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February 15, 2008

(See attached file: PR 080215.xlsx)(See attached file: PR 080215.pdf)
  • U.S. futures markets tested both ends of expanded trading limits this week, setting new records for inter-session volatility. After locking limit-up everyday last week, the markets responded to the new limits by collapsing through Wednesday's session in every position except the Minneapolis nearbys. The sell off might have been technical, but fundamentals providing optimism for global supplies (both old crop and new) supported short positions. The bulls came back on Thursday following a raft of import tenders and further indications of risk to quality exportable supplies. The new trading limits established this week have introduced a new degree of price volatility, making risk management even more important for buyers. For the week, nearbys at the CBOT fell off 66 cents/bu, the KCBOT was down 58 cents while the MGE March position continues to astound, jumping $3.82/bu.
  • Bearish fundamentals that supported the early week sell off were based on an increased stocks estimate in France, the U.S. releasing HRS and SW food-aid supplies on the market and several optimistic reports for new crop supplies. Australia is receiving beneficial rains and expected to receive more from the current La NiƱa pattern. Plantings in Russia and the EU are higher and much higher in the Ukraine and U.S. SRW region with favorable weather. A USDA baseline forecast showing optimistic 2008/09 U.S. acreage, based on projections from last November, was widely reported as current news. USDA will release its current forecast at its annual Outlook Forum next Friday.
  • Export sales this week fell to a sustainable level, indicating that markets were successful (at least for one week) at rationing demand. The all class sales total was 83,000 MT, just under the 91,000 MT weekly sales needed over the next 16 weeks to achieve the USDA forecast. New crop sales continue to ratchet up, reaching 1.8 MMT with 75,000 MT booked this week with the Philippines and Egypt accounting for the largest share. Some or all of the 115,000 MT Egyptian old crop SRW purchase will show up on next week's sales report, as will a 115,000 MT sale to Japan, pushing the weekly sales total well over sustainable levels again.
  • Importers tendered on Thursday morning as Tunisia, Japan and Egypt took advantage of the buying opportunity from the early week sell off. Egypt tendered and passed on Tuesday, saving $24/MT (6%) by waiting. Importantly, French wheat offers to GASC below normal Egyptian quality standards signaled to the trade that Europe may lack exportable supplies of milling quality. News on Iraq purchases are anxiously awaited, particularly on wire reports that the Australian Wheat Board is questioning supply availability for the 400,000 MT previously committed through private traders.
  • Trading limits were expanded by the markets earlier and to a larger degree than anticipated. On Monday, limits were doubled to 60 cents/bu above or below the previous day's settlement price. If two or more contract months within the same marketing year close at limit bid or limit offer, the daily price limits for all contract months on the exchange will increase by 50% for the next session and an additional 50% each subsequent day that two or more contract months within a crop year close at a limit. Daily price limits revert back to 60 cents after no wheat futures contract month closes limit bid or limit offer for three consecutive sessions.
  • Basis prices for HRS in the Gulf look more like cash prices at $5.75/bu for March positions, climbing 25 cents/bu each deferred month. Some traders are not offering July or August positions, lacking pre-harvest availability. Exporters are competing against U.S. mill demand with HRW basis prices at domestic mills in Kansas currently double basis offers for Gulf export origination. SW prices at the PNW were unchanged this week while high protein specifications on HRW and HRS are not being offered.
  • Ocean freight rates have roared back as Chinese demand returns from the New Year holiday. After a 3-month decline, rates have risen $15/MT over the last 2 weeks in both the Atlantic and Pacific.
  • The bear/bull debate focuses on the extent of importer coverage and remaining supplies held by exporters. Bears believe Egypt only needs to cover early April before its new crop is harvested while the U.S. will not see any more unexpected purchases this marketing year. Bulls see remaining exportable supplies in Argentina and the Black Sea at risk from government protection. Both sides agree that over the next 3 months the world is facing the tightest supply situation in recent history.

File Name
PR 080215.xlsx
PR 080215.pdf
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