Wheat Soars Most in 20 Years on Federal Reserve's Rate Decrease

By Tony C. Dreibus

Oct. 29 (Bloomberg) -- Wheat rose the most in at least 20 years on speculation the Federal Reserve and European Central Bank would cut interest rates, increasing liquidity and freeing up capital that will allow buyers to purchase U.S. supplies.

Investors bought baskets of commodities including energy, metal and grain futures on expectations the Fed would cut its benchmark lending rate. After markets closed, the central bank reduced the rate to 1 percent from 1.5 percent, which may encourage borrowing and spur overseas importers to purchase U.S. grain. Wheat dropped 24 percent this month through yesterday.

``A half-point rate cut by the Fed is factored in,'' said Vince Ambrose, a trader at MF Global in Chicago. ``And it doesn't look coordinated, but the Europeans will move next week, or that's what they've stated. A lot of commodities have sold off dramatically and we're getting a bounce.''

Wheat futures for December delivery rose 47.25 cents, or 9.2 percent, to $5.6125 a bushel on the Chicago Board of Trade, the biggest percentage gain for the contract closest to expiration since June 30, 1988.

Futures still are down 58 percent from a record $13.495 a bushel on Feb. 27 after growers planted more to take advantage of prices that rose 77 percent last year.

Lowering the interest rate will make money cheaper to borrow, lessening the value of the greenback against other world currencies. The dollar fell as much as 2 percent against the yen and 2.3 percent against the euro today, increasing purchasing power for overseas buyers.

Still, U.S. exporters have shipped 13.2 million metric tons of wheat since the beginning of the marketing year on June 1, down 10 percent from the same period a year earlier, Department of Agriculture data show.

Egyptian Purchase

Egypt today bought 120,000 metric tons of wheat from Russia, shunning U.S. supplies and paying $179 a ton, or $4.87 a bushel. U.S. soft-red winter wheat was selling for $4.78 a bushel in New Orleans yesterday and $6.0075 a bushel in Houston, not including freight costs for overseas buyers.

Futures also rose as freight rates declined, making U.S. inventories more attractive to overseas customers.

Ocean transport costs, as expressed by the Baltic Dry Index, have plunged 90 percent since June 30 on slack demand for shipping containers. The index, which measures rates for dry bulk goods, dropped to the lowest since February 2002.

``Shipping rates have come down drastically and that's going to help U.S. grain exports,'' Ambrose said.

Wheat is the fourth-biggest U.S. crop, valued at $13.7 billion in 2007, behind corn, soybeans and hay, government data show.

To contact the reporter on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net.