Wheat prices soar despite Macquarie caution

Wheat prices rebounded strongly on Monday on fears over Ukraine and the dryness in the US Plains, despite a caution from Macquarie that the market has "built in sufficient weather risk premium".

Wheat futures for May reached $7.16 a bushel in Chicago, a gain of 3.3%, while hitting $7.94 in Kansas City, which trades hard red winter wheat, up 2.9%.

In Paris, wheat for May hit E213.75 a tonne, a gain of 1.4%.

The headway came amid lingering concerns over the impact on US winter grain seedlings from dryness in states such as Kansas and Oklahoma, primarily hard red winter wheat country.

'Dust bowl winds'

"US wheat futures are gaining support from continued dryness in the southern Plains," Benson Quinn Commodities said.

Wheat prices, Monday as of 11:40 Chicago time (16:40 UK time) 

Chicago: $7.14 a bushel, (+3.0%)

Kansas City: $7.93 a bushel, (+2.9%)

Minneapolis: $7.64 a bushel, (+2.8%)

Paris: E213.50 a tonne, (+1.3%)

London: £169.75 a tonne, (+0.9%)

Values for May contracts

"The moisture situation in the southern plains continues to offer support to wheat markets that have a tendency to get overbought."

Weather service MDA said that "moisture remains very short across the Plains, and continues to decline across the Midwest and Delta".

Although some rain is due in the Midwest and Delta, areas growing soft wheat, this week, "more will still likely be needed to completely replenish moisture", MDA said.

QT Weather said that "dust bowl winds are blowing like a son-of-a-gun again today", with many observers highlighting dust storms in states such as Texas and Oklahoma.

'Political tensions'

Furthermore, "the situation in Ukraine will continue to draw some interest", Benson Quinn Commodities said.

SovEcon on Monday cautioned of potential long-term setbacks to Ukraine's grain export capability from the Crimea crisis, while also flagging the potential for a further rise in wheat prices in Russia, which was already last week, in an Egyptian tender, revealed to be losing competitiveness against rival origins such as France and the US.

Commerzbank said: "The political tensions between Russia and Ukraine could hamper not only production there, but above all the international trade flows."

'Sufficient weather risk premium'

However, Macquarie urged caution against expecting the rally to persist, noting that US wheat is still early in its development, meaning that "we can, in reality, tell very little about the crop today".

"Given the run up in prices through the last couple of weeks, we believe the market has changed from one that would be required to rally if dryness persisted to one that will likely see a price fall if rains build through these regions," Macquarie analyst Chris Gadd said.

He downplayed the extent yet of the threat from dryness to other crops too, including those in eastern Germany, Poland, and southern Ukraine, and in Australia where a dearth of rainfall has raised question marks over the forthcoming autumn sowing period.

"Whilst we see that massive downside in prices is unlikely in the near term, we do though believe the market has built in sufficient weather risk premium to reflect current concerns," Mr Gadd said.

Chinese imports to drop

Macquarie also highlighted the prospect of weaker demand for wheat this season, particularly from China, whose import needs for 2013-14 were spurred by a poor harvest last year.

"Whilst we see that domestic demand will likely see little change in the 2014-15 season, we would expect exports to see a considerable drop.

"We expect trade flow demand to fall in the 2014-15 season as the exceptional demand that we saw from China last season should fall back to normal levels."

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