News From Eastern Europe Sparks Wheat-Buying Frenzy – for Aug. 12, 2010

ICE Futures Canada canola futures continued to break into new bullish territory during the week ended Aug. 6, with the most actively traded November contract gaining $10 to close at a fresh contract high of $469 per tonne.

Winnipeg canola futures picked up technical momentum on price charts this week. Talk of fresh export demand and gains in competing oilseed markets (CBOT soy, EU rapeseed and Malaysian palm oil) helped lift canola futures.

The key supportive feature to all grain/ oilseed markets has been bullish speculative spillover impetus drawn from the wheat markets. And that will be the highlight of this report.

Indications Mexico contracted some fresh export business for Canadian canola for an unspecified delivery period heightened commercial buying interest. Steady domestic crusher demand and pricing of old export business to Japan were also noted.

Continuing concern about growing conditions for canola in Western Canada also helped to generate underlying support. Reports of EU rapeseed production woes also remain a constant worry, helping to sustain price uptrends.

The gains in canola were restricted by steady elevator company hedge selling, with producers continuing to be good sellers into the cash pipeline. Firmness in the Canadian dollar also limited canola gains.

Chartwise, the November canola contract this week managed to close above chart resistance at $460 per tonne, with the next upside target pegged off the weekly chart at $480, established in May 2009.

Also of technical interest, on the November daily chart, using the bull flag technical measure from the first rally phase (June) suggested a technical target of about $460 per tonne. Now, with another possible bull flag in place at the end of July, the next technical target measure could conceivably be argued at $495.

SHADES OF 2008

My attention – and that of all grain traders these days – now turns to wheat. It’s a simply stunning rally we’ve seen in wheat markets over the past month, but especially exciting over this past week, bringing back ideas of the wild markets of 2008.

Limit-up (or near to it) gains posted in U.S. wheat futures Thursday (Aug. 5) and a steady series of strong gains in the lead-up through the week. But there’s a nagging feeling about the sustainability of such dramatic upward momentum. On Minneapolis December spring wheat futures, for instance: a rally of $2.70 per bushel since the June 29 low, with the contract knocking on US$8/bu. (up 47 cents on Aug. 5 alone, to $7.92-1/2).

The big news involved reports of Russia banning grain exports starting Aug. 15 until Dec. 31. That’s going to include wheat, corn, barley, rye and flour.

Ukraine, another major exporter, also has cancelled several wheat export contracts due to lack of supply from farmers and other issues. That’s admittedly big news and has heightened fears about tightening supplies because export restrictions in the former Soviet Union helped shove prices to record-high prices in early 2008.

Such news has again sparked a frenzy of buying as traders anticipate more export business for the U.S., and for anyone else with wheat to sell, including Canada. Plus, speculative money continued to aggressively chase the long side of the market. Momentum has definitely favoured the bulls to this point.

But bull markets must be fed a constant dose of supportive news. Without fresh bullish news, the market could be vulnerable to profit-taking as futures are heavily overbought.

So with wheat futures having soared to their highest levels in two years in such a short period of time, one has to wonder about sustainability of this rally, and when the top – or even corrections – comes, it could be harsh.

STOCKS MUCH HIGHER

The wheat supply situation doesn’t appear to be as dire as it was in 2008, when crops failed worldwide and wheat prices rose to record highs. Wheat stocks are much, much higher than in 2008.

The International Grains Council (IGC) production forecast is still the third highest on record. And in the U.S., where good weather is boosting this year’s harvest, wheat stocks are at a 23-year high. U.S. inventories had dropped to an all-time low in 2007-08. That’s not even close to being the case this year.

So then, this latest price spike probably says as much about heightened speculative investor sensitivity to extreme scenarios – plus an increased desire to chase apparently juicy trades – as it does about the prospect of food shortages.

And in the midst of this highly charged speculative environment, it is impossible to predict with any certainty where wheat prices will go in the weeks and months ahead. Could be up sharply yet, but wheat could lose momentum quickly and at any time.

And with U.S. wheat futures markets posting their largest monthly percentage gains in 50 years, the Canadian Wheat Board is also alerting farmers of potential pricing options to lock in some of the current rally. If the rally turns out to be short lived, it won’t be reflected in the annual pooled price.

– Mike Jubinville is a grain market analyst with ProFarmer Canada in Winnipeg and writes for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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