EU wheat doubles in 2010 on global weather woes

European milling wheat futures ended the trading year with an annual rise of 92 percent after a series of weather events including a severe drought in Russia slashed global supply and sent grain markets soaring. The jump in Paris-based wheat futures in 2010 comes after two years of declines and has brought the market back to levels last seen in March 2008 when it was easing from all-time highs.
In a shortened session on Friday ahead of the New Year holiday, the Paris-based futures settled higher, with operators making adjustments in low volumes. January milling wheat gained 1.8 percent to 252.50 euros a tonne, compared with a closing level of 131.25 euros for front-month prices at the end of 2009. The surge in European milling wheat made it one of the top commodity performers in 2010 along with palladium and cotton.
"Technically and fundamentally the market remains bullish," a French futures broker said. "If Chicago wheat breaks through the $8 barrier everything else should follow." Among other European crop futures, rapeseed futures on Euronext also posted large annual gains, with front-month prices up 0.2 percent to 497.25 euros a tonne, putting gains for the whole year at 73 percent.
In the much less liquid maize market on Euronext, front-month futures ended 2.6 percent higher at 235 euros a tonne, making for an annual rise of 74 percent. The turnaround in the European wheat market this year was powered by adverse crop conditions in several major producing countries, first and foremost in Russia where the worst drought in a century crippled harvest output and led the world's No 3 wheat exporter last season to halt grain exports from August.
Harvest rains in Germany and now Australia, which have hurt the quality of crops, have further increased demand for French and US wheat and made tight supply of milling-grade wheat a major concern for global grain markets. The grain complex as a whole has come under strain from declining production prospects and robust global demand led by China, and dry growing weather in major corn and soy exporter Argentina is now set to keep markets on edge going into 2011.
"The most striking pattern for grain markets in 2010 has been the contrast between the first half and the second half," Societe Generale analyst Emmanuel Jayet said in a note. "In the first six months, the focus was on good production prospects, subdued demand and stock rising to comfortable levels."
Even before the second-half weather events, weakness in the euro, linked to a debt crisis in the euro zone, played a part in reviving European exports and prices. This helped France post record non-EU shipments of 10 million tonnes in 2009/10, a level it is set to top with expected shipments of 11 million tonnes.
Grain prices are widely tipped to maintain their upward trend at the start of 2011. "Everyone is looking at the all-time highs set in 2007/08," said Sebastien Poncelet, analyst at French grains consultancy Agritel. "Before no one dared to talk about them but now people are," he said, referring to a record of 300 euros set by Paris wheat futures in September 2007.
In the short term, prices will also be shaped by investor positioning and index reweighting in the new year, with grains and commodities in general expected to attract more interest in view of their bullish fundamentals. Grain fundamentals will hinge again on weather and a further deterioration in Argentina could give the market the extra fundamental impetus to test all-time highs, analysts said.