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Opinion: wheat's price rally isn't built on air

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If American officials were trying to talk down grain prices, their effort looks wide of the mark.

The US Department of Agriculture on Thursday said that there was "no global shortage of food grains".

It added that "expectations that prices in the next few months will hit the record levels of 2007-08 levels are not substantiated by the reality of the global supply situation", pointing to the world's relatively high levels of stocks, compared with demand.

While neither statement looks irrational, nor are they illuminating. Investors looked justified in giving the caution short shrift and sending the wheat market higher.

Inflationary recipe

Investors do not need to believe in a big squeeze on food grains, nor in huge price prospects, to justify wheat purchases.

Sure, wheat's price rally has been impressive. But, even at last Friday's high, it had recovered well under half the ground lost between its 2008 peak and between its June low. There's plenty of ground for bulls to aim for without looking way overambitious.

What investors do believe is that world wheat supplies have been heavily disrupted by the huge slowdown in exports from the former Soviet Union.

That's put exports in the hands of fewer suppliers, most of them with less of an instinct for discounting too. This looks recipe for upward price pressure in any market.

Pressure point

Funnily enough, the USDA itself illustrated this a month ago, when it focused a different lens on the wheat market.

Then it noted how stocks of wheat held by the major exporters now looked likely to fall, by 12m tonnes, over 2010-11 rather than rise, and highlighted that this change in expectations was "already causing prices in the US and the EU to rise".

That drop in inventories now looks more like 20m tonnes, plugging in the fresh USDA crop estimates unveiled on Thursday.

And that assumes that Kazakhstan, Russia and Ukraine can still be considered members of the main exporters' club, when one of the trio has already banned exports, and the other two are under pressure to follow.

Take them out of the mix, and stocks held by the big shippers' club falls to 45m tonnes, around the levels in 2006-07 which laid the foundations for the spike which followed.

Not irrational

That's not to say history will repeat itself.

There's still plenty of scope for the rally to come unhinged, whether through a crop-specific factor � say, a surprise uptick in Black Sea exports - or an external shock, such as a realisation of the some of the worst fears for the world economy floating around.

But nor is a wheat's rally irrational. And, with Argentine and Australian crops still in the field, the former Soviet Union situation still unclear, and buyers still in town, there is some potential for further gains, even if the days of the easy wins appear to have past.


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