Wheat markets in Europe retain fire in their belly with Russian wheat production estimates being cut on an almost daily basis providing the trading community with plenty of fuel to not only sustain current price levels but drive them even higher.

Private analysts were back to the drawing board today, with suggestions of a cut in Russian production leading to exports falling to 11Mt. USDA estimates for Russian exports for 2009/10 stand at 17.5Mt with projections for 2010/11 currently at 15Mt. Based on the continuing drought conditions and associated impact on yields, we can expect a significant cut to USDA estimates in their report due August.

The current bull run is lending to a marked increase in fear within the market. However, as mentioned for some time now, we believe that when one assesses the actual current world supply and demand in wheat, there is no question that tightness in the market is NOT what lies behind this rally. Using the USDA global wheat ending stocks estimates, 2010/11 is estimated to give us 193.93Mt. We can expect a reduction in this figure and although it takes us below 2009/10 estimates of 193Mt it is still significantly above 2008/9 level of 165Mt.

Nevertheless, despite our view that prices have overextended in a significant manner and have divorced themselves from key fundamentals, market prices don't lie! The market will rise as is currently very well exampled with or without fundamental support if the speculative community sees enough profit potential. Daily trading volumes yesterday in new crop November milling wheat is a case in point, registering over 28K contracts.

The market is zeroing in on Russian export capabilities and talk of Russian export embargoes is more than enough to keep the upward momentum in NYSE milling wheat for the moment. Fear is being well defined in overall market sentiment, and we even have the Egyptians GASC authorities removing their one port requirement for their tenders, allowing for French (Rouen) bids to participate in future tenders and of course lending to greater competitiveness.

For those holding inventory, current market conditions would suggest covering downside risk in a controlled and timely manner. We have had a €49.00 move higher since the beginning of this month, with the market failing to pause or consolidate in any meaningful manner. With harvest steadily progressing In France and Germany as well as across much of Central Europe and of course the Black Sea Area, the next 25 days will do much to let the air out of this current bubble. It is true that initial harvest pressure may be delayed as stressed buyers move into the market to cover their shorts, but this should only provide initial support before allowing prices to find more reflective values of the fundamental market.

Jaime Miralles