Australian wheat farm

Amazing the difference a week can make. It all started last Friday morning, with continued escalations in the Middle East. The wheat market jumped 20 odd cents (US c/bushel) quickly, or nearly 5%, over concerns that the conflict would quickly spiral out of control. The lack of an immediate response tells us that an uneasy stalemate has been achieved, at least for the time being.

The other thing that happened over the weekend, was that the US House of Representatives finally agreed to a huge (US$60B) assistance package to Ukraine. That assistance will come in the form of armour, air defence systems and other munitions. It comes at a time when Russia appeared to be gaining some ascendancy and any delay in the funding was seen as assisting Russia. The response to date has been renewed attacks on critical infrastructure and export logistics around the deep sea port of Odessa.

 

The weather market is also kicking into gear. US HRW wheat conditions slipped 5% points to 50% good to excellent.  Key crop state Kansas is also reporting that 26% of the crop is in poor to very poor condition. Overall, conditions are better than a year ago, but a combination of dry and early heat is knocking the crop around. There is some rain forecast towards the back end of this week which should be hugely beneficial for those that receive it.

 

Russia remains dry and the forecast is not promising anything for at least another week.  Daytime temperatures are pushing into the low to mid 30’sC which will be exacerbating the dry conditions. Respected analyst SovEcon has made a small 1mmt cut to production, calling the Russian crop 93mmt citing the dry conditions. The next few weeks could be very interesting.

 

So finally, we are starting to see some fundamental changes to wheat Supply and Demand, or at least the potential to change.  This is shaking the resolve of the fund/money managers and we are seeing some of the shorts being covered. This is all adding to the upward momentum we are seeing in markets.

 

It is important to note that both weather market action and short-covering rallies can be highly variable and short-lived.  A good rain and the action would be over before you could blink. However, any cuts to production, whether it be in Russia, the US, Canada or here in Oz, would be positive for prices. 

Next week

Conversely, when it comes to bulk imports such as fertiliser the cost of freight is likely to drastically fall. This may provide some cushion should we see any supply driven rises in fertiliser price

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Data sources: USDA, FAS, SovEcon, Mecardo

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