Sell-off in grains and oilseeds 'an over-reaction'

by Agrimoney.com

The sell-off of in grain and oilseed markets in response to the Libyan crisis is an over-reaction, with tight supplies, particularly of corn, warranting continued high prices.

The Canadian Wheat Board said that the Libyan unrest "in reality, does not materially change the grain fundamentals facing the market", even through the global economic fears it has provoked through lifting oil prices.

"There are macro-economic impacts that may arise from the political uncertainty, but these factors are not anticipated to have a measurable impact on wheat demand or trade," the board, the world's biggest marketer of wheat and barley, said.

For durum wheat, the variety used in making pasta, "the turmoil across North Africa and the Middle East has had neither a positive or negative effect on demand".

'Unsustainable levels'

Rabobank analysts said the sell-off of up to 14% in grain prices in seven sessions had driven them to "unsustainable levels", provoking demand at a time when, with supplies thin, high prices were needed to limit consumption.

"The underlying fundamentals in grains and oilseeds remain bullish," the bank said, retaining an upbeat view on prices over the medium term.

"Grains and oilseed prices are likely to find support from consumers who have shown an increase in buying activity amidst this pullback in prices. Higher prices are needed to further ration demand."

The bank attributed the correction largely to a sell-off by speculators trimming risk exposures, or switching to oil, whose prices have been sent by fears of further Middle East unrest to two-year highs above $100 a barrel.

'Single most bullish aspect'

Both the CWB and Rabobank were particularly bullish over corn prices, which the board saw as taking over "market leadership" from wheat.

"Corn futures should stay strong to ensure acres and will thrive with any adverse weather during the planting window," the board said, terming the dynamics of the broader coarse grain complex, including barley, oats and sorghum too, as the "the single most bullish aspect" in farm commodity markets.

"The massive world protein push coupled with key production disruptions and of course the continued use of grain as fuel has placed enormous pressure on the global coarse grain supply-and-demand balance."

Without a "massive" US corn harvest, and decent production in the Black Sea producers, coarse grain stocks could challenge the 20-year low set in 2007-08 – a major driver behind the last spike in farm commodity prices.

Wheat price prospects 

The CWB added that wheat prices were, nonetheless, set for a gentle decline as global production recovers this year.

Even the "perilous condition" of America's hard red winter wheat crop looked surmountable, given the relatively strong levels of stocks, of 309m bushels, which the US was set to hold at the close of 2010-11.

"The stocks situation may potentially play a role in cooling wheat markets as the US marketing year winds down between now and the end of May," the CWB said.

But spillover strength from corn meant that richer inventories did "not necessarily mean that wheat futures will decline precipitously from the recent heights"

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