-Dec.

Wheat prices to go up, but there is no shortage
Several industry analysts forecasted a rise in wheat prices despite plentiful supplies. They downplayed the impact of the Russian wheat crisis and said that global wheat supplies are normal, and stocks in the United States are at a 23-year high.

Daniel W. Basse, president of AgResource, an agricultural consultant firm in Chicago said that this year would still record the third-largest wheat crop in world history even with the Russian crisis. “The question becomes, will the drought persist, and will there be problems elsewhere, in other big producers like Argentina or Australia?,” Basse asked.

An independent study made by the International Food Policy Research Institute (IFPRI), showed that the wheat crisis in Russia will not have an impact on world supplies. It said that Russia accounts for roughly 8% of the world wheat production. The Russian ban on wheat exports means a loss of only 1.6% in the global wheat supply.

Russia’s ban could be offset by an increase in the wheat output of the U.S and China, which could stabilize global stocks, the study said.
-Precy Dumlao

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