Futures in high-protein Kansas wheat offer one of the best potential bets in commodities, Societe Generale said, as Australia rains and Russia's grain drain sparked concerns for supplies of quality wheat from elsewhere.

The continued discount of Kansas's March contract to the May lot appears an anomaly given the squeeze on supplies of high quality wheat, SocGen commodity strategist Jesper Dannesboe said.

Futures in other milling wheat markets, in Paris and especially Minneapolis, had moved into so-called backwardation, with May contracts trading above March, to reflect the squeeze.

While grain markets usually trade in so-called contango, in which later lots attract a premium to reflect storage costs and interest, backwardation sometimes kicks in when short-term supplies are seen as tight.

March vs May

The case for the Kansas spread is heightened by the relatively poor state of this year's seedlings which, thanks to a lack of moisture, are entering winter dormancy with a historically low 48% rated in "good" or "excellent" condition, according to Australia & New Zealand Bank analysis of official US data.

"Looking at the hard red winter wheat areas, the Kansas City wheat curve should soon move into backwardation," Mr Dannesboe said.

"As the drought is expected to linger well into the New Year, we recommend a bull spread," with investors going long on the Kansas March 2012 contract and short on the May lot.

'Stocks decimated'

The comments came as concerns mounted for supplies from the Black Sea, given rain damage to the Ukraine crop, which has left only about 30% of wheat of milling grade, according to Agritel, and heavy exports from Russian which are emptying silos of higher-quality wheat.

Andrei Sizov senior, the chief executive of analysis group SovEcon said on Wednesday that Russia's "wheat balance is fragile", with stocks "decimated" in the south and centre of the country.

Inventories in Krasnodar, near to export facilities, entered the month at half their levels a year before.

Russia's wheat stocks are likely to end 2011-12 at 10m tonnes, below the 11.7m-tonne level at the close of the previous season, when the country lost one–third of its crop to drought, Mr Sizov added.

'Supply has begun to dwindle'

And, at Morgan Stanley, Hussein Allidina, head of commodity strategy, said that "sources indicate that Russia's high-protein wheat supply has begun to dwindle, owing to high early-season volumes shipped to milling customers such as Egypt".

Mr Allidina added that "if these reports prove true, this would be positive for US high-protein wheat in the second half of the marketing year and may lead to some additional widening in the Minneapolis-Chicago wheat spread, which has widened to nearly $2.50 a bushel".

Chicago trades soft red winter wheat, a lower protein grain than the hard red winter wheat traded in Kansas, and Minneapolis hard red spring wheat.

"Any weakening in Russian export supplies, not replaced by Ukrainian exports, also bodes well for hard red winter wheat export sales which currently lag the five-year average pace by 52m bushels, 18%."

'Precisely the wrong time'

Furthermore, hopes dwindled further for Australian supplies, following rains which dumped 300mm (nearly 1 foot) of rain in some parts of New South Wales, the second-biggest grain producing state, this month, with some wet damage in top ranked Western Australia too.

"The rain has come at precisely the wrong time for the nation's winter grain and oilseed producers," with winter barley and canola crops ripe or ripening, Luke Mathews at Commonwealth Bank of Australia said.

Signally, he compared this harvest with the last one, one of the worst on record for harvest rains, and quality downgrades to wheat, saying "current weather related issues are reminiscent of the 2010-11 east coast harvest, which was one of the most challenging in memory".

Downgrades, caused as harvest moisture encourages sprouting of grains, lowering protein and starch content, "are now expected to be significant in New South Wales", where some 4.5m tonnes of wheat is yet to be harvested.

"We are now hearing widespread reports of wheat samples with poor test weights, low falling number results and sprouted grains," Mr Mathews said.

In Sydney's futures market, "the east coast harvest delays and associated quality downgrades have supported milling wheat prices for prompt delivery", he added.