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Will record inventories sink wheat prices?

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The game isn't over for elevated wheat prices, despite world supplies being even richer than investors had thought.

Sure, the US Department of Agriculture has delivered a blow to bulls by raising its estimate for world stocks to a record high of 213.1m tonnes.

That's equivalent to about 31% of consumption, or enough to meet nearly four months' use - plentiful in anyone's books, and hardly makes the 2% falls in wheat prices on Thursday look unjustified.

But buyers still don't hold all the cards.

Location factor

Consumers' trouble is that, even though there is more wheat around, they can't get to much of it.

The USDA's biggest upgrades were to inventories in land-locked Kazakhstan, which is already running full pelt to get the most of its record crop it can through its meagre export links, and India, a modest importer.

OK, India looks like it might export to Iran, which is being denied access to US and European supplies by sanctions, to judge by comments by trade secretary Rahul Khullar.

India, which is paying farmers 12,850 rupees ($260) a tonne for wheat, equivalent to more than $7 per bushel, might even be able to persuade Iran to offer it a profit.

Exporters' stocks

But, even if it does, India, keen to protect domestic food security and with such high-priced supplies, hardly looks like tipping the balance on world trade much.

Its total shipments over the last five years total less than 300,000 tonnes, and not since 2003-04 has been a leading player.

Meanwhile, supplies in the major exporting countries aren't looking any larger.

In fact, the USDA cut by 1.4m tonnes its estimate for year-end inventories in the top exporters, including Australia, Canada, the European Union, the US and the former Soviet Union - excluding Kazakhstan, for which extra supplies do not look like improving export prospects.

Their combined carryout stocks of 75m tonnes for 2011-12 are in fact forecast a little lower than they were at the end of the previous season.

Premium under threat

And this is against a background of increasing concerns over 2012 harvests.

Doubtless, many of the fears over winterkill in Ukraine and eastern Europe, and drought setbacks to wheat crops in the likes of North Africa, parts of the European Union and the US, will prove overblown. But they still warrant some risk premium for now.

The Wasde certainly tipped the needle in grains back away from wheat and towards corn, for which US and world inventory estimates were lowered.

While that may mean corn prices outperform again for a while, it doesn't mean that wheat values will tank.


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