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AM markets: Ukraine plane crash fears sustain wheat rally

Grain markets began on Friday largely where they left off the last session, with concerns over Ukraine tension following the Malaysia Airlines crash lifting wheat, but corn and soybeans proving reluctant to follow.

In fact, wheat's gains were modest, and futures had by 08:00 UK time (02:00 Chicago time) failed to beat the intraday high of the last session.

It has yet to be officially confirmed that the Malaysia Airlines aircraft was shot down (although US figures have said it was a missile strike), let alone who by, what the reprisals might be, and how these could affect grain markets.

(The consensus theory appears to be that the plane was shot down accidentally by separatist rebels in Ukraine, with a Russia-provided missile - but that is speculation.)

'Justifiably concerned'

Not that a rally in wheat prices is unwarranted.

"The outcome [of the crash] is not known, but just the fear of it may send the funds out of their net short wheat position which could be short-term friendly for corn and wheat," one US broker said.

Investors are "justifiably concerned about another surge in tensions that may divert Black Sea grain buyers to other origins - especially if the European Union employs tougher sanctions" against Russia, said Richard Feltes at broker RJ O'Brien.

"Recall the wheat market rallied over $1.40 a bushel in late February-March as Russia moved on Crimea following the Winter Olympics."

Market concerns

Ukraine and Russia are major wheat exporters not that any sanctions are likely to apply to grain itself, a major source of cheap supplies for, for example, North Africa, but regional instability could affect transportation, or least raise fears of disruptions that persuade buyers to turn elsewhere.

Meanwhile, weaker currencies can curtail production in raising credit costs, and through currency weakness, making imported inputs such as seed and agrichemicals more expensive, although it has to be noted that Russia appears set for a strong harvest this year.

Chicago's September soft red winter wheat contract stood 0.8% higher at $5.55 a bushel, up a more modest 16.75 cents over the last two sessions.

Kansas City-traded hard red winter wheat for September was up 0.5% at $6.51 a bushel, up less than 15 cents over the two sessions, lacking the extra firepower from short-covering that has lifted its Chicago peer.

Hedge funds had a large net short, of more than 40,000 contracts, in Chicago wheat as of Tuesday last week, the latest data available, compared with a net long in Kansas City wheat.

'At least 2m acres unplanted'

Separately, the US winter wheat harvest remains a negative theme for prices, bringing seasonal pressure, but also improving as it heads north.

"Quality remains good with proteins holding higher than normal," CHS Hedging said.

On a more price-supportive note, the broker also flagged talk that "Canada ended up with at least 2m acres unplanted because of wet conditions", a factor which has proved most supportive to prices of canola, the rapeseed variant, and of which Canada is the top exporter.

Canola for November actually stood 0.6% lower at Can$448.00 a tonne in Winnipeg, but this would be the first negative session this week.

Demand talk

Back in Chicago, corn did a bit better in trying to keep up with wheat this time, adding 0.3% to $3.88 a bushel for December delivery, with the old crop September contract gaining 0.3% to $3.80 a bushel.

Still, the main theme in the corn market is the prospect of a huge US crop, with warmer Midwest temperatures due next week provoking little concern, despite occurring during the heat-sensitive pollination process.

 "Some areas are looking at above-normal temperatures and below-normal precipitation, but overall no one is calling this a major threat at this time," one US broker said.

CHS Hedging said: "Highs in the 80s and 90s [degrees Fahrenheit] are expected next week which should have limited impact on crop development as scattered rains are forecast".

In fact, "weather conditions remain nearly ideal as tassels appear in many states".

Futures are receiving support, thought, from ideas of firm demand especially at current price levels, amid decent US export and ethanol production data.

Societe Generale forecast a further recovery in corn prices, based in part on strong consumption ideas.

'More work on the downside'

Soybeans for November, however, eased 0.1% to $10.92 a bushel, despite talk of decent demand here too, with Chinese buyers in town.

But has the buying got legs? "I suspect the torrid pace of Chinese new crop soybean buying will abate in coming days," RJ O'Brien's Richard Feltes said.

Meanwhile, the movement of a benign forecast into the sensitive soybean growing month of August, when pod-setting occurs, is encouraging the removal of risk premium, just as corn suffered as conditions for its current pollination period were forecast as benign.

In fact, with November soybeans still worth 2.81 times as much as December corn, a historically high ratio, "soybeans have more work on the downside than corn", Mr Feltes said.

'Bearish situation'

Cotton also struggled, shedding 0.4% to 67.40 cent a pound for December, within an ace of contract lows, as growing US production hopes offset the glow from decent weekly US export sales data released on Thursday.

"The weather in west Texas continues to be beneficial from crop production and this is adding to an already bearish situation," Citigroup's Sterling Smith said.

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