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Opinion: what wheat buyers can learn from sugar

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Wheat buyers just got a reminder to avoid doing what many peers did with sugar - and not to bank on buying on the cheap when production pressures kick in.

There is every chance that the fresh rally in wheat prices will fizzle out before too long.

It would be mightily premature to write off the US winter wheat crop on the basis of the first condition rating of the season – especially when sowings of the grain are likely to have been sent rocketing by farmers cashing in on a firm market.

However, buyers should not count on prices returning to levels that existed before the July spike, just because hefty crops look on their way in Argentina and Australia.

Not as planned

Those are the kind of hopes that many peers in sugar harboured, holding off after New York futures hit a multi-decade high of 30.40 cents a pound in February in expectation of record Brazilian production - only for many to find they had missed the boat.

While sugar prices quickly halved, expectations that they would fall back to historic levels of around 12 cents a pound - and stay there - proved misplaced, for two reasons.

First, too many buyers had made the same bet, meaning long waits to get sugar out of Brazil as the country's infrastructure creaked under the weight of orders.

Secondly, poor weather dented output in Brazil and many other producers, meaning greater competition for what sugar was around.

The result – consumers who missed the dip are now having to pay nearly as much as they did at February's peak.

Production pressure ahead

Many wheat buyers appear to be banking on wheat prices heading for a tumble too.

Traders have told that many consumers are holding off coverage for 2011 in expectation that prices will fall as Australia's bumper crop – estimated by Australia & New Zealand Bank on Wednesday at a 25-year high of 13m tonnes in eastern states alone – and an increasingly promising Argentine crop come onstream.

A dearth of end-user purchases was reflected, for instance, in a steep decline in UK milling wheat premiums last week.

Wrong place

But the success of a policy of holding off assumes that enough Australian wheat gets onto the market to put significant pressure on prices. And with production concentrated in the east this year, where infrastructure is limited, that is not a given.

Rabobank has estimated that Australia's 2010-11 exports will be, at less than 14.5m tonnes, potentially lower than last year's.

As for Argentina, that crop is a long way from the silo yet. Indeed, it has yet to run in earnest the gauntlet of La Nina weather conditions, which Rabobank claims are closely correlated in Argentina with weak yields.

Reasons to be fearful

It is certainly possible that wheat supplies may, in five or six months' time, look a lot more healthy than they do now.

But with exports in many European countries running at unsustainable rates, autumn sowings in the former Soviet Union down and high corn prices posing the potential for greater wheat use among livestock farmers - let alone the poor start for US winter wheat - is not a racing certainty.

Wheat buyers may be wise not to let price breaks run too long, as their sugar peers did, before considering them ripe for exploitation.


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