Grain futures slump, as G20 frets over high prices

by Agrimoney.com

Grain futures plunged, sending wheat down 8% in Paris and Chicago, where the spot contract hit its lowest since July last year, and corn limit down even as heads of leading economies held their first-ever summit on high food prices.

Leaders of the G20 nations met in Paris on Wednesday to discuss plans including emergency grain reserves, and improved information on agricultural commodities, to tackle food prices which remain near record highs, according to United Nations data.

Many of the measures proposed by France, in its term of presidency of the G20, are proving controversial, including limits on speculators' positions and minimum cash deposits for futures deals, ideas opposed by Brazil and the UK.

However, even as delegates attempted to thrash out an agreement, food prices reverted to a downswing which has dragged Chicago wheat 30% below a February high, and seen corn notch up a 15% loss since setting a record set on June 10.

Chicago wheat for July hit $6.17 ¼ a bushel at one point, the lowest for a spot contract for nearly 11 months, during the early days of the grain market rally.

'Already priced in'

The declines came despite a cut by the UN's food agency, the Food and Agriculture Organization to 2.30m tonnes in its forecast for world cereal production this year, 13m tonnes below an estimate set two weeks ago.

Crop prices at 16:10 GMT Chicago wheat: $6.26 a bushel, -7.2% Paris wheat: E196.00 a tonne, -7.8% London wheat: £164.00 a tonne, -5.6% Chicago corn: $6.77 ½ a tonne, -4.2% (down the exchange maximum) Prices for July contracts on US exchanges, and November lots in Europe

The downgrade reflected America's "excessive wet conditions", which have delayed sowings and flooded some crops, and "persistent dry weather" until late in much of Europe.

"But often by the time government agencies make adjustments, they are priced into the market anyway," Erin Fitzpatrick at Rabobank said.

What had been a bigger surprise was the extent of the market's rally on Tuesday, when Chicago corn jumped some 3%, and was now being reversed against a less exuberant macroeconomic background.

Risk of surprise

Indeed, shares traded broadly flat, while the dollar gained ground, as focus shifted from the success of the government in debt-laden Greece in winning a no-confidence motion on Tuesday to its ability to push through cost cuts and tax rises needed to secure a E12bn rescue package.

Antonis Samaras, Greece's opposition leader, said his party would vote against government plans for further austerity measures.

A stronger greenback erodes the competitiveness of dollar-denominated assets such as many agricultural commodities.

And markets were likely to continue to trade broadly in line with macroeconomic factors, with investors potentially unlikely to take positions ahead of important US Department of Agriculture reports due next Thursday on domestic crop inventories and sowing area.

"No-one wants to be on the strong side of the trade if the USDA surprises markets next week," Ms Fitzpatrick said.

Oversold?

Nonetheless, the FAO dismissed ideas of an extended dip in crop prices, saying they would "stay not only high, but also volatile" in 2011-12, thanks to the likelihood that cereals output would, now, fall short of consumption.

The stocks-to-use ratio – a key measure of the availability of supplies - for world cereals was set to fall by 0.5 percentage points to 20.7% over the season.

Separately, Barclays Capital analyst Sudakshina Unnikrishnan warned that grains had been "oversold" by investors taking a lead from macro-economic fears rather than crop fundamentals.

"Weather woes remain with concerns over delayed and lower-than-expected plantings in North America and the impact of a dry spring on European production," she said.

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