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Opinion: Kansas wheat's downer won't last for ever

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Investors hoping for a rebound in Kansas wheat won't be disappointed for ever.

There are good reasons to think that the grain's loss of all but a handful of its premium over Chicago's soft red winter wheat won't yet herald quite the same bounce as it did in December last year.

Then the premium widened from 15 cents to 50 cents within five months.

But that does not mean that a revival will never come.


There are good fundamental reasons for Chicago to play catch up for now.

The huge wheat stocks the US is building up are primarily of Kansas's hard red winter variety, a higher-protein type.

US inventories of hard red winter wheat will rise by nearly 40% to 354m tonnes during the 2009-10 marketing year, according to Washington estimates.

Meanwhile, stocks of Chicago's soft red winter wheat will fall 5% or so, to 162m tonnes.

It is hard to see US millers paying too much extra for quality when they have so much to choose from.

Exports suffer

Prospects for the other main source of demand for Kansas wheat – foreign buyers – don't look promising either.

The slide in US wheat exports to a seven-year low that the US Department of Agriculture portrayed last week will hit the hard red winter variety hardest.

Its shipments will tumble by 23% in 2009-10, twice the decline that the average US wheat will suffer.

What's more, if market thinking is correct that delays to the US corn and soybean harvests will leave no time for winter wheat plantings, it is sowings of the soft red variety that looks likely to suffer most.

Hard red winter wheat is grown primarily in wheat country that has less tolerance of soybean and corn rotations.

Buy sign?

That's a gloomy picture. But there are some potential touch-ups that could make it look prettier in a few months' time.

One is a pick up in US wheat exports. As the main export variety, that would be likely to benefit Kansas wheat more than other types.

Washington hasn't given optimism much room in its latest export projections.

And it is easy to envisage how they might be proved pessimistic, if the global economy revives as fast as equity investors are pricing in, and the weakening dollar appears to indicate.

Regulation lottery

Another reason could be the fallout from America's regulatory shake-up of wheat and energy markets

Chicago is far more favoured by speculators and index funds. That's one reason, many say, why its futures prices tend to show a far bigger basis over cash than Kansas wheat contracts do.

If regulatory tinkering prompts investors to sell down wheat it is likely to be Chicago that suffers worse.

Risk versus reward

It's very possible that Kansas's premium over Chicago may close further for now. Kansas wheat may even fall into a discount, as it did in the summer of 2007.

But investors should take that as a signal to take a keener interest rather than give up hope. Two years ago, Kansas turned a discount of 40 cents a bushel to Chicago back into a 10-cent premium within a month.

Kansas wheat may have further to fall. But it is already approaching a point where the risks of steering west of Chicago are smaller than the potential rewards.


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