Analysis: Wheat futures frenzy fails to infect cash market
CHICAGO (Reuters) - A near 80 percent surge in wheat futures prices since June suggests a world in panic over supplies of the vital grain. But recent buying in U.S. cash markets tells a different story.
Export sales from the United States, the world's top supplier, have shown only a mild increase over the past two weeks, despite a dawning realization that the worst Russian drought in 130 years would cut into supplies from the No. 3 exporter.
And even as Moscow's declaration on Thursday of a temporary export ban triggered a renewed surge in Chicago Board of Trade wheat futures, cash basis prices fell to their lowest level in nine months as farmers rushed to capture high prices and Midwest grain buyers balked at paying higher prices.
The sharp decline in the so-called basis and the export data underscored what many grain analysts have been saying for weeks: with global inventories flush, the fund-led futures surge is an overreaction to a weather disaster that, for the moment, still appears unlikely to cause a worldwide shortage.
With that in mind, many are bracing for futures prices to collapse.
"With world wheat stocks being ample, and wheat stocks in the U.S. likely to be the highest in 23 years this season, we are not seeing any real import demand at our doorstep," said grains analyst Dan Basse of AgResource Co. in Chicago.
"Generally, how can you have continued gains in futures unless cash markets lead futures higher?" he said.
The situation is a far cry from the global shortage in rice two years ago, when a surge in prices stoked violent protests in several countries after some top producing nations banned exports in a bid to preserve supplies for the domestic market.
In March 2008, Chicago Board of Trade spot wheat futures raced to a record high above $13 a bushel.
On Thursday, futures rose the daily trading limit of 60 cents to $7.85-3/4, the highest for a spot month since August 2008, as Russia announced an export ban from August 15 to December 31 in an attempt to keep a lid on inflation.
A drought that analysts said could have decimated a quarter of the Russian crop has revitalized the wheat futures market, which just two months ago was wallowing in bearish fundamentals of ample supplies across the globe.
But even as CBOT wheat futures surged on Thursday, prices tumbled in the cash barge market where U.S. exporters source supplies for shipment to customers around the world.
CIF bids for August shipment fell 10 cents per bushel while bids for September shipment fell 30 cents, traders said. This indicates that export demand for U.S. wheat from end-users like makers of cereals and bread was not strong enough to sustain prices in the cash market.
Wheat export sales for the past two weeks have come in higher than expected, but not unusually high for this time of year at just under 1 million tons.
"...I think wheat is all dressed up with no place to go. If export business is going to be shifted here, you would think the cash basis would be up but the barge basis is in fact down 30 cents," said Roy Huckabay, analyst for The Linn Group.
LOW-INTEREST RATES HELP FUNDS PILE INTO WHEAT MARKET
Basse said historically-low U.S. interest rates are helping to fuel massive fund buying in wheat futures as "they look for investable markets" amid concerns that the economy might suffer a double-dip recession in the coming months.
Funds bought an unusually large number of CBOT wheat futures on Thursday, estimated by traders at 20,000 contracts, equivalent to 100 million bushels of wheat.
Latest data from the U.S. Commodity Futures Trading Commission showed that managed funds reduced their net short position in CBOT wheat futures for a sixth straight week.
U.S. wheat stocks this season are projected by the USDA to be the largest in 23 years at about 30 million tons -- more than double the amount of wheat estimated lost to the Russian drought, according to a Reuters poll.
Although there has been no panic-buying, countries like Egypt that depend heavily on supplies from Russia have been bulking up on U.S. wheat as insurance in case of defaults by exporters they have contracted with to supply the grain.
The USDA's export sales report on Thursday showed that Egypt, a top buyer of U.S. wheat now firmly in the arms of Russia, bought 110,000 tons of U.S. hard red winter wheat last week. That added to the 95,200 tons the country had purchased in the prior week, USDA data showed.
Although there has been no significant surge in export demand for U.S. wheat, the drought in Russia and its export ban lifted shares of grain companies like Archer Daniels Midland Co. (ADM.N) and Bunge Ltd. (BG.N) on Thursday amid expectations that their exports of U.S. wheat will be boosted.
(Additional reporting by Sam Nelson and Mike Hirtzer; Editing by David Gregorio)
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