The Early Vibe

It's up, up and away again this morning. May London wheat opens GBP3.50 higher, with Paris slightly more subdued at around EUR2.00-3.25 higher.

In Paris the Nov/Mar inverse is still there, but has narrowed to EUR3.00/tonne. Open interest in Nov is currently running at around 120,000 lots, or 6 MMT.

What we don't know is how much of the open interest is commercially owned as opposed to fund held. My chum at FCStone tells me that there is talk on the continent that some of those commercial longs may be prepared to take physical delivery.

The fact that the sole delivery point against the Paris contract is Rouen, and that there is only around a sixth of this open interest volume physically available in the port makes this a very interesting conundrum.

The EU markets seem to be following through from Friday's strong CBOT close, with added impetus from the overnight eCBOT grains showing wheat around 8c higher and corn up 5-6c.

Russian winter plantings continue to lag. Reports are circulating that they might be in the market to buy US corn, but nothing has been confirmed. The Russian Ag Minister has re-iterated that they have adequate grain stocks at 26 MMT of carry-in plus around 64 MMT of production, against a domestic requirement of around 77 MMT.

The market however is choosing to ignore that, as fresh fund money moves into agri-commodities.

The USDA are out Thursday with their quarterly stocks report, plus the usual weekly export sales. You will recall that the latter were pretty disappointing for corn and wheat last week, sending prices tumbling.

The US dollar looks set to remain weak, with a "not quite so sick" pound looking like it may attempt a move towards resistance at 1.60 against the US unit. Neither seem like they could fight their way out of a paper bag at the moment it has to be said.

It's October on Friday, which means that we only have three weeks to go before we find out exactly what spending cuts new Chancellor George Osborne has in store for us. It seems that the coalition government are intent on getting as much of the bad news out as early as possible. They can only use the "it's not our fault" excuse for so long after all.

The market almost certainly isn't going to like what he's got to say, with all this talk of a double dip recession, more QE and inflation remaining above it's target. The pound looks vulnerable to taking a pasting later next month and beyond methinks. A winter of discontent might lie ahead as the spending cuts lead to increased unemployment, pay freezes (at best) and increased inflation.

You could argue a case for domestic grain prices going either way in such a scenario. Livestock numbers could easily fall quite sharply, but a sinking pound should mean wheat prices going up not down surely?

Not necessarily, the pound was at 1.10 against the euro back in March (and below 1.50 against the dollar), when UK wheat prices were also at their lowest levels of the year. Two years previously, in March 08 when UK wheat prices peaked at close to GBP200/tonne we were running at 1.28 against the single currency and the dizzy heights of 2.0 against the dollar.