Signs that investment funds are beginning to rebuild positions
in soft commodities markets could bring some much needed support to
grain prices, according to one trader.
Mark Smith, grain director at
Saxon
Agriculture, said there were signs that corporate funds were
starting to rebuild the extensive positions held on the Chicago
futures market before they scrambled to liquidate contracts this
summer.
"It seems the funds are starting to creep back into play again,
which is likely to be quite a supportive factor in the marketplace.
And when these guys are buying they regularly buy huge
tonnages."
More than 35m tonnes of "paper" wheat - over three times the UK
national harvest - was traded in a single day on the
Chicago market last year, Mr Smith said. "Funds can cause chaos
when they leave the market in a hurry, but they do seem to have got
back the appetite for soft commodities."
Last month, futures markets reacted jumpily to suggestions that
the US government could regulate investors' involvement in soft
commodities futures, as the scale of their activities risked
putting upwards pressure on food prices.
"If Chicago becomes heavily regulated, it's possible we could
see much greater investment fund activity on the
French MATIF market or even the
London futures exchange."
Mr Smith said he remained optimistic about the long term outlook
for grain prices, although he acknowledged the UK had a significant
exportable surplus to shift this season. "World stocks of grain are
into the safe zone again, which is why we are seeing depressed farm
prices. But the UN Food and
Agriculture Organisation is predicting we will need 1bn tonnes
of cereals worldwide by 2050 - and that's without any demand from
biofuels."
World harvests in 2008 and 2009 had seen few production problems
in key exporting regions like Australia and Canada, Mr Smith said,
suggesting it was only a matter of time before weather problems
somewhere caused a shortfall. "It's very rare to get three
consecutive big crops in the world."
However, cheap Black Sea wheat remained an aggressive competitor
to UK wheat for key Mediterranean markets. "Russia, the Ukraine and
Kazakhstan all have a strategy to increase production and exports.
These countries see highly variable production trends due to often
extreme weather. But Ukraine is the key variable and that's the
market to follow."
The Black Sea region had significant potential to increase
yields, Mr Smith added. British farming company
Landkom International, which
farms some 8000ha in the Ukraine, had already pushed output to more
than 1t/ha above the Ukrainian average, he said.
* For a Farmers Weekly view on the grain trade, see
Phil Clarke's Business Blog
