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Opinion: beware of swaying wheat

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Commodity investors have been given a taster of things to come. Not so much in the recovery of wheat prices on Thursday, nor in the tumble which preceded it. But in the grain's very somersaults.

This week has witnessed two of the three most unstable days for wheat so far this year. Prices on Wednesday spread 54 cents, or 8%, between day high and day low.

A few pirouettes in Chicago were to be expected. Trading volumes, and levels of open futures contracts, in all the major crops is rising. That's often a signal for moving prices. Just look what happed as trading patterns changed in the autumn of 2007.

The surprise is that it is wheat which is leading the acrobatics.

Fundamental reasons

There are good fundamental reasons why corn prices might spike. America last month forecast a fall in its corn inventories to their lowest for six years and looks likely to cut that estimate again, given the impact of slow plantings on yields.

Steady competition for limited supplies is one recipe for violent price movements.

Soybeans too, look ripe for volatility, as the United Nations Food and Agriculture Organisation said today. Oilseeds stocks, as a percentage of demand, are on their way from a snug 17.5% two years ago to an asphyxiating 12.6%.

Large stocks

The world, however, looks like staying awash with wheat, even after the recent downgrades to supply.

Sure, many producers, including Poland and the Ukraine, have cut forecasts for this year's crop. Plantings of America's spring crop have been slow. And Argentina's sowings have slowed to a trickle.

But global stocks have a long way to fall from the 182m tonnes the US is currently forecasting for a year's time to get to the sparse 120m tonnes which helped spur last year's wheat rally.

Reasons to invest?

Certainly, wheat has its attractions.

It looks cheap on some measures. The grain's average price in May was further below 2008 peaks than for corn or soybeans, according to FAO calculations.

And there is the chance of change in fundamentals if El Nino is indeed reborn, as some Australian forecasters think. Taking 10m tonnes out of Australian production, as drought two years ago did, would make a big dent in wheat's comfort zone.

Risky reason

But that's taking a chance. As is what many investors appear to be doing - following the herd into wheat.

They may be taking succour in the significant rise which followed the grain's autumn 2007 round of acrobatics. And growing inflation fears make it very possible they are about to rise again.

But commodities don't always end volatile spells ahead of where they started. Investors jumping on to wheat's bumpy ride should prepare for spells of discomfort.

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