Wheat advanced in Chicago and traded at a record in Zhengzhou, China, as demand increased and on speculation a drought in the Asian nation, the biggest grower, may damage plants.

Snowfalls in China's major wheat-growing regions failed to ease a drought and the dry spell is likely to affect crops, Mr Chen Lei, Deputy Director at the State Flood Control and Drought Relief Headquarters, said on February 12. Egypt, the biggest importer, and Bangladesh announced tenders last week, and hedge funds increased their bullish bets on wheat to the highest in more than three years.

“Reports of possible substantial damage due to the multi-month drought in the major growing areas in China are the main reason for rising prices,” Mr Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said in a report on Monday. While the situation could improve significantly now if enough snow or rain falls soon, concerns are currently determining the picture.

Futures surge

Wheat futures for May delivery surged 13.75 cents, or 1.5 per cent, to $9.125 a bushel on the Chicago Board of Trade at 10:24 a.m. London time. The price earlier touched $9.15 a bushel, the highest level since August 22, 2008. The September-delivery contract on the Zhengzhou Commodity Exchange jumped as much as 3.7 per cent to a record 3,110 yuan ($471) a tonne.

Milling wheat futures for March traded on NYSE Liffe in Paris gained €3.25, or 1.2 per cent, to 276.25 a tonne.

Getting Warmer

As drought threatens to damage the crop in China, also the top user of the grain, hedge funds and money managers increased in the week of February 8 their net-long positions, or wagers on rising prices, by 19 percent to 51,787 contracts, the highest since August 2007, US government data showed on February 11.

“The dry spell is likely to continue to affect crops as the weather is getting warmer and winter wheat needs large amounts of water when turning green,” Mr Chen said in a statement on February 12.

Dry spell

About 42 per cent of the total area planted with the grain in China's eight major producing provinces has been hit by the dry spell that may last into the spring, Minister of Agriculture, Mr Han Changfu, said last week.

As of February 10, the drought had affected 6.75 million hectares (16.7 million acres) of crops, leaving 2.8 million people and more than 2.5 million livestock short of drinking water, the state-run Xinhua News Agency reported February 12. Rain on the North China Plain has been substantially below normal since October, the United Nations Food and Agriculture Organisation said February 8.

Weather Outlook

The weather in China's growing regions is one to watch, Mr Michael Pitts, commodity sales director at National Australia Bank Ltd, said by phone from Sydney. The drought will be very significant, if it continues, he said, referring to its impact on global harvests and wheat prices.

China's wheat harvest may drop by four million tonnes this year, Mr Alex Bos, a London-based analyst at Macquarie Group Ltd, said last week. Output may have fallen to 114.5 million tonnes at the last harvest, from 115.1 million tonnes a year ago, according to the US Department of Agriculture.

Demand also may be boosting prices. Egypt agreed to buy 1,70,000 tonnes of Australian, US and Canadian soft wheat in a tender, General Authority for Supply Commodities Vice-Chairman, Mr Nomani Nomani said Feb. 11.

“There has been a bit of tender business and also private business through the Middle East,” Mr Pitts said. “That is highlighting the mid-term demand and the US is one of the most competitive suppliers,” he said.

Soybeans for March delivery gained 0.2 per cent to $14.19 bushel in Chicago while May-delivery corn increased 0.3 per cent to $7.195 a bushel.

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