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Traders feel out ICE’s new wheat, barley contracts

Canola futures on the ICE Futures Canada trading platform posted small to modest advances during the week ended Jan. 27. Most of the buying interest was concentrated in the deferred values, where concerns about dry growing conditions during the spring and summer on the Prairies fuelled some of the strength.

The strong export lineup at Canada’s West Coast, strong domestic crusher demand and spillover from the advances seen in CBOT (Chicago Board of Trade) soybeans, helped to influence the price advances.

The upswing in the value of the Canadian dollar, along with steady farmer deliveries of canola into the cash pipeline in Western Canada, restricted the upward price action. Overhead technical resistance was also evident and further capped the upside price potential.

The new milling wheat, durum and barley contracts offered on the ICE Futures Canada platform saw some action, with much of the trade tied to the feeling out of where values should be among commercial accounts. Volumes were on the light side, but the process of building liquidity appeared to be underway.

Western barley futures on the ICE platform were little changed, although the May contract found some light commercial support.

CBOT soybean values climbed significantly during the period ended Jan. 20. Support was derived from South American weather concerns and some spillover buying from the uptrend that surfaced in CBOT corn futures. Weakness in the U.S. dollar and firmness in the cash market contributed to some of the price strength.

Fresh macroeconomic concerns helped to offset some of the price advances. The upside in soybeans was also restricted by ideas the weather situation in Brazil and Argentina was beginning to stabilize and that drier weather in the forecast will help to speed up the harvest of the soybean crops there. The continued absence of export demand for old- and new-crop soybeans also limited the price gains.

CBOT corn futures were higher, with the old-crop futures leading the upward price push. A lot of the support came from the belief among market participants that supplies of old-crop corn in the U.S. were a lot tighter than what the U.S. Department of Agriculture has forecast. With the anticipated supply tightness, export outlets have stepped up their demand, which in turn took corn futures higher. Firmness in the cash market also generated support for corn.

Overhead technical resistance capped some of the upward price potential in corn. Bouts of profit-taking also restricted some of the advances.

Wheat futures at the CBOT and Kansas City and Minneapolis exchanges posted gains during the week, with some of the strength linked to reports that Russia’s grain export program will be scaled back, leaving some room for U.S. wheat to finally recapture a portion of the globe’s wheat market. The upward price action in CBOT corn also spilled over to provide support. The weakness in the U.S. dollar also allowed wheat to be better valued on the world market.

The reduction of the large short positions that speculative and commodity funds had been holding in wheat was another key factor behind some of the price strength.

However, the advances in the U.S. wheat market were tempered by the fact the world wheat supply situation is still extremely abundant.

The new milling wheat, durum and barley contracts on the ICE Futures Canada platform began trading Jan. 23, with the October contract the first month offered. There was some playing around before the first trade was made, especially as the participants making the bids and offers sorted out their differences. Most of the action was commercial in nature, with speculators still sitting on the sidelines waiting for liquidity to build. Market players also had a lot of issues with the quote vendors as they tried to work out the kinks in the new contracts.

There are ideas that demand for the new milling wheat, durum and barley contracts will pick up further. However, that activity was seen coming as more and more grain companies begin to forward-contract with producers in Western Canada.

Some of the reluctance to trade the new commodities was also being linked to worries over pending court actions being taken by certain individuals regarding Bill C-18, the federal bill deregulating Prairie wheat and barley marketing.

There was also talk this week about Russia imposing some form of restriction on its grain exports. The talk in the trade is that the export pace to date, and food security concerns for the upcoming 2012-13 season, will encourage the Russian government to curb the wheat export program. Whether or not Russian officials will actually move forward on this is anyone’s guess, but any kind of tariff tax or quota would have a friendly impact on the world wheat market.

Market participants indicated that the flaw in the slowdown in the Russian wheat export program is that this is just part of the natural ebb and flow of movement.

Russia’s wheat export pace, in years characterized by supply “surplus,” always flies out of the gate, pausing only if Ukrainian competition undercuts it, and ultimately slows when southern Russian winter wheat supplies tighten.

The bottom line is that the market is talking about and perceiving a threat around Russian export policy. However, given that world wheat supply is not tight, and in the absence of any unexpected wheat demand, conventional wisdom will start to discount the bullishness of potential Russian export restrictions.

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