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Wheat Market Update - Friday 12th February 2010
UK and Europe Harvest Overview
London feed wheat futures appear to have consolidated at current levels with values fluctuating in a given range on the back of outside market influences. Fundamentals remain bearish and continue to hang over markets with traders searching for fresh news to provide an indication of future direction. In the medium term fund activity, currency movements, weather concerns and South American crop prospects will be the main price drivers.
Physical markets remain thin with consumers well covered in the spot positions and farmers continuing to sit on stock. Farmers are reluctant to sell at current prices as they are perceived to be lower than the cost of production. Having now received their Single Farm Payment subsidies many farmers appear to be waiting until the new tax year in April before selling. At the moment they can afford to wait but limited barn space and a lack of incentive to carry over wheat into the new harvest year means it will come to the market soon. Some reports suggest that farmers have 30-35% of their wheat crops left to sell which isn’t unreasonable for this time of year.
Meanwhile, short covering by merchants is offering support to physical wheat premiums in the spot position. Premiums further forward remain steady and relatively unchanged from the levels they were trading at before the recent drop in futures values.
The latest European crop progress reports remain positive with the current spell of cold weather having little impact on final yields at this stage. A blanket of snow coverage across most parts of Europe has offered protection against frost damage.
There appeared to be some good news for Greece yesterday as Eurozone leaders agreed a deal to rescue them from their ballooning debt crisis which was threatening to bankrupt the country and cripple the Euro rate further. However, specific details on the deal have yet to be published and this is creating further uncertainty in currency markets. Euro values have declined by nearly 9% since December and this move could restore investor confidence and offer support.
US/World Overview
The latest USDA forecasts, released on 9th February, saw a further increase in global wheat production which is now estimated at 677Mt, up 1Mt on previous although still some 5Mt lower than 2008/9 levels. Global ending stocks are now forecast at 196Mt, against 164Mt last year, being their highest in nearly 8 years.
This is further bearish fundamental news for global markets to digest which could add to the downward pressure on wheat markets. Speculative funds are still shorting the market with only index funds continuing to hold a long position. Currency, outside market movements and fund activity are going to be the main market drivers in the short term and will continue to create a volatile trading environment.
Summary
The latest USDA report offered very little additional information to the market. Fundamentals remain bearish and will continue to weigh on values for the remainder of the season. This should limit any upside movement in the short term although outside markets, fund activity and weather events could offer support at some stage. Meanwhile, physical wheat trade in the UK in the near positions remain thin and consequently bread making premiums have firmed of late.
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