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Opinion: wheat's rally may yet have some puff left

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Wheat's rally may still some puff left, even after its sprint on Thursday.

That's not to say that prices can avoid a dip on profit-taking. Indeed, it may be the prudent course to cash in some gains after a rise of more than 50% since the end of June in prices of Chicago wheat, the global benchmark.

And farmers yet to sell a grain of this year's crop might yet find their white-knuckle ride ending in the soup if a blow-up, even apparently disconnected to commodities, such as a sovereign debt crisis, sends funds scurrying for cover.

But the ultimate stop light to any crop rally � a buying strike by end users - has yet to show red. That's some comfort to those still with money on the table.

Farmers vs buyers

Sure, many investors swear by charts, candlesticks, Fibonacci ratios and other technical indicators as guides to market movements.

But the ultimate determinants of prices are these � the lowest values that will tempt farmers out of bed, and the highest prices that buyers will get out their cheque books to pay.

For much of the last year, buyers have been in charge, with low prices, weighed down by hefty stocks left over from bumper 2008 and 2009 harvests, defying wheat farmers not to throw in the towel.

And many did. Wheat sowings in the US, the world's top exporter, slumped to their lowest since 1971. While plantings rose in the European Union, the leading producer, that was only because conditions in the barley market were even worse.

Living on the ceiling

But now growers are off the ropes. As noted a week ago, the wheat market "crossed a rubicon" when Egypt relaxed its tough restrictions on exporters � showing that importers were no longer packing all the punches.

Indeed, the market have turned from exploring the floor to testing the ceiling, to discovering exactly how far buyers are willing to go to secure supplies.

There was little sign that consumers were baulking on Wednesday, when Egypt, Israel, Jordan and Tunisia announced purchases, even at prices more than 60% higher than they were paying when growers were on the back foot.

Sure, Thursday's rally raised the bar higher � by 8% in Chicago at the time of writing.

But with Japan buying on the day, and Bangladesh and Jordan (again) out to tender, it is not clear yet that the hurdle is high enough to deter enough consumers and correct the market.

Egyptian factor

The kind of thing investors and farmers should look out for is upgrades to southern hemisphere crops, or more buyers following the United Arab Emirates, which cancelled an, albeit small, tender on Thursday.

That gave a little candlepower to the market's amber traffic light.

A statement by Egypt, the world's biggest wheat buyer, that it would replace orders threatened by Russia's export ban with tenders for a mere 60,000 tonnes a month looked like an attempt to get the red light flickering too.

Indeed, Egypt's ability and willingness to run down its stocks in the hope of buying cheaper, later, will be a key dynamic in determining just when the market traffic lights change colour.

But with the export market losing Russia and, potentially, Kasazkhstan, Canada and Ukraine lowering their aim, and Egypt demonstrating on Wednesday it was prepared to pay a generous $270 a tonne for wheat, it's not obvious that Cairo should have investors feeling too uncomfortable for now.


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