Wheat prices hit new highs as drought heats up markets

Wheat prices have struck new highs as widespread drought in Black Sea countries has added to fears of a widespread shortfall in world grain harvests.

London wheat futures opened at £148/t for November movement this morning (Tuesday, August 3) as the bull run showed no signs of abating. The value of the November contract on the NYSE Euronext exchange has risen from about £105/t to nearly £150/t in the space of a month.

However, it is still too early to determine realistic estimates of yields in Western Europe and shortfalls may not be as much as feared.

Ukraine is expected to cut its grain exports in the 2010-2011 season from 21.5m tonnes to 16m tonnes, while other Black Sea countries like Kazakhstan are understood to have escaped the worst of the drought and are not expected to see any significant reduction in yield.

However, prolonged drought in Russia and Ukraine has been coupled with “sukhovei”, a hot dry wind similar to the American dust bowl storms which could further reduce exports this season from major shipping regions.

Senior trader Nick Oakhill at Glencore Grain said futures markets had risen 48% since the UK Cereals Event in mid-June, as investment funds had invested heavily on Chicago and MATIF futures exchanges. “The potential situation in Russia, coupled with a lot of fund activity in recent weeks, has proved a pretty intoxicating mix.”

However, he said the market was likely to correct itself when more precise information was available on individual countries’ harvests.

For the time being the fear of significant reductions continues to inflame markets. Russian wheat production could be nearer to 50m tonnes, compared with 61m tonnes last season, and traders fear that the Russian government may step in to limit exports and conserve animal feed stocks.

Last week the Canadian Wheat Board cut its forecast for the 2010-2011 wheat crop to 18.5mt.

But prospects of a return to the global food shortage seen in 2007-2008 are unlikely, as world grain stocks remain relatively high.

And short-term market activity presents the best opportunity UK farmers have had to lock into prices of £140/t and above for more over two years.

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* For a Farmers Weekly view, see Phil Clarke’s Business Blog