Wheat futures in correction mode

Wheat futures prices are seeing a correction after a rally for three days now and seemingly without the support of the spot market.

"While the supply remains short in the spot market, demand too is at its lowest ebb, thereby allowing balance to prevail," a New Delhi-based trader said. Also the festive demand, as per market expectation, did not come forth following high prices.

Further, demand at origin mandis like Kanpur remains strong with buying trying to strike deals at origin than at secondary markets like Delhi's Lawrence market, due to the prevailing high prices. Following this, price gains at origin mandis are better than secondary markets, traders said.

Ncdex November wheat contract ended today at Rs 844.60 per 100 kg, down Rs 5.20 from previous close and saw an open interest of 40,800 tonnes. December contract ended Rs 5.40 lower to Rs 861.80 per 100 kg and saw an open interest of 75,480 tonnes.

Gains in futures is higher vis-a-vis the spot market. "The rally in futures is largely speculative and may even take the December contract prices to a high of Rs 875 per 100 kilograms, in a fortnight," said Rajini Panicker, head-commodities research with Refco Commodities.

Traders said speculative rally is also getting fuel from the fact that festive buying was about 50 per cent lower this year following high prices and thus, demand may have been shifted. A section of traders are also expecting that flour millers may soon be forced to tie up for their supply of wheat for the next six month and this is likely to boost demand.

With the futures prices rising beyond market expectations, technical analysts are expecting correction to happen soon before the prices tread to a higher level of Rs 875 per 100 kg. "Correction is already overdue and December contract will then find support at Rs 845 (per 100 kg) level. Following that level, prices are expected to rise again to Rs 875 level which can act as a good profit-taking point," said a Mumbai-based technical analyst.

With speculation likely to push wheat prices to new highs this year, a market players feel that prices will tread higher than the OMSS (open market sale scheme) prices announced recently by the Food Corporation of India.

FCI last month had raised OMSS price by Rs 15 per 100 kg for all states, for the October-December period this year, much below market expectation of a rise of Rs 25-40 per 100 kg. OMSS sale price is basically the rate at which FCI sells stock in the open market. Though the corporation barely sells 1.5-2 lakh tonnes wheat in the open market in the whole season, the OMSS sale price usually act as a cap on the market.

With the wheat demand seen "just matching" the supply, as a trader termed it, the market scenario is likely to remain rife with speculation over supply shortage and thus, keep prices high.

While the government estimates the shortfall in 2005 crop is not significant at 720 lakh tonne (compared with 721.1 lakh tonne last year), market players peg the recently harvested crop at around 690-700 lakh tonne.