Drought report sends wheat prices surging

By Chris Flood, Financial Times
Published: Jun 06, 2007

European and US wheat prices surged yesterday after Romania said prolonged drought would reduce this year's wheat harvest to a four-year low.

Romania expects its wheat harvest to fall by 46 per cent to 2.9m tonnes while its barley production crop is forecast to decline 30 per cent to 235,000 tonnes.

Euronext November wheat futures - the benchmark for the new crop - rose €3.25 to €166 a tonne. Traders said further drought could push prices towards €170 a tonne, the previous high during 2002-03 when the European crop was severely damaged by drought.

Drought has also badly affected wheat production in Ukraine, which on Monday moved to introduce a ban on grain exports.

In Chicago, July wheat rose 14 cents to $5.34¼ a bushel while July corn rose 2¼ cents to $3.86 a bushel.

Malaysian palm oil prices hit a record yesterday amid expectations that Indonesia would increase export taxes on cooking oil and proposals by India to cut import duty on vegetable oil. In Jakarta, the benchmark August palm oil contract rose 3.8 per cent to M$2,701 a tonne.

Brent crude held above $70 a barrel as a cyclone hit Oman, causing the temporary closure of a terminal shipping 650,000 barrels a day of oil. ICE July Brent rose 5 cents to close at $70.45 a barrel, while Nymex July West Texas Intermediate fell60 cents to settle at $65.61 a barrel.

The Organisation of the Petroleum Exporting Countries is facing increasingly urgent calls from consuming countries to raise its oil production quotas.

Abdalla El-Badri, Opec's secretary-general, said there was "plenty of oil" in the market and blamed geopolitical tensions and refinery bottlenecks in the US for rising prices.

"We have to be vigilant as there is plenty of oil in the market," said Mr El-Badri, who also ruled out an extraordinary meeting to discuss a quota increase ahead of the cartel's next meeting in September.

The International Energy Agency, the western countries' energy watchdog, asked Opec last month to increase its output before the summer to satisfy a thirsty market and avoid further declines in crude oil stocks.

Crude and product stocks in developed fell in the six months to March at an "unusually high" rate of 900,000 barrels per day, according to the IEA.

Mr El-Badri left the door open for a quota increase this year if crude stocks continued to decline and oil prices rose further.

He said: "If we see a gap in the third and fourth quarter [between supply and demand] we will correct it."

Copper dipped 0.8 per cent to $7,560 a tonne in spite of concerns about possible strike action in Mexico affecting mines and processing plants owned by Grupo Mexico.

Lead retreated 1 per cent to $2,345 a tonne after Xstrata said a partial force majeure on shipments from its Northfleet lead refinery in the UK would be lifted on July 1. Xstrata imposed the measures in February due to problems at the Mount Isa operations in Australia, which supply the UK plant.

Aluminium dipped 0.8 per cent to $2,802.5 a tonne, ahead of the expiry of June options today.

Gold firmed up 0.2 per cent at $671.55 a troy ounce. Spain's central bank sold almost 1m troy ounces of gold in May, further shrinking its holding from 14.7m ounces last August as it reduces gold in its international reserves.