All of a sudden, there’s optimism in world grain markets.
If Mother Nature can cause more pain to farmers in the southern United States and Eastern Europe, then there could be higher prices for wheat and its sister commodities.
“The drought persists and that’s what’s driving the market,” said Oklahoma State University economist Kim Anderson last week, as wheat prices on U.S. commodity exchanges closed higher in a rally that has taken them more than 13 percent above the low prices in early December.
“There’s a potential for $5 (US per bushel) wheat. If it doesn’t rain (in the southern U.S. wheat belt) there’s potential for $6 wheat.”
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Large parts of the American hard red winter wheat area are dry and frost has been biting.
The situation is also bad in Russia and Ukraine, where more than one-quarter of the winter crops have been damaged or destroyed by a combination of winterkill and drought.
Ukraine, which grows bigger winter crops than colder Russia, has reported that 30 percent of its winter wheat and 50 percent of winter barley has been hurt by severe cold in January.
Russia has reported that about 30 percent of its winter crops may have been killed by freezing.
Both countries suffer some winterkill every year, but this amount is well above average. Replacing winter wheat with spring wheat produces a significantly smaller crop.
Anderson forecast wheat futures prices trading in a range of $4.05 to $4.45 per bu., well above December prices of around $3.60.
Rich Nelson of Allendale Inc. said on Feb. 17 that a cold snap was further damaging the U.S. drought-stricken crop. The dryness has left large parts of the crop without snow cover and susceptible to freezing. Severe cold last week appears to have hurt many fields.
“Generally this winterkill may cause some problems down the road,” said Nelson in a commentary for the Minneapolis Grain Exchange.
The problems in the U.S. wheat belt and Eastern Europe have drawn new attention to predictions that 2006 wheat production will fall behind world consumption and draw down stocks.
Wheat futures have also been helped by commodity index funds, which have bulked up on grain contracts, said Errol Anderson of Pro Market Communications.
Commodity index funds “are the new kid on the block, and they’re building an overall portfolio of wheat and soybeans and so forth,” said Anderson.
“They’ve just got scads of money. We’re talking billions of dollars.”
Not only has index fund investing helped shore up a generally weak market, but other funds also piled into wheat during its rally. That should pull the cereals higher.
“It’s really lining up that wheat and corn are going to lead this thing higher,” said Anderson.
As has been the pattern all winter, oilseeds offer the most disappointing prospects. Large stocks of soybeans and canola are holding down the price and South American soybean crops have so far encountered no serious problems.
But soybeans, and especially soy oil, were caught up last week in the rally, with oil up about four percent and beans up about two percent on the week.
Canola gains
Canola at the Winnipeg Commodity Exchange gained one percent, although the expected record three million tonne carryover limits further upside prospects, most analysts say.
But Anderson expects canola to rally at some point as well.
“We could move up $10 to $15,” said Anderson.
Fund buying could push canola through a key resistance level, causing a surge upward.
“Mind you, that’d be a good time for growers to sell,” said Anderson, sharing the same bleak long range-view for old-crop canola.
