The recent activity in the wheat market has been both a little surprising and welcome at the same time. Dec ’20 CBOT wheat futures rallied something like 40¢/bu in a week, dragging up ASX and cash prices around $10/t. It has been very welcome for growers looking for opportunities to make forward sales and has also provided opportunities to price further out the curve.

But what is driving a rally at a time when the world is settling into record production and carryout figures?  And can it last?

 

Typically there is no one simple reason.  However, the lions share of blame (or gratitude) has to be given to the Black Sea region.  With disappointing European production, Russia and Ukraine have stepped up to the plate with record export pace. This is causing a squeeze on supplies at port as;

  1. a) the Russian farmer is holding on to more crop and
  2. b) the stock is coming from further north of the typical export draw zones.

 

Russian wheat prices have surged in the past month as they try to stimulate sales to keep up with export pace. This is important as Russia (being the #1 exporter) tends to set the floor in pricing.

 

Add to this scenario, the winter wheat growing regions in Russia and Ukraine are abnormally dry. This is having an impact on the pace of seeding but also the establishment of the crop prior to dormancy. This may be incentivising the Black Sea farmer to hold back sales as a hedge against a poor winter crop.  The 10-day rain forecast holds some moisture for Ukraine in particular, so it will be interesting to watch this unfold.

 

Weather in Argentina is also appearing in some headlines. Some analysts are calling for a wheat crop of 17mmt, from earlier estimates of 21mmt due to dry and frosty conditions.  Approximately 7mmt of Argentinian wheat is exported to Brazil on a yearly basis with the remainder available to competitive tender.

 

The rally in wheat futures has made US wheat the most expensive in the world. The US had been enjoying some excellent trade with China which also bolstered prices.  However recent sales have slowed which has coincided with a faltering market.  The US economy is showing signs of slowing and the recent round of money printing merely kept the economy on life support.  Recently we have seen equity markets plunge, sending investors to the USD as a safe haven asset. This has seen the AUD come back nearly 3¢ in the space of a week.  This will make US wheat more expensive on a global scale and will likely see the wheat market (futures) lose some of its value.

 

There is good export demand at the moment however, with major importers looking to be food secure in the face of potential COVID lockdowns. The fall in the AUD will make Aussie wheat more attractive and this should help offset any fall in the futures market.

Next week

Expect CBOT to gradually drop back to find where the demand is.  Eyes will also be watching the skies in the Black Sea region to see if forecast rain actually falls.

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Click on graph to expand

Click on graph to expand

Data sources: USDA, Reuters

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