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Firm wheat prices are not such a paradox

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Rising wheat prices, despite near-record world stocks, may not be such a paradox after all.

There are plenty who fear the worst for the market. It's not difficult to see why given that Chicago futures fell below $2.50 a bushel in 1999-2000, the season last time world stocks hit the kind of levels forecast for this season.

But the outlook for now does not be quite so bleak, especially given Russia's predicament.

Corn support

Sure, wheat sellers were lucky for the second half of 2011.

Fears for crop damage caused by western Europe's dry spring turned out to be something of a, um, damp squib in crop loss terms, while Australian and former Soviet Union harvests far exceeded earlier estimates.

These results were likely to have sunk wheat prices, had it not been for a strong corn market, after a disappointing harvest left the US looking at historically-thin stocks of the grain.

Wheat has, as a rule of thumb, a 15% advantage in feed over corn, according to broker Allendale, meaning that even level prices made wheat look cheap, let alone the discount it has suffered for most of the last few months.

Lost prominence

But imagine that Russia does choke-off grain exports when they hit 23m tonnes. That would be far below potential of 27m-30m tonnes that the country's farm ministry has said may be possible. And most of the "lost" tonnage would be in wheat.

Russia's neighbours look in no position to fill the void. Ukraine farmers have been hoarding grain after a dismal start for autumn sowings, raising the prospect of higher prices ahead. Ukraine's grain harvest could tumble 30% to 40m tonnes, analysis group ProAgro said on Thursday.

Even if land-locked Kazakhstan can get its grain to ports, it's not clear how eager buyers would be, after Egypt, the top wheat importer, revealed it had rejected one cargo over quality concerns, and agreed to switch the three others it has bought in 2011-12 to Russian supplies.

Inventory breakdown

Nor are other exporters so comfortably off to pick up unfulfilled demand.

Nearly all the 10m-tonne increase in world grain inventories the US Department of Agriculture foresees for 2011-12 is accounted for by the former Soviet Union and China, which stockpiles rather than exports.

Inventories forecast for the other main exporters – Argentina, Australia, Canada, the European Union and the US - are seen little changed and, at 54.7m tonnes, lower than they were heading into 2010-11, when Russia's grain export ban sent wheat prices soaring.

Weapon blunted

It is only some comfort to consumers that Russian export curbs look very unlikely for now, although the cold snap which appeared on Thursday forecasts may make politicians less eager to take a chance on adequate supplies.

Russia's wheat exports may well fall off sharply, whatever. The country has lost price competitiveness, as merchants are forced to look further and further afield for supplies. And price is Russia's main weapon in trade.

Importers are hardly, after a history of bans and duties, likely to prize the country for reliability.

Not like 2010-11

Where buyers can take heart is in the relatively small amounts of trade likely to be displaced to the likes of the US, compared with 20101-11, when Russian wheat exports tanked by more than 10m tonnes.

Chicago futures look most unlikely to revisit levels approaching $9 a bushel hit a year ago.

But nor does wheat's renewed premium over corn look such a stretch.


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