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Morning markets: wheat futures extend rally. Can it last?

Wheat futures are beginning to put together a bit of a rally.

Chicago's September contract stood up 1.2% at $5.59 a bushel in early deals on Wednesday looking for a sixth successive positive session, a winning spree not seen since April, just before the tumble in prices began from levels over $7.50 a bushel.

The contract, which last session recorded its highest finish in nearly a month, has gained 6% so far during its recovery, and set camp firmly above its 10-day and 20-day moving averages.

Even London feed wheat futures are showing signs of life, closing the last session at £123.50 a tonne for November delivery, 3.3% above a four-year low reached on Friday.

And London feed wheat has the worst fundamentals of all, given that wheat prices are being boosted largely by European quality fears of milling wheat being downgraded to feed, boosting supplies of the latter.

Furthermore, feed wheat faces competition in livestock rations from corn, of which there appear more than ample world supplies.

'Trend change'

Has wheat's revival got legs?

This kind of rebound "usually means a trend change", Mike Mawdsley at Market 1 said.

"Let's be a tad careful but it this market could find some buyers, don't rule out [crossing] the 50-day moving average," something the contract has not seen in a while.

(Since May 14, to be exact, for Chicago's September contract.)

The contract in fact touched its 40-day moving average on Wednesday for the first time since May 14.

$6-a-bushel wheat?

At Citigroup, futures specialist Sterling Smith said that another technical indicator, retracement levels, "take the market back to the $6.00-a-bushel level", a price not seen in the September contract since late June.

Still, he added that "while this possible, we do have out serious doubts about much in the way of extended bullishness, given the state of the row crops", the prices of which are being depressed by strong US production prospects.

And it is worth remembering that the round of gains in futures is being fuelled, especially in Chicago, in part by a temporary factor the covering of short positions, which hedge funds have ramped up over the last three months.

Indeed, as of last Tuesday, they had their second biggest net short position in Chicago wheat futures and options ever.

'Uncertainty of war'

Still, there are fundamental supports too, especially the quality downgrades to EU wheat, thanks to rains which show no signs of relenting.

Rainfall on harvest grains encourages sprouting, meaning downgrades, potentially below milling standard.

And the concerns have spread to Ukraine too, where ProAgro has estimated that feed wheat will account for 35% of the domestic harvest, up from 25-30% last year.

That said, in Russia, 77.5% of wheat is of milling grade, with the balance feed, according to Russia's Veterinary and Phytosanitary Surveillance Service.

Still, on the bullish side there are the Ukraine political concerns to factor in too, and Russia's growing troop numbers at the border.

"Ukraine is still a large portion of the world's wheat supply and the uncertainty of war has the market on edge," one US broker said.

Data revisions ahead

The market is less on edge about corn supplies, even though Ukraine is a big exporter of that grain too, but with the US looking set for back-to-back record harvests.

Still, the low prices caused by the strong US production expectations are, besides encouraging demand more on which will be known later today in weekly US ethanol data choking off output too.

The US Department of Agriculture attache in Buenos Aires pegged the Argentine corn crop in 2014-15 (harvested in earlyish 2015) at 23.5m tonnes, well below the USDA's official estimate of 26m tonnes.

Official estimates may be changed next week in the monthly Wasde report, the prospect of which, in encouraging uncertainty, is also seen as potentially curtailing further notable price losses.

"We are unwilling to think that there will be aggressive trade in front of the report," Citigroup's Sterling Smith said.

The biggest focus will be on the US corn yield, which the USDA is expected to upgrade from its current figure of 165.3 bushels per acre (to 168 bushels per acre, Informa forecast on Tuesday).

Corn for December actually rose 0.1% to $3.68 a bushel, given a help by fellow grain wheat.

'Continues to ease nerves'

It was soybeans which lagged, with the November contract shedding 0.2% to $10.63 a bushel, as continued benign US weather encouraged the removal of risk premium.

For the oilseed, August is the crucial month, bringing pod-setting, rather than July for corn, the pollination month, meaning that soybean futures often see a little later price deflation assuming non-adverse weather.

In fact, "the US weather continues to ease nerves," Mr Smith said.

Elsewhere in the oilseeds complex, palm oil dropped 0.4% to 2,262 ringgit a tonne in Kuala Lumpur, earlier hitting 2,239 ringgit a tonne, the lowest in nigh on a year, undermined by concerns of soft Malaysian exports, thanks to a strengthened ringgit and competition from other vegetable oils.

Furthermore, the waning chance of an El Nino has reduced the concerns of damage to South East Asian production from dryness which typically accompanies the weather pattern.

Evening markets: EU, Ukraine fears lift wheat. Softs soften
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