Last week we were all concerned over the USDA’s October report which saw a sharp jump in prices followed swiftly by further fund selling which pushed prices lower still, despite the bullishness of the report – particularly in corn and soybeans. The power of a protracted fund selloff has been amply demonstrated these last few weeks, however it now seems that we may well have reached the end of the liquidation. Wednesday saw little, if any, fund selling and Thursday’s picture was characterised by the speculators once again adding to long positions and the market saw a lift as a consequence. Both London and Paris markets benefitted with decent gains seen for the first time in more than two weeks.

News on Friday that Ukraine has banned wheat exports with effect from November 15 has added to the lift in markets with Nov ’12 London wheat gaining £2.50/mt in early trade with sellers reluctant to offer volumes in an already thin market. Front month Paris wheat also made strong gains in early trade, rising some €3.75 on the back of the announcement. It is probably fair to say that the news does not come as a huge surprise because grain exports and wheat in particular had already been capped following a poor growing season, which has left the region some 28% behind last year in terms of wheat output which means the gains made after the announcement may be more emotional and short lived. The wheat export cap at 5 million mt was put in place to preserve domestic stock levels and we have seen an acceleration of export pace as traders rushed to beat the inevitable clampdown. There has been no mention of restrictions on other crops, corn and barley, which we believe to be because of their lower degree of sensitivity and importance to the region.

So far, we have seen no reaction from neighbouring Russia who suffered the same poor growing season and have been experiencing rises in domestic grain and flour prices to record levels that have prompted intervention sales in an effort to stem the upward price movement. However, similar to the Ukraine, Russian wheat has been priced out of the market for the past few weeks which has already limited sales and acted like a de facto ban.

Looking forward, we believe that EU wheat export levels will have to slow if balance sheets are to be maintained at adequate levels. Failure to see this could well result in a larger corn import programme (where from?) in order to fully meet demand.

In the wider world, Australian wheat looks set for a downgrade in output from the current USDA level of 23 million mt due to on-going dry conditions. A widely discussed output of 20 million mt is becoming the “norm” right now, which would likely impact the USDA’s export figure of 18 million mt on a tonne for tonne basis. In summary, the world continues to see adverse news as far as wheat is concerned and we continue to recommend that adequate cover be in place, at least for this season.

Soybean markets, like wheat and corn, have also suffered fund liquidation pressures and the related decline in price. Nov ’12 soybeans have lost over $3.00/bu but now seem to have found a degree of support and are currently trading $0.60 above the recent lows as buyers find value at these lower levels. The pace of export commitments from the US, particularly to China, have been particularly interesting with an almost unheard of proportion of the total USDA annual export estimate committed within two months of the season starting.

We continue to believe that global supplies remain tight and demand shows no sign of easing – yet! Consequently, the logical conclusion would be that prices will rise to force demand rationing, which begs the question, “Have we just seen the season low?” Our advice would be to ensure cover is in place through to Q1 and look for value in Q2 & Q3 when S American supplies begin to make their impact felt on prices.