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Morning markets: Russia fears keep wheat prices on offensive

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New month, new money?

That is another one of those Chicago trading themes, that just as end of months see funds withdraw cash, for paying the likes of client withdrawals, the month starts see fresh wads of money arrive.

And it could be one reason for the firm start to February for futures prices, in New York too, where raw


added 0.3% to 23.72 cents a pound for March and


for the same month gained 0.6% to 93.84 cents a pound, recouping losses from the last session.

(And without help from Chinese markets, which closed a tad lower for sugar and flat for cotton.)

'Key market determinant'

Another reason for strength in the agricultural commodities space is, of course, the continued talk of potential Russian curbs on grain exports, a concern really for the market in wheat, of which the country is a leading shipper.

And this when cold weather (temperatures in north west Russia reached -36 degrees Celsius) is not only hampering logistics but posing the threat of winterkill, and in some neighbouring countries too.

Overnight did little to quell fears which lifted Chicago wheat to a four-month high in the last session, and Paris wheat to a seven-month top.

"Cold weather in southern Russia, a major winter wheat area, incurred frost damage to some winter wheat in exposed areas with low snow coverage," Paul Deane at Australia & New Zealand Bank noted.

"Russia is shaping up to be a key market determinant again this year, after the export ban of 2010, with the government reportedly discussing a grain levy from April onward."

'More upside for wheat'

In Singapore, Lynette Tan at Phillip Futures said: "Going forward in the week, we could expect more upside for wheat as the protective duty from Russia is likely to push up wheat prices."

Whether any tariffs would be actually warranted or not, well, Brian Henry at Benson Quinn Commodities has his doubts.

"I believe the market could correct this problem regardless of a new policy," he said.

However, he added that "election year politics will likely yield a decision to limit access to Russian production".

And while "it seems the globe has plenty of wheat supply to fill the void left by Russia moving away from the export market, the buzz surrounding this issue combined with the large net short position will likely limit offers" of the grain.

Indeed, as of 08:40 GMT, when Chicago wheat stood 1.0% higher at $6.72 ¾ a bushel, having touched a fresh four-month high of $6.75 a bushel earlier.

Corn vs wheat

One would expect


, as a fellow grain, to get a boost too.

(Which is actually what happened, with the March contract adding 0.9% to $6.44 ¾ a bushel.)

But the simple headline move concealed some more complex background dynamics, with many speculators hedging one grain against the other.

"The May wheat-May corn spread is becoming very active lately, buy wheat-sell corn," Mike Mawdsley at Market 1 noted.

If that is a negative factor, a positive one was the March contract's zip through its key technical points of the 100-day moving average, situated at a little over $$6.39 a bushel, and above which the lot has not closed since September.

Key month

As extra supports, the corn market also has orders this week from Japan and South Korea to factor in, besides Tuesday's downgrade by drought-hit Mexico to its corn crop hopes.

Agriculture minister Francisco Mayorga pegged the crop at 21.8m tonnes, of which 20m tonnes comprised the white corn used to make tortillas, compared with earlier expectations of a 25m-tonne harvest.

A weak harvest would be a second successive drought-depressed one, with last year's coming in at 19.2m tonnes, including 17.6m tonnes of white corn.

And, of course, this is a key month for the crop, setting the prices at which insurance payouts for the next crop year will be set.

"We would expect the bulls will be looking back to last year when a $0.63-a-bushel premium was added from start to finish and they will be hoping for a repeat," Jon Michalscheck at Benson Quinn said.

"This year the market is convinced that the producer will be adding 3m-5m acres and that could provide some overhead resistance to prices this year unless global risk concerns continue to underpin prices."

'Increasing concerns'


were dragged up too, by 0.5% to $12.05 a bushel for March, bouncing up against their nine-day and 20-day moving averages.

While weather in Argentina is looking better in precipitation terms, a depressant to prices, the oilseed is now getting locked in in earnest to corn in the so-called battle for acres, when crops compete for prominence in farmers' planting schedules.

The key battle is actually between November soybeans and December corn, which showed a ratio of 2.10 on Wednesday, indicating some regained ground by the grain which the oilseed must counter to avoid losing area.

Furthermore, downgrades to Argentine crops keep coming in, whatever. Oil World on Tuesday cut its estimate for the country's soybean harvest by 2.0m tonnes to 46.5m tonnes, and its forecast for Brazilian output by 2.0m tonnes to 70.0m tonnes, citing "increasing concerns" about the crops.

"The soybean and corn crop losses in South America will shift foreign demand to US origin in 2012," the analysis group added.

"This is likely to result in lower-than-expected US stocks at the end of this season."

Chinese boost

Also worth placing on the radar are data showing an unexpected improvement in Chinese manufacturing, with the official monthly purchasing managers' index rising to 50.5 from 50.3.

Any number above 50 indicates expansion, and economists had forecast a figure below, with the sector sapped by the woes in the eurozone, a major export customer.


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