The wheat market has continued its recent strength, climbing by around 20¢/bu for the week. The slow, incremental rises are a little perplexing at a time when a large Northern Hemisphere harvest is about 2/3’s complete. While there has been some retraction (EU27 and Argentina), the remaining big exporters’ crops (Russia, Aust, Canada) are building.

Part of the reason why the ag commodities are rallying is because of the interest in owning (bought) positions by the managed money/spec crowd.  The managed money net position for wheat is around 12k contracts long/bought*.  This is unusual for this time of year when again the weight of new crop should be a bearish signal. 

*To understand this, think of wheat/corn/bean futures as shares. You would buy them when you thought they were good value, or thought they were going up.  Similarly, you would sell them when you wanted to either profit take or thought they had peaked.  It is also important to remember that the speculators/managed fund money account for ~96% of trades in CBOT making it the most liquid market we have.

So, what are the managed money crowd taking into account?  It is likely a combination of factors, chiefly, strong demand from China for US commodities, a weakening USD (making US commodities cheaper) and a deteriorating crop in key ag state of Iowa.  The spec crowd also rely heavily on algorithms – a mathematical model of predicting a market movement – and can also change their positions very quickly if the sentiment changes.

Speaking of Iowa, the ProFarmer tour there has confirmed dry conditions – something like 96% of the state is drought declared – yet the estimated yields observed are still average to slightly above.  Harvest should commence in the next 2-4 weeks in beans and corn so the proof will come then.

Russian FOB prices rose by $9/t for the week to be around US$211 on the back of strong consumer demand (Egypt bought 530kmt of Russian wheat in their latest tender) and internal logistics of getting grain to port.  As mentioned earlier, the bulk of this year’s crop is in the central Russian provinces which make the transport of grain to the Black Sea ports slower and more costly. 

Further delays in transport could result in short term price spikes but also increases the amount of wheat competing with Southern Hemisphere crops in the new year.  It is going to make pricing grain very interesting in the months ahead.

Commodity Conversations

Next week…

The wheat market feels top heavy. There is a big crop globally and all we are doing is finessing the final estimate.  Expect some profit taking in the next week.

Have any questions or comments?

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Click on graph to expand

Click on graph to expand

Data sources:  USDA, Reuters, ProFarmer, Mecardo

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